The Impact of Accurate Home Price Estimates in
Residential Mortgage-Backed Securities

Abstract

This article examines how home price assumptions utilized in the credit analysis of U.S. residential mortgage backed securities analysis were inadequate leading up to the financial crisis. The valuation techniques have improved immensely since then. Coupled with techniques to identify the specific properties underlying each security, precise valuation methods such as Automated Valuation Models (AVMs) and neighborhood level price indices have been brought to bear in the analysis of securitizations today. The major benefit to the financial industry is more accurate pricing of bonds—both to support trading in the secondary market and to help institutions struggling in this illiquid market to find appropriate valuations for the securities they hold on their own books. As the securitization market returns, these property valuation methods tied to anonymous, securitized mortgage pools will be critical to increasing transparency, raising investor confidence, improving liquidity, and minimizing fraud.