FNC Report: Foreclosures, REO No Longer Drive Distressed Valuation

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FNC Releases "Appraisals Pipeline Report"

Data shows that home foreclosures and REO properties no longer drive valuations of distressed properties.

Two and half years into the housing recovery, home foreclosures and REO properties no longer drive distressed valuation, according to a report released today by mortgage technology company FNC.

The “FNC Appraisals Pipeline Report,” provides an in-depth look into residential real estate appraisal valuation in the mortgage origination and servicing arenas. It was built using data from the thousands of appraisal orders that flow through FNC’s Collateral Management System® (CMS®) -- an appraisal management platform used by most U.S. mortgage lenders, servicers, and appraisal management companies.

“We appreciate our originator clients who share data from their appraisals with us. This appraisal data enables FNC to obtain a detailed view of the appraisal valuation process which is critical to mortgage underwriting,” said Robert Dorsey, FNC co-founder and chief of data & analytics.

FNC’s report indicates that 54% of the appraisal volume that was processed through the CMS in August was attributable to origination and the remaining 46% to servicing. Purchase loan applications continue to pick up in the ongoing housing recovery, comprising 28% of the August appraisal volume. In April 2014, purchase loan applications surpassed refinance loans in the origination space.

In the servicing space, appraisals of properties in distress are down but remain the key driver, contributing more than 60% of the servicing volume. When distressed properties are further classified based on whether they are (1) in-foreclosure or REO properties, (2) short sales and deed-in-lieu-of-foreclosure properties, or (3) all other types of distress including loan workouts, bankruptcy, and tax delinquency, the data shows rapid declines of appraisals on REO and in-foreclosure properties since early 2013.

“With home prices in a 29-month rising streak and strengthening equity positions for many homeowners, our data shows that home foreclosures and REO properties no longer drive valuations of distressed properties,” said FNC Director of Research Yanling Mayer.

In August, foreclosure and REO properties accounted for 15% of the appraisal volume driven by servicing distressed properties. Nearly 60% of distressed valuation volume is attributable to loan restructuring, loan modifications, loss mitigations, bankruptcies, and delinquent tax.

The report shows that 9-in-10 purchase loan appraisals provide a value opinion that supports the arms-length transaction price, leaving only 10% appraised below the transaction price. When disaggregated, above-contract appraisals are 61.4% and at-contract appraisals 27.6%, meaning that appraisals are twice as likely to provide a valuation that exceeds the transaction price.

“Despite anecdotal reports, there is no strong evidence that low appraisal valuations contributed in some significant way to mortgage loans falling through,” Mayer said. “In fact, we do not see much difference between the percentages of low appraisals in down-markets versus up-markets.”

Meanwhile, the report compares the number of significantly above-contract appraisals to the number of significantly below-contract ones and finds the former outnumbers the latter by at least 3 to 1. The proof is in the percentages: 40% are appraised at more than 1% above contract price versus 10% appraised at more than 1% below contract price; similarly, 22% are appraised at more than 3% above contact price versus 7.5% appraised at more than 3% below contract price.

“What we find puzzling and probably warrants more research is this large asymmetry in collateral valuation,” Mayer said. “If the market is relatively efficient in setting prices, we should expect to see below- and above-contract values with similar frequencies.”

“With that said, we did find some encouraging evidence that in the higher-priced market segment, the distribution of appraisals are relatively symmetric at contract price,” Mayer added.

Examining whether appraisal valuations exhibit different characteristics, the report shows that lower-priced properties are just as likely as higher-priced properties to receive a valuation that supports the transaction price. However, there is one big underlying difference: lower-priced properties are much more likely appraised above contract, whereas higher-priced properties are more likely appraised at or close to contract.

More highlights from FNC’s Appraisal Pipeline Report:

  • Servicing is at 20-month lows, down from 58% in February to 46% in August
  • New-home loans, as a percentage of purchase loans, peaked in early 2014 after rising quickly in 2012 and 2013.
  • Second-lien equity loans are rising quickly through 2014. The LTV ratios average 25%, and range between 40% and 45% on a quarter of these loans.
  • Appraisals on short-sale properties account for about 30% of the distressed valuations volume, down from its peak levels of 40% in spring 2013.
  • Valuation asymmetries: Significantly above-contract appraisals outnumber significantly below-contract appraisals
  • 14.2% appraised at more than 5% above contract
  • vs. 5.1% appraised at more than 5% below contract
  • No strong evidence of trending under different market conditions. Frequencies of at- or above-contract appraisal valuations are similar in down and up markets: About 90% of purchase loan appraisals are consistently at or above contract.
  • 3-in-4 purchase loan applications have an LTV ratio at or above 80%; more than 1-in-3 with LTV 95% or higher.
  • The recovery that began in early 2012 was initially accompanied by continued declines in the number of high LTV loans, likely due to perceived uncertainty about the market development and continued tight credits. It took about 16-18 months into the recovery before high-LTV loans picked up.
  • The past 12 months are seeing upward trending in the number of high-LTV loans. The rises in high-LTV loans are driven primarily by lower-tier properties.
  • Lower-tier properties account for more than 75% of high-LTV loans (LTV 90% or higher), compared to their overall percentage of 62% in completed sales in recent month.

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Bill Dabney
FNC, Inc.
+1 (662) 236-8304
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