Increased utilization of alternative real estate valuations could have a negative impact on the quality of residential mortgage-backed securities. But there are some positives to the shift.
In an effort to cut operational costs, increase efficiencies and address the declining number of real estate appraisers, home lenders are expected to use more appraisal alternatives.
The alternatives include hybrid appraisals, broker price opinions and automation valuation models. Each
method presents different strengths and challenges.
Moody’s Investors Services discussed the transition in Use of Appraisal Alternatives is Likely to Grow, Posing New Risks.
Lima Ekram, an analyst for the New York-based ratings agency, said in the report, “Their use in tasks that affect the credit quality of RMBS securitization collateral could, however, lead to a weakening of new RMBS transactions.”
Different approaches to alternative valuations will yield varying levels of reliability. For instance, hybrid appraisals rely on information from on-site property examinations conducted by third parties like real estate agents and brokers.
But Moody’s noted that alternative valuations have the potential to improve the credit quality of some RMBS transactions.
An example is how the use of cheaper valuation models could help preempt a shift toward smaller sampling during quality control or due diligence.