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Lookout - the next time you buy or refinance your home.....
by Steve Keohane, USN (Ret)
AppraiserCentral.com
The BIG AVM Lie
Automated Valuation Models (AVMs)
Many lenders, including Fannie Mae, Freddie Mac, Wells Fargo, Countrywide and Washington Mutual made very risky decisions a couple of years back to utilize computer generated appraisals (known as AVMs) instead of licensed real estate appraisers.
This extraordinary "Risk taking" by lenders in the name of greed nationwide is now beginning to cause problems in the bond markets because of the extraordinary risk of backing mortgages when nobody ever even looked at the property (homes and property) being financed.
Lenders nationwide were warned in the spring of 2004, that when they use anything less than a full, traditional appraisal in housing markets where values are soft, they could be penalized on Wall Street.
Fitch Ratings, one of the major risk-assessment firms for the global bond market, believes that anything less than what it calls "the full monty" -- an on-site, exterior and interior professional appraisal -- is likely to overstate the true worth of the property if it's located in any of dozens of slowly appreciating markets around the country.
Fitch plans to impose a 10 to 15 percent "haircut," or devaluation, of the homes backing mortgages in bond pools if they are in soft real estate markets and did not get traditional full appraisals. That rules out all the quicker and less costly valuation alternatives in wide use, including online database "automated valuation models" (AVMs), broker price opinions, desk reviews, tax assessments and drive-bys.
Bond investors -- those who buy into the giant mortgage pools that fund much of the U.S. home loan market -- care deeply about accurate property valuations. That's because when borrowers default and go into foreclosure, investors lose more when the appraisal used by the lender inflated the property's true value.
Read more on Bond problems with mortgages backed by AVMs here
These AVMs are similar to those you pay $10-$20 for on YaHoo or at some other company sites. They were known as neural logic or "fuzzy logic" when they were used on the stock market in the mid 90's. They failed there miserably.
Like neural logic programs of the past, AVMs which the banks are now using are also failing miserably. These computer programs begin their "appraisal" by blindly generating an appraised value for a home with very faulty data. This computer "analysis" is based on multiple regression analysis with a large amount of the most pertinent variables, including your homes actual condition, its actual verified size, and your location removed from their equation. Only after AVMs find the appraised value do they begin searching to find what they consider likely comparables.
The reason the banks are doing this is not to save you money--but to increase their own bottom line (they collect the fee). This also allows the lender to "fudge" these computer generated home valuations, because no 3rd party (like an appraiser) is now watching them. When a mortgage company is involved, our experience as state licensed appraisers is that a large percentage (not all) of loan officers will do anything it takes to "push a loan" just to collect their own commission. This is not always in your best interest! Suppose you owe much more than your home is worth, and the real estate market takes a down. You may soon find yourself filing bankruptcy if you had to sell your home. Relying on these AVMs to give you a value prior to selling your home could very well cost you $10,000-$100,000 in lost equity. It has happened to many people.
AVMs and LOW VALUES:
AVMs base their value estimates without anyone ever evaluating the condition of your home or the condition of the comparable sales used to estimate your value. AVMs nearly always totally ignore the number one criteria in real estate--location. These computer programs could care less if your home is located in a much superior neighborhood--an inferior neighborhood is often separated by just one street from you. These computer programs don't care if you have an ocean front view, or even a "crack house" view. A comparable which your home is judged by these AVMs may have sold low because half its foundation was falling down a cliff. It could have sold low by $50,000 because it has urea formaldehyde in the walls--AVMs don't care. Because its within their "circle" computers figure it's equal to yours. AVMs always indiscriminately compare your neighborhood with run-down and other incompatible neighborhoods. That's because computers cannot see the difference as they incorrectly analyze data in an office hundreds or thousands of miles away from you.
Computer generated evaluation databases are predominated by 10-15 year old county data. This data most likely does not show whether you renovated your home's interior or exterior, put in new thermal windows, finished your basement, added an in ground pool, deck or porch. Computer generated evaluations will most likely miss your new kitchen and your new bathroom also. Additionally, AVMs are not likely to measure your home correctly. And they'll probably miss that finished 3rd floor and that new $60,000 addition in the rear. In short, AVMs do oranges against apples. They'll include a finished basement as if living area (gross living area) in the comparable sale--and often they'll not do the same with your home.
Computer generated evaluation databases will most likely not include "fresh sales" in your neighborhood, or even across the street from you. If you have waterfront property, a computer evaluation will most likely compare your home against a non-waterfront home. Should your lot spill over to another town or even another state, this AVM will most likely miss that lot portion outside of your town. Computer generated evaluations will not talk to local brokers about why a home sold so high, or so low. They will also miss a lot of good comparables that exist when a homeowner sells their own property (FSBO). If you have a lot that could be sub-divided to give you a windfall of $100,000-$100,000,000, unlike an appraiser--the bank computer will give you no "heads up" so that your "gravy" goes to the new buyer--and you are none the wiser.
