Beginning of the end for AVMs

Fitch Ratings doesn’t like AVMs.

Neither do we and probably neither do you, but when Fitch Ratings speaks, things happen.

Here’s an example.  The mortgage lending industry has been lobbying for years now for a federal predatory lending law.  The stated reason is that it costs too much (and this is passed on to borrowers) and is too confusing to have to follow hundreds of different predatory lending laws, on the state and local level.  And this is true.  The unstated but just as important reason is that Congress is more malleable and easier to throw “resources” at than hundreds of lawmaking bodies around the country.

But so far it hasn’t been successful, despite mortgage bankers, mortgage brokers and mortgage investors joining forces with no less a powerhouse lobby than that of the GSEs.  Congress has yet to affirmatively say it’s taking over predatory lending and the states and cities can sit it out.  In the meantime, Fannie and Freddie and their mortgage industry pals pick their spots and try to lobby states to ease up on their predatory lending regulations, with success in fits and starts.  Fannie Mae – the public interest outfit chartered to help people buy homes – got into a little trouble a couple years ago for threatening not to help any Californians buy homes unless the Golden State failed to enact its proposed predatory lending rules, the Wall Street Journal alleged.

But the most dramatic reversal of a state from what the mortgage lobby considered constrictive predatory lending legislation occurred in Georgia last year.  Georgia lawmakers hastily met to pass new rules taking some of the teeth out of its fang-filled predatory lending laws.  At the behest of the mortgage lobby?  No.

Fitch Ratings, which provides investors with opinions as to the creditworthiness of the companies and other entities they invest in, said it was reluctant to rate companies that bought mortgage backed securities (MBS) for mortgages originating from Georgia.  It couldn’t be sure if years down the road the company that bought the mortgage could be sued and socked with damages for the predatory practices of the mortgage originator, because the connection between buyer and originator was too loosey-goosey under the Georgia law.  Furthermore, “predatory” practice under the law was very broadly defined and it was essentially too easy to get into trouble.  All this uncertainty led it to say it wouldn’t rate certain MBSs.

Fast forward to this week, when Fitch Ratings announced its “concern” that “under certain weakening housing conditions, any valuation method other than a full appraisal is likely to overestimate property value.” It’s not just AVMs, either.

“Non-full appraisal techniques, such as AVMs, rely on public data that is ordinarily several months old.  In rising markets, AVMs rely on housing price data that is slightly lower than current market conditions.  However, in declining markets, the AVM may overestimate property values given current market conditions.  It is also true for desktop review appraisals to the extent that they rely on older, higher-priced comparables and that the reviewer is unaware of currently declining housing prices.  Finally, drive-by valuations are by nature very limited in scope, which hinders the accuracy of the price opinion.”

Accordingly, Fitch said, it will decrease the values of mortgaged properties for loans with “non-full appraisals” that originate in “weak” or “soft” markets in RMBS pools.  It identified those markets as Salt Lake City-Ogden, UT; San Jose, CA; and Denver, CO (weak); Memphis, TN-AR-MS; Charlotte-Gastonia-Rock Hill, NC-SC; Albuquerque, NM; Atlanta, GA; Grand Rapids-Muskegon-Holland, MI; East South Central, Detroit, MI; Cincinnati, OH-KY-IN, Dallas, TX; Greenville-Spartanburg-Anderson, SC; Akron, OH; Indianapolis, IN; Dayton-Springfield, OH; Cleveland-Lorain-Elyria, OH; Columbus, OH; Toledo, OH; Baton Rouge, LA; San Francisco, CA; Columbia, SC; Tulsa, OK; and Houston, TX (soft).

Ironically, the “weak” and “soft” markets are identified as areas where property values are declining relative to the aggregate United States according to home price data from Case Shiller Weiss, a property research firm that puts out one of the more popular AVMs (CSW CASA).

“Fitch does not differentiate between vendors of alternative appraisals and AVMs nor does Fitch express preferences regarding alternative valuation tools as a secondary valuation type,” Fitch said.

We’re delighted at this news, because it’s good for our customers.  One of two things has to happen.  AVM vendors, for the first time ever, will have to prove their products are reliable enough to support origination decisions, which we believe they will fail spectacularly to do.  Or, on top of AVMs having failed to gain any appreciable market share in first mortgages – even during the most historically busy mortgage activity period in human history – this announcement will force the mortgage industry, which has invested so much hope in automated values, to acknowledge they simply can’t do business with them anymore on first liens.

Either way, appraisers and homebuyers win.