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Report reveals 2.2 million sub-prime borrowers face foreclosure

National Mortgage Professional
Apr 11, 2007

The new generation of AVMsAllen Johnsontechnology, mortgage approval, loan process Taking the risk away It's the year 2026. An eager would-be homebuