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AVM Usage to Reach 17% by 2008

TowerGroup report looks at AVM technology spending

December 7, 2003

By PATRICK CROWLEY


Everything else is going high-tech, so why not appraisals?

The industry is on the verge of a huge growth spurt in spending on technology used by appraisers for mortgage collateral assessment, according to a report from TowerGroup, a market and technology research firm in Needham, Mass.

Spending on Automated Valuation Models, or AVMs, will increase from $33 million this year to $193 million in 2008, according to a research report authored by Craig Focardi, a TowerGroup senior analyst.

Tower also estimates that automated collateral evaluations using AVMs will grow from 2% of loans originated in 2003 to 17% by 2008. And that will cut the average time to complete a property appraisal from six to 10 days now to four to seven days by 2008, the firm said.

"Automated mortgage collateral assessment and systems will revolutionize mortgage underwriting in this decade in the same way that automated underwriting systems rewrote the rules for underwriting borrower credit in the last decade," according to the report.

"Processing costs and turnaround times will decline by up to one week, as streamlined appraisals, AVM property value estimates and automated collateral systems effectively manage risk and reduce inefficiency," TowerGroup said in the report.

Lenders use collateral assessments to determine the value of a property and to ensure that a loan can be recouped if the borrower defaults on a mortgage loan.

In his report, Focardi identifies three types of property valuation: appraisals that inspect the property interior and exterior; appraisals that inspect only the property exterior; and automated property valuations using AVM technology.

Some appraisers fear that AVMs will hurt their business.

"AVMs are a real estate appraiser's road to potential loss of business," said Tom Dilts, an independent appraiser in the Cincinnati suburb of Dayton, Ky.

"The appraisal industry sees these as a potential disaster," Dilts said in an email response to questions about AVMs.

"Placing a value on a property without the eyes, experience and expertise of certified professionals could create a flood of mortgage loans with slanted and/or inaccurate information," he said.

But Gary Taylor, president-elect of the Chicago-based Appraisal Institute, said in an interview that appraisers should not fear technology.

Rather, the industry should embrace AVMs as another way to improve productivity and "help consumers and the lending world understand and mitigate risk" of a real estate purchase, he said.

"It's another tool in our tool bin," Taylor said.

But Taylor also said AVMs are not for everyone, that it takes a skilled and confident appraiser to use the technology.

He also said lenders must have the software used in conjunction with the data created and processed in an AVM appraisal.

Some parts of the country have been quicker to embrace the technology that other areas, Taylor said.

In his report, Focardi predicts that AVMs adoption "will continue to be faster in the nonconforming first mortgage and for home equity (second mortgage) loans than in the Fannie Mae and Freddie Mac conforming mortgage market because nonconforming underwriting guidelines are often more asset-based than credit based."

TowerGroup estimates that 25% to 35% of nonconforming loans qualify for AVMs compared to 15% to 25% of Fannie and Freddie loans.

"However, TowerGroup believes that although (Fannie and Freddie) will retain control over collateral decisions and analytics usage, they will increasingly approve use of commercially available AVMs on a selected basis for their largest and best customers."


Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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