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A New Approach to REO Property Valuations

SVP Tracy Mooney Property valuation is a cornerstone of selling real estate. It tells the market what we think a home is worth and what we'll accept as a sales price. A proper valuation process will also determine a home's value in its current "as-is" condition and after repairs and renovations.

Freddie Mac accounts for about five percent of the nation's supply of foreclosed homes and we finished 2011 with a nationwide inventory of just over 60,000 homes in REO, which is still historically high by company standards. Last year we sold about 110,000 homes for an average of 95 percent of market value; two-thirds of them were sold to owner-occupants.

Our challenge is to build on these results in 2012. To continue selling at prices that not only meet our traditional goals of minimizing credit losses, stabilizing local home values, and strengthening local housing markets, but also protecting the taxpayers' investment in Freddie Mac. And though we are working hard to improve the net proceeds of our real-estate sales, our primary goal is to reduce foreclosures by enabling more distressed borrowers to receive loan modifications or to sell their homes as short-sales, while still maximizing recoveries for Freddie Mac and taxpayers. To meet these objectives we have to sell each house for as close to current market value as possible.

Adding to the challenge is the fact we're not the only company out there selling single-family homes and REO. In addition to traditional home sellers and builders, we are competing for buyers against some of the best financial companies in the world. How do these best companies compete? They compete on analytics. Fortunately, so do we.

There are three fundamental methodologies for valuing properties: automated valuation by a model, opinion of an industry expert, and /or the reconciliation of the two. Given the volume of homes Freddie Mac is currently selling, we require a better valuation methodology that is systematic in its implementation, responsive to credit conditions, and optimized for local markets.

Improving valuation is inherently an exercise in leveraging corporate intellectual capital – automated valuation models and analytics – with better value estimates from experts in the field (i.e., appraisers and "Broker Price Opinion" providers).

Freddie Mac, fortunately, has an outstanding in-house portfolio-management and analytics team and HomeSteps, a nationally award-winning REO Sales unit. By working together, and with other divisions across the corporation, they have developed a new methodology with the capacity to raise the bar for valuation accuracy and loss mitigation. What's more, their achievement aligns with the corporate scorecard developed by the Federal Housing Finance Agency, our regulator, and supports their other initiatives to stabilize home prices and bring more private capital into the marketplace.

Last year we piloted this new REO valuation methodology on thousands of homes. This past February we implemented it for all valuations performed on our REO inventory nationwide. Last year we sold our homes in REO for an average of 95 percent of market value, which, as financial haircuts go, is a little off the top as opposed to a buzz-cut. This year, our goal is to improve on that accomplishment and sell what to us are unprecedented numbers of homes at exceptionally strong recovery rates.

Here, in general, is how our new valuation methodology works.

First, we acquire complementary valuation sources – broker price opinions, automated valuations, and appraisals. Based on the variances between them, a sophisticated decision model determines the best valuation approach for each home. Potential actions can range from simple formula-derived market values to full-blown desktop appraisal reviews with expert valuation vendors utilizing a full array of available data and valuation tools. The larger the variances in the initial values – the more due diligence required. Last year's pilot showed that by using the model's values as a benchmark, we can minimize our exposure to such marketplace risks as broker collusion or the "REO stigma mindset" and can improve pricing and recovery.

One critical part of the rollout of the new methodology is the use of ingenious trending techniques that let us constantly monitor the effectiveness of the practices. In addition to the tools described above, these techniques involve the use of national data for sales and listings, our own valuation dataset, normal resale versus REO sale data, plus a number of other available data sources in the industry. These data streams are assimilated to benchmark Freddie Mac's home sales and REO performance to the overall housing market, and to refine our methodology for valuing properties over time. Going forward, the integration of these data with our business analytics will enable Freddie Mac to develop other techniques to increase participation in foreclosure alternatives, recoveries from home sales and reduction of loss severities.

A second component of this dynamic new analytic framework involves training and monitoring our national network of valuation vendors and asset management companies. We set the values on our homes, hold them accountable for achieving them, and provide monthly feedback on how well they map to our expectations. If the feedback shows someone missed the mark in a given month, we provide the training to get him or her back on track.

Our new valuation methodology is now being used to value, price, and sell HomeSteps homes and improve the performance of their national network of real estate professionals. Our ultimate goal is to apply the elements of this new methodology to all real estate valuations involved in the default process. As this is being written (in April), we are planning to put these new capabilities in place to provide our servicers with new and improved valuations for short sales under the Obama Administration's Home Affordable Foreclosure Alternative program and our classic short payoff options.

Going forward, the analytics, thinking, and problem-solving for valuation will help us improve our broad strategies for selling real estate and improving our ability to set the best price and get the best recoveries at foreclosure auctions, short sales, or at the closing table where HomeSteps homes are sold.

As Freddie Mac continues to value and sell billions of dollars worth of residential real estate, our new valuation methodology should help stabilize home prices in neighborhoods across the country, provide significant collateral recoveries to Freddie Mac and taxpayers, and add momentum to the housing recovery now taking shape.

(Originally published in HousingWire, June 2012, page 66)

* Tracy Mooney left her position with Freddie Mac in July 2014


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