Is there a place for AVMs?D. Cameron Rogers and Wayne B. BzdulaAutomated valuation models
Did the Office of the Comptroller of the Currency's (OCC's)
guidance memo of May 2005 make you wonder about your institution's
use of alternative approaches to appraisals? If so, you're not
alone. Soon after the release of "Credit Risk Management Guidance
for Home Equity Lending," many lenders started re-examining their
home equity lending practices in view of the memo's goal of
promoting "sound credit risk management practices for institutions
engaged in home equity lending ... "
Do automated valuation models (AVMs) still have a place in a
lender's closing toolkit in light of the OCC memo? We believe so.
In fact, the memo put down in writing some of the important
considerations that we have been advocating for years about sound
credit risk management practices.
Here are a few tips to help lenders evaluate which situations
make sense for AVM usage:
Know your own risk appetite
From a risk management perspective, each lender needs to understand
his institution's tolerance for risk. Lenders need to develop their
own risk reward analyses or equations. These should be based on
safety and soundness, loan size, collateral profile, credit,
collateral reliance, operating efficiencies and cost objectives.
These policies will shape their strategy for deciding on the
methods that they apply for value determination.
Develop a policy
Lenders need to develop a set of polices that assure them that what
they are doing to value real estate is appropriate. These policies
should put risk parameters in writing and give guidance about the
most appropriate valuation methodology to use under different
circumstances. Naturally, they will be developed around the notion
of equating risk with cost.
Often, our clients develop a matrix to simplify the process. It
might recommend that, for example, a customer with a high credit
score and low debt-to-income or low loan-to-value would be an
appropriate candidate for a quicker, less expensive means of doing
collateral evaluations, like an AVM. As risk parameters indicate a
greater degree of risk, then a more thorough evaluation of
collateral might well be indicated.
Understand what AVMs can deliver
AVMs provide an independent, unbiased determination of value. They
can be used alone, with or without an insurance enhancement, or in
conjunction with other valuation methods as part of a validation
strategy. The attraction of AVMs is that they determine property
values almost instantaneously, not in two to three weeks like
traditional approaches. In addition, they reduce costs and
processing time, two critically important competitive advantages in
Understand the market
In the home equity market, the name of the game is "speed to
decision." There's no ignoring the fact that speed to decision can
lead to larger market share. You know your competitors are trying
to convince borrowers that they need home equity lines of credit.
"It's a simple process, so why not get it?" they ask in their ads.
You also know that any time you throw up an obstacle, like an
appointment for a formal appraisal, you lose the consumer's
interest. AVMs can be one of the key components to overcoming
consumer reluctance, because they eliminate obstacles. When used
correctly, they deliver speed, without sacrificing safety and
Partner with the right provider
Especially in light of the OCC guidance, it is particularly
important that lenders work with recognized providers that offer a
range of services. These providers also need to be able to design a
program to match a lender's needs that includes documenting
criteria for choosing one method of valuation over another. Develop
your programs on the assumption that you will need to be able to
support your decisions with data and provide that data to the
regulators. Experienced vendors should be able to help in that
process. They should provide tools to help lenders build the
justification for the risk programs they design.
In short, we believe that the OCC guidance memo was a wake-up
call to lenders. Federal regulators acknowledged that the rapid,
ongoing evolution in collateral valuation practices is something
that they haven't kept up with. But, that may soon change. Right
now, they have no formal policy guidance for AVMs, but the memo
suggests that creating such guidance is a "top priority." Until the
regulatory landscape for AVMs becomes clear, we advise lenders to
adopt best practices—to document to the greatest extent
possible why they chose one valuation method over another and to
continue to respond to the needs of the marketplace with the most
appropriate valuation approach. In the end, lenders will need to
develop their own risk acceptance criteria around the notion of
equating risk with cost, and then be prepared to document the
reasons for those criteria.
D. Cameron Rogers is a senior vice president in Fiserv
Lending Solutions valuation services. Wayne B. Bzdula is a senior
vice president and director of risk management for Fiserv Lending
Solutions. They may be reached at (800) 842-8423 or e-mail [email protected]
and [email protected]