Overestimating the present: How lending decisions should be made

by MPA27 May 2016

On the May 22 episode of my Lykken on Lending podcast, we had the opportunity to interview Allan Weiss of Weiss Residential Research on some new technology he has developed for making more accurate home valuation decisions. At one point in our conversation, we asked him how lenders might use such a technology ... and he brought up a very interesting point.

When lenders make decisions on securing the loan for a particular house, the value is based on a number of things. However, the valuations are done based on how all of those variables factor into the price of the house today. Therefore, the ability of the person to repay the loan for the home is based on its present value. The problem is, of course, that a mortgage extends several years into the future. What we really need to know is, how much will the home be worth tomorrow?

Allan's technology doesn't just show the current value of homes but, based on predictive modeling from an enormous index of homes, also shows the direction the value is headed. The interesting thing about this idea to me was that it could completely revolutionize the way lending decisions are made. It's still new, and there hasn't been any talk with regulators at this point, but I can foresee a future in which home valuations are made on future expected values rather than just the present conditions. Can you imagine how that could affect the industry?


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