New residential mortgage-backed securities (RMBS) are at risk of weaker credit quality given the likelihood that US mortgage market participates will increasingly use alternatives to traditional residential property appraisals in the coming months, according to a new report by Moody's Investors Service.
Market participants are showing increasing interest as well as new uses of appraisal alternatives such as hybrid appraisals, broker price opinions, and automated valuation models. Moody’s said alternatives vary across RMBS products, with each type presenting different strengths and challenges.
"In seeking to reduce operational costs, increase efficiencies, and address the shrinking ranks of US property appraisers, mortgage market participants are exploring the use of alternatives to traditional means of calculating property values and, in some cases, starting to use them more," Moody's analyst Lima Ekram said. "Their use in tasks that affect the credit quality of RMBS securitization collateral could, however, lead to a weakening of new RMBS transactions."
Moody’s said that the risk can be mitigated by using products with stronger profiles, adhering to borrower or loan attributes that result in stronger and/or more predictable mortgage performance, and employing additional RMBS credit enhancement. Another factor is whether the alternative is used as a primary valuation method or as a means of quality control.
The use of appraisal alternatives could help improve RMBS credit quality in certain situations, according to Moody’s. For example, a shift toward smaller sampling during quality control or due diligence could be avoided when cheaper valuation options are deployed.
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