Does Automated Collateral Evaluation Lower Mortgage Credit Risk Relative to Home Appraisal Valuations?

Abstract

Automated valuation models (AVMs) are increasingly being used as a substitute for home appraisals in mortgage origination. This article examines whether there are differences in the credit risk of mortgages originated using AVMs relative to traditional appraisals. This question is explored through modeling the conditional default rates of loans originated through Freddie Mac’s automated collateral evaluation (ACE) program relative to those originated with appraisals. We show that ACE loans have about a 9.6% lower default risk in comparison to otherwise similar loans originated with appraisals. This superior default performance can be explained by the ACE decision logic employing data beyond that found in a traditional appraisal and the more efficient utilization of available information through statistical modeling. These findings are limited to Freddie Mac’s use of its AVM, the Home Value Explorer®, and the algorithmic decision logic in the ACE program.