Automated Valuation Systems Need Proper Review

By S&P PR Newswire
Feb 29 2000 2:29PM ET

NEW YORK, Feb. 29 /PRNewswire/ -- Standard & Poor's today affirmed its criteria for validating any automated collateral valuation system used to appraise residential mortgage properties. Any such system used within a pool of securitized mortgages to be rated by Standard & Poor's must be reviewed and its results incorporated into Standard & Poor's ratings criteria.

Standard & Poor's reviews a new electronic home valuation tool solely at the request of the vendor. To begin the testing process, Standard & Poor's provides the vendor with a test portfolio of properties with known sales prices for valuation. The vendor supplies a value for each given property address, and Standard & Poor's analyzes each one for variance to the actual sales price. The ability of the system's user to manipulate the results is also determined and incorporated in the analysis.

Investors should be informed that any mortgage pool featuring properties assessed by a system that has not been reviewed by Standard & Poor's might feature appraisal variances that exceed Standard & Poor's standards. Analysis of the four automated systems that Standard & Poor's currently does accept, including those designed by Mortgage Risk Assessment Corp. (MRAC), Solimar Inc., Transamerica Intellitech Inc., and Experian Inc., has indicated that systems can be extremely accurate for some property characteristics or geographic locales, and inaccurate for others. In some cases, a system may overestimate a property value by as much as 200%.

It also merits noting that automated valuation systems created using databases of conforming mortgages may generate large variances when used on nonconforming product, because of the greater price volatility that higher-priced homes can experience.

Given this unpredictability, Standard & Poor's creates system-specific acceptance parameters so that the property values accepted from a system are within an acceptable tolerance range. These parameters are then embedded within Standard & Poor's residential mortgage-backed securities (RMBS) ratings model and its Documentation and Automated Collateral Scoring System (DACSS). DACSS evaluates the attributes of a loan application and the credit quality of a borrower, then assigns alternative documentation and collateral assessment requirements in accordance with Standard & Poor's rating criteria, without affecting credit enhancement requirements.

If an unapproved automated collateral system is used for loans to be included in pools submitted for rating, Standard & Poor's revises its assumptions regarding loss severity and foreclosure frequency, and higher credit enhancement requirements result. -- CreditWire SOURCE Standard & Poor's Rating Services.

-0- 02/29/2000

/CONTACT: Susan E Barnes, 212-438-2394; or Frank Raiter, 212-438-2579, both of Standard & Poor's Rating Services/

/Web site: http://www.standardandpoors.com/ratings/ CO: Standard & Poor's; Mortgage Risk Assessment Corp.; Solimar