Appraisal Alternatives--So Many Choices, So Little TimeDave StokesInterior Appraisals, Exterior Reports, AVMs
The appraisal function of home equity lending requires a
significant amount of time and substantially adds to the cost of
origination. With that in mind, home equity lenders are always
looking at their alternatives. They all want the same three things:
the ability to close loans faster, streamline the process and
reduce costs. However, many are concerned that new alternatives
could put them at increased collateral risk, so they look at these
options with some caution. Many are especially wary of using these
new products for higher dollar amounts or loan-to-value loans.
As a means of making some sense of the available alternatives,
I've provided the following definitions:
++Interior Appraisals: These reports might be
considered the top-of-the-line. They provide very detailed analyses
of the property, including a physical inspection of the interior
and exterior by an appraiser. They are very thorough, but usually
take more time and are more expensive to produce than the other
alternatives. Lenders often use these on loans of large dollar
amounts (more than $100,000) and higher LTVs (80-100 percent). A
customary turn-around time is seven days. These reports are usually
delivered via fax or e-mail and cost between $200 and $250 per
loan.
++Exterior Reports: Less expensive and
time-consuming, exterior reports generally fall into two
categories: exterior appraisals and drive-by BPO valuations. The
exterior appraisals are usually used for higher property values and
LTVs than the drive-bys. In general, exterior reports are used when
there is less risk, so the lenders are willing to take less
information than a full interior. The lender's underwriting
guidelines will dictate how much information they need to make a
loan decision, helping them to choose between the two alternatives.
Their appeal is that both avoid the need to set an appointment with
the owner to view the property. This often slows down a full
appraisal. Also, since they involve less work than a full-scale
interior appraisal, they are less expensive (generally $75 to
$125). These reports are usually delivered by e-mail in three to
four days.
++AVMs: Lenders looking for the lowest cost and
quickest turn-around are now turning to AVMs. Using the latest in
technology, these automated reports give instant property values
and are the least expensive of the alternatives. Relying on an AVM
increases the number of loans the lender can get done faster and
cheaper. They give lenders a good picture of the value of a
property on the spot, making AVMs especially powerful tools to move
along refis and home equity loans quickly. These computerized
models are based on available public data such as town records,
registries, assessments and sales records. These database-driven
property evaluation systems may be queried over the Internet, and
their results are delivered digitally over the Web. They are
considerably less expensive than drive-by assessments, but accuracy
of the value has been a concern.
These products are "hot" now, but some lenders don't have the
comfort value they have with the more traditional techniques. They
worry that, because there is no physical evaluation, some property
values may be overstated. As a remedy to the same problem, some
companies are introducing value insurance for such products to
protect the lender from any loss as a result of an overstated
value. Along with the instant AVM delivery, this coverage provides
peace of mind to lenders who are concerned about using AVMs for
higher loan amounts and LTVs.
No lender likes risk. Other the other hand, most aren't too
crazy about anything that adds to the cost of a loan. The variety
of appraisal alternatives available today gives lenders the
opportunity to control some of those costs. And, some of the newest
offerings allow them to do that without losing sleep.
Dave Stokes is the executive vice president of Integrated
Loan Services (ILS). He may be reached at (800) 842-8423.
