Home Equity Lenders Are Saving Time & Money with Automated Valuation Models — What Do the Regulating Agencies Say About This Evaluation Method?

Article thumbnail image

By Jesse Rivera, CEO at New Vista Solutions

As the home equity market continues to heat up, many lenders are making the shift from full appraisals to a more cost effective way of evaluating a property’s value — the AVM.

It’s no secret that AVMs can save time and money, but some lenders who are scrutinized by the OCC, FRB, FDIC, OTC or the NCUA are new to this valuation method and they want to make sure they’re playing by the rules set forth in the Interagency Appraisal and Evaluation Guidelines (the Guidelines).

In this article, we’ll try to condense the language in the Guidelines and talk about how AVM products can be utilized while remaining compliant with the Agencies’ requirements.

In Section IV, pg. 2 of the Guidelines, the agencies make a broad statement about Appraisals and Evaluations:

“An institution’s board of directors or its designated committee is responsible for adopting and reviewing policies and procedures that establish an effective real estate appraisal and evaluation program.”

Following this general statement, there is considerable attention paid to the Agencies’ requirements regarding full appraisals, but let’s fast-forward to Section XI, pg. 11 entitled Transactions That Require Evaluations:

“The Agencies’ appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions. These exemptions include a transaction that has a transaction value equal to or less than the appraisal threshold of $250,000.”

In Section XII, pg. 12, the document goes on to say, “An evaluation must be consistent with safe and sound banking practices and should support the institution’s decision to engage in the transaction. An institution should be able to demonstrate that an evaluation, whether prepared by an individual or supported by an analytical method or a technological tool, provides a reliable estimate of the collateral’s market value as of a stated effective date prior to the decision to enter into a transaction.”

On pg. 13, the Agencies take the evaluation requirements one step further:

“A valuation method should address the property’s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral’s market value.”

So, let’s summarize what we have so far. The Guidelines allow federally regulated lending institutions to utilize alternative valuation methods (referred to as Evaluations) in lieu of full appraisals IF the loan amount is $250,000 or less, and IF the institution can verify the property’s physical condition and the current market conditions in the area.

In Appendix B, pg. 32, the document addresses AVMs:

“AVMs are computer programs that estimate a property’s market value based on market, economic, and demographic factors. Institutions may employ AVMs for a variety of uses such as loan underwriting and portfolio monitoring. An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. (See the Evaluation Development and Evaluation Content sections.) For example, to be consistent with the standards for an evaluation, the results of an AVM would need to address a property’s actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in “average” condition.”

Although much of the language in this document is a bit vague and open for interpretation, it’s safe to say the Agencies will accept AVMs in lieu of full appraisals as long as certain conditions are met, including a physical inspection of the property.

On pg. 34, the document addresses the “validation” of AVM results:

“An institution should establish standards and procedures for independent and ongoing monitoring and model validation, including the testing of multiple AVMs, to ensure that results are credible. An institution should be able to demonstrate that the depth and extent of its validation processes are consistent with the materiality of the risk and the complexity of the transaction. Validation can be performed internally or with the assistance of a third party, as long as the validation is conducted by qualified individuals that are independent of the model development or sales functions. An institution should not rely solely on validation representations provided by an AVM vendor.”

In short, the regulations require some due diligence on the part of the lender with regard to validating AVMs, whether managed internally or by a third party. The industry leader among third party validation providers is AVMetrics, who works with all of the leading AVM providers to run quarterly tests that compare actual sales data with estimated market values to determine the strongest AVMs at the county level.

The leading AVM providers are savvy enough to make sure their valuation products are compliant with Interagency Guidelines. The products vary in scope and price — the most reliable being a “cascade” which involves an intricate comparison of several AVM databases to determine the top three for a given set of criteria…and delivered in an instant. This method produces the highest fulfillment rate (hit rate) and the most accurate results.

If an AVM model doesn’t have access to enough data to produce a valuation for a specific property (which can occur in some rural areas), there are other evaluation products available to pick up the slack. These employ a more manual approach, but they’ll get the job done.

So, if you’re a home equity lender who is on the fence about using AVMs, you can rest easy knowing there are plenty of reputable AVM providers whose products are tested for accuracy and are Interagency compliant. Just remember to verify the physical condition of the property along with the AVM.

At New Vista Solutions, we go the extra mile to ensure our vendor partners are among the best in the industry. Our AVM cascade and Property Condition Report is second to none, and we can customize any cascade model to find the best fit for a specific geographic footprint. We also offer warranties on all of our residential evaluation products. Contact us at 866.721.9295 for a free consultation, or visit our website at NewVistaSolutions.com.