Interview with Mark T. Simpson

Mark T. Simpson is the Director of Property Valuation Standards and Practices, Single-Family Credit Administration, for Fannie Mae in Washington DC. Mark was one of the keynote speakers at Valuation 2003 in Orlando on December 3rd, 2003.

BUZZ: What is Fannie Mae's philosophy on property valuation?

SIMPSON: At Fannie Mae, we believe property valuation is an important component of the mortgage loan origination and servicing functions. We also believe loan level credit risk should dictate the level of property valuation and property inspection documentation requirements for mortgage loan origination purposes. We hold our lenders responsible for the management and quality of any required property valuation and property inspection.

BUZZ: What is Fannie Mae's perspective on Automated Valuation Models (AVMs)?

SIMPSON: Fannie Mae believes AVMs can be helpful tools to enhance risk management and streamline the traditional property appraisal process. The development of our automated underwriting system, Desktop Underwriter, involved the reengineering the appraisal process based on expanded credit risk management techniques and led to the development of Fannie Mae's proprietary AVMs.

Fannie Mae's use of AVMs to recommend streamlined property valuation and inspection options benefits both lenders and borrowers by reducing the costs and time delays typically associated with the traditional property appraisal process, without sacrificing credit quality.

At present, we believe AVMs have generally not evolved sufficiently to fully replace traditional appraisals and human judgment for the origination of first lien mortgages, except for the less risky loans.

BUZZ: How does Fannie Mae use AVMs for loan origiation purposes?

SIMPSON: Desktop Underwriter relies on our proprietary AVMs and credit risk management techniques to determine the minimum level of property valuation and inspection fieldwork required for loans processed through the system.

• As part of its risk analysis, Desktop Underwriter makes a property valuation and inspection recommendation based on a variety of factors, including the overall credit risk of the loan transaction and how robust our data are about the particular property.
• Desktop Underwriter assesses the reasonableness of the property sales price (or the lender's estimated value for a refinance transaction) and recommends to lenders the minimum level of fieldwork that must be performed for the loan to be delivered to Fannie Mae. We are relying on our AVM to validate the lender-reported value. A lender may elect to obtain only the minimum documentation we require, or it may require additional documentation for any reason.
• As a result of the Desktop Underwriter risk analysis, the system makes one of three fieldwork recommendations: an appraisal with an interior and exterior inspection, an appraisal with an exterior-only inspection, or an exterior-only inspection. When the system recommends an exterior-only inspection of the property, an appraisal is not required.
• We have also implemented appraisal-related messaging in Desktop Underwriter to identify refinance transactions that appear to have excessively high estimates of value. Our intent in implementing this functionality is to provide practical property-related quality assurance information to the lender during loan origination. The use of this technology has enabled Fannie Mae to better manage property valuation credit risks.

BUZZ: What is Fannie Mae's view on the strengths and weaknesses of AVMs?

SIMPSON: The strengths of AVMs relative to traditional real estate appraisals are speed, reduced costs, consistency, and objectivity. This is not to suggest that conscientious, skilled appraisers lack consistency and objectivity. However, an AVM can significantly reduce the time it takes to obtain an estimate of value and reduce the costs associated with the traditional property appraisal process, which can be particularly helpful for quality control applications and for the loan processing of the less risky mortgage loan transactions.

AVMs suffer from three principal limitations: First, they are dependent on the accuracy, comprehensiveness, and timeliness of the data they use. Second, AVMs cannot be used to determine the physical condition and relative marketability of a property. And third, AVMs can never fully incorporate the breadth of knowledge and judgment of a skilled appraiser.

Consequently, AVMs tend to work best in circumstances when there is a relative abundance of accurate and current data, when properties in a given area are relatively homogenous, and when a property's condition and marketability are relatively typical for the area. They work less well when data are thin, in heterogeneous neighborhoods, and for properties that differ markedly from the average property condition or marketability.

The use of AVMs for loan origination purposes creates unique credit risks. Therefore, it is critical that users of AVMs design appropriate use and implementation strategies that consider the overall credit risk of the loan transaction, specific strengths and weaknesses of the particular AVM and property data supporting those products.