The worse thing about these computer evaluation models (AVMs) is that they are spitting out reports to homeowners who are basing their selling decisions on these. We suggest if you lose money by relying on one of these - that you contact an attorney and file suit. AVMS are often falsely advertised as "Appraisers", "Real Estate Appraisers" and "Appraisal" on internet search engines.
WHAT CAN A HOMEOWNER DO? Tell the Mortgage Company or Bank that you insist on an appraisal by a state licensed appraiser.
RECENT TRUE LIFE EXPERIENCES WITH AVMs
An appraiser in Massachusetts writes; In December 2001 a homeowner called me to do an appraisal. This homeowner told me on the phone that 2 days prior he paid $20 for an on-line AVM report. This AVM report said that his home was worth only $214,000. The local City Assessor valued his home at $190,000--so he figured it was right. I went out there and did an in-depth appraisal and found this home was worth $250,000. I had many comparables to support this. What if this homeowner relied on this AVM when he sold his home. In reality, that $20 report would have cost him $36,000.
Steve K
In January 2002, an appraiser in Maryland reported this about attempted bank manipulation; "This is new one. AVM came in $6,000 lower than appraisal (full 1004 - with/interior inspection, with good comparables..). Well - Underwriter is concerned - thinks value should be lower, wants 3 more comparables -I just want to scream - SCREAM....
B IN B
ANOTHER AVM "horror story":
I appraised a HUD repossession for the mortgage company representing the buyer of the home. The sales price was $95,000. My value came in at $124,000.
It was a track home approximately 1600 square feet with a pool but in a single subdivision that was surrounded by $250,000 custom home sites. There were no sales within the subdivision within the past the 6 months. I had to go further out in my search for comps to find a very similar subdivision to find suitable comps. There were no comps in the subject's subdivision, nor in that nearby similar neighborhood as low as $95,000.
The Lender ordered a field review because, little did I know, an AVM came in at $95,000 and set the list price the realtor used. The AVM must have had to use very old comps to find any comps in that subdivision, especially sales as low as $95,000.
The review appraiser come in with the same value that I did. Prior to that field review I was treated like there must be something wrong with my appraisal until the review appraiser confirmed my results.
Why would I intentionally come in that much higher than the sales price, especially knowing full well it was going to cause me problems with that higher value. I had no choice, THAT WAS THE MARKET VALUE. What was I supposed to do, lie or make up comps to make everybody feel warm fuzzy about AVMs.
Another AVM Horror Story (1 Jan 2002):
I went to homeadvisor.msn.com site and entered my home
address in their valuation software. It says "Home Values provided by Freddie Mac" on the site. Not only was the last sales price reported for my own home incorrect by $34,000,
a quick check of county records confirmed the sales prices of the comparables were incorrect by $25,000-$35,000.
Where are they getting these sales prices? It's bizarre. I predict the (improved) AVM programs of the future will be bundled with the desktop underwriting software and will be as quick and easy as a credit report for the lender. If it gives the lender the value they want, and the AVM is acceptable to the secondary market, then appraisers will never know about the loan. I see no future in appraisers selling AVM's (as some would like to have us believe), they are another tool for the lender. Diana M., Washington State
March 2002, an Appraiser writes:
Been on the hustle lately and happened into a town hall the other day and ran into an old attorney friend of mine and we started to chit chat and I said by the way what do you think about those AVM jobs; here's his response-
had one closing all set & ready to go and noted a glitch, they didn't have the second mortgage payoff noted, so I called their closing dept. and they said - go ahead & close our "Title Search" shows no such item. He closed the deal and said to me quietly chuckling, someone just lost $50,000 hehehe* At this rate it won't be long folks, just wish I was on the end of one of those $30,000 to $50,000 giveaways.
In March 2002, an Appraiser writes:
Just finished a rebuttal to a client where the value was questioned by the borrower (refi). The borrower had gone to one of the on-line valuation services and had six sales. Of the six, three were generally comparable. All three sales were inaccurate, reporting sales prices in the $190's whereas the actual MLS sales prices were in the 160's - 180's. Given the errors (invariably where the sales prices are reported higher than actual), I foresee some significant long-term problems for lenders who rely only on these methods. That is, as long as appraisers exist. After that, we will have rampant inflation of values as there will be no real check on realtor and lender actions.
