In today’s challenging market, high interest rates and home values have created a unique opportunity for lenders to grow their home equity lending business. Despite the recent interest rate cuts, demand for home equity products remains strong. Homeowners want to preserve their historically low interest rates while waiting for rates to sink in the future. According to ICE’s Mortgage Monitor, home equity on tap grew by $5.5 trillion from a more than 50% increase in home prices since Q4 2019—and available equity on tap per borrower increased by nearly $95,000.
With the increase in available equity due to high home prices, homeowners are turning to home equity products to fix their existing homes or pay off high interest credit card debt using their equity. Lenders can tap into this multi-billion dollar market through consolidation automatic measurement models (AVMs) and digital position reports (PCRs) in the collateral measurement workflow. Home equity products, which generally fall under the Interagency Guidelines (IAG), do not always require routine inspections, making AVMs an ideal time-saving solution.
One of the highest costs of starting a home equity crowdfunding is the property appraisal. Using reliable and trustworthy AVMs, combined with a thorough PCR, can give lenders an edge when competing in the home equity business. With these AVMs, lenders can deliver faster approvals to borrowers that reduce appraisal costs. In cases where additional validation of the property value is required, desktop PCR testing can also be a good option.
What are AVMs?
AVM estimates property value by analyzing its characteristics and recent sales using advanced algorithms and statistical modeling. AVMs consider various factors to estimate the value of a property, such as:
- Latest sales
- Structural features
- Local area
- Market trends
Lenders can use individual AVMs or an AVM waterfall to help determine a property’s value. AVM Waterfall uses multiple AVMs, each with its own mathematical formula, data sources and local criteria. Every AVM — including AVMs in the AVM waterfall — provides a confidence score to indicate the degree of accuracy of the AVM value of the structure.
What about the environment?
While AVMs use hard data to estimate a property’s value, IAG also requires mortgage loan valuations to reflect the current state of the property. Lenders can use the latest digital appraisal solutions to quickly capture important property condition information needed to complete the appraisal process.
ICE verification effectively provides the status of the property and the value of the property that has been modified. This consumer-facing solution allows the borrower to securely capture current photos and details of their property using their mobile device. It then walks the borrower through a series of steps to capture the required asset information. Validate also uses computer vision technology to analyze images provided by the borrower to help determine the condition and value of the property.
Combining highly accurate and proven AVMs with real-time PCRs can help deliver the reliable results and confidence needed to address collateral risk.
Eligibility criteria for AVM + PCRs
Qualifying home loans can start with AVM and PCR to deliver quick and easy property valuations while helping to reduce costs. Several criteria should be considered when determining the feasibility of using AVM, without introducing collateral risk. Generally, to use a Home equity product, the property must be a residential property with sufficient equity in an area with reliable market data.
Lenders also consider a wide variety of other factors, including Loan-to-Value (LTV) ratios, borrower eligibility, loan amount limits, property type and condition, location and additional criteria based on their risk tolerance and regulatory obligations. These eligibility requirements help ensure that using an AVM is an appropriate method of site inspection.
Using AVM solutions for improved customer experience
Not only can AVMs provide significant time- and cost savings to lenders looking to grow their home equity business, but they also provide a simplified and improved borrower experience. An early property value and suitability helps lenders determine the borrower’s expectations while avoiding later frustrations when the property’s condition or value does not meet loan requirements. Using AVM and PCR will soon help the lender determine if the valuation method meets the collateral risk policy, or if another type of assessment (desktop or traditional) is needed based on the potential risk.
Remember, when choosing an AVM solution, not all options are created equal. Their accuracy, consistency and reliability depend on the data and analytical models used. Choosing an AVM partner that delivers the most reliable AVMs, solid asset and public record data, and transparent performance monitoring, offers clear benefits to improve confidence and reduce risk when originating a home loan.
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