Since the US housing market topped out three years ago, nearly a quarter of the nation's housing value has vanished. Not surprisingly, this relatively sudden disappearance of equity has resulted in nothing less than a national foreclosure crisis, and it has stressed every corner of the mortgage service business.
It's been a tough stretch to be sure, but I'm here to say that the industry is getting better for it. Indeed, smart technology — really smart technology — has emerged across the last 18 months to handle this far less stable and far more demanding world. Top-tier valuation providers are answering the call to servicing action with a next-generation electronic valuation platform known as "intelligent granularity."
Relying on superior computing power and clever algorithms, this powerful new technology combines hard data and meaningful trends with comparative and predictive analytics to create trend lines for virtually any market segment in the country. These homogeneous levels of granularity are, in turn, bringing a kind of clarity never thought possible to property value estimates.
And that's because these next-generation valuation products look past the largest metro largest areas into 'micro-geographies,' or neighborhoods with similar economic and social dimensions. Residential real estate markets are a local phenomenon after all, and no one could argue that the most highly desired information for the servicing industry is what's going on in the neighborhood. With this kind of intelligent granularity, decision-makers are gaining a far better sense of what to do about properties and borrowers within each trending market segment. For example, many of the industry's pricing models are based on ZIP code level trends. While a ZIP code could be (and has been) viewed as very granular, we have to remember these areas were established for optimal postal delivery, not for optimal loss-mitigation strategies.
The reality is that price volatility and trends will vary greatly from one neighborhood to another inside any one of the 20,000 or so ZIP codes around the nation—one might be hard hit hard by foreclosures, another might sit on a lake or golf course.
Decisions regarding both neighborhoods will necessarily be skewed by an aggregate number for the ZIP code area. Intelligent granularity, on the other hand, creating homogeneous segments based on property similarities, would cluster the foreclosure neighborhood and its unique attributes with like neighborhoods and cluster the positive neighborhood and its attributes with with similar neighborhoods, thus preserving the clarity and transparency of each locality's actual price trend.
This highly granular market data allows a servicer to better model a strategy for each property and maximizes the recovery generated by the servicer on behalf of the investor. The "right" decision is reached earlier in the process and the overall returns are greater from this early decision. Already, this information is being used for valuation work all along the continuum, from automated valuation models (AVMs) to reconciliations. And, generally speaking, there is no premium associated with greater granularity or more intelligent granularity.
From where I sit, all of this is bringing new levels of clarity, accountability, and transparency to a process that needs to be done properly. The stakes are high, and I'm convinced the better understanding that's coming from better technology is leading to a more productive mortgage lending industry.
Ryan Tomazin is the president of Integrated Asset Services (IAS), a provider of default management and residential valuation services.