In May 2002, an Arizona Appraiser writes:
I conducted a full appraisal report on a very typical, conforming home in one of the only tract subdivisions in the small town in which I reside. I state this to clarify that in my opinion, this neighborhood is one of the simplest subdivisions in my town in which to estimate market value, due to the high degree of similarity in housing quality, size, age, etc. My appraisal report stated the appraised value of the home as $123,000, with good market support from very similar, very recent comparable sales with few adjustments.
The borrower thought the property was worth $135,000, was upset with my value conclusion, and insisted that another appraisal be conducted. Another appraiser completed an appraisal report, and concluded the property was worth $125,500. The borrower was still unhappy with these results, and filed a complaint with the state appraisal board against me and the other appraiser.
Now here is where it gets interesting. The documents provided by the appraisal board related that the borrower had originally been provided with a "desktop appraisal" by the lender (an AVM), which estimated the home's value as $93,000! This valuation was lower than the original purchase price of the home 6 years prior, in an area which had experienced moderate appreciation over the entire period. The lender had decided to decline the loan, based upon this "desktop appraisal", but the borrower had the good sense to insist on an appraisal completed by a state licensed appraiser.
I found it quite interesting that two independent appraisers, completely unaware of the fact that both were conducting an appraisal of the same property, came to conclusions that differed by only $2500, or 2%, but the lender's AVM provided a value estimate that was $30,000 to $32,500 lower! And this was on a VERY SIMPLE appraisal assignment with ample market data.
The consumers and the taxpayers in this country need to become educated about the dangers of utilizing these faulty, unproven systems to estimate the value of the largest and most important investment most will ever make in their lifetime. If not, we will all bear the costs of an insolvent mortgage banking industry.
Mike
In August 2002, an Appraiser writes:
Within the same week, two borrowers had basic screaming matches with their lender on the drive by and AVM values arrived at the week before. In both cases, the lender did not want to order an appraisal. In one case, the AVM (Automated Valuation) estimated the value of this waterfront property at $250000. My appraisal with recent comparables in the same area, similar linear WF (water frontage), and similar GLA (size/gross living area) on the homes came in at a conservative $375000. The AVM utilized all the sales in the area of which the majority were not waterfront homes. God help us.
A Homeowner writes in August 2003:
Last year my home was appraised for an equity loan, and was valued at $142,000. The bank established a line of credit based on that amount, and I have tapped into it and now owe a total of$130,000 on my house. At the time, I thought the appraisal high, but my banker assured me that these folks knew what they were doing. Okay, so now, a year later, interest rates are rock bottom and I apply for a consolidation loan. I was approved on the spot, and given a rate of 5.35% which would have made about a $200 difference in my mortgage payment. They decided to do an onsite appraisal this time. Guess what - my house is only worth $114,000. This is a fine mess. I don't get my interest rate reduction, and am upside down in my home. I believe they used an AVM last year.
Do I have any recourse in this matter? Or is it just my tough luck that I am now upside down in this house?
Any advise or opinion you might have would be much appreciated.
Judy C.
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Other info on this subject:
See article; Fannie Mae Weighs Elimination of Some Appraisals
See "Fannie Mae & Freddie Mac - The next Enron?"
Fannie Mae Appraisal Waivers Questioned
Below is by Source: San Diego Union-Tribune (01/06/02); Harney, Kenneth R.
(January 8, 2002) -- In a move that has drawn fire from appraisers, Fannie Mae is allowing some mortgage lenders to forego appraisals on sales and refinancing for a $50 fee.
Through the property inspection waiver pilot, lenders can close mortgages more quickly, offer savings to cost-conscious borrowers, and quote lower rates. Additionally, these lenders avoid contractual warranties to Fannie that normally could trigger financial penalties in the event that a home's value is stated inaccurately.
The waiver could lead to the same problems experienced during the savings and loan crisis of the 1980s, when thrift institutions lost billions due to recessionary lending based on inaccurate appraisals, says Frank K. Gregoire, chairman of the NATIONAL ASSOCIATION OF REALTORS Appraisal Committee.
Appraisals are necessary to determine a property's worth. Although a home may look fine on the outside, the interior could be plagued with building code violations that go unnoticed without an appraisal, says Richmond, Va.-based appraiser Patrick Turner.
Appraisals are not being banished altogether, says Fannie Mae, but eliminated when adequate electronic valuation data is available. Most applications received through Desktop Underwriter, Fannie's automated underwriting system, require no appraisal or only an exterior inspection; very few need a complete appraisal.
Although Fannie's program appears to save both borrowers and lenders money, appraisers like Turner say that saving a few hundred dollars on an appraisal cannot compare to the thousands at stake for borrowers who pay more for a home than what it actually is worth because they waived this process.
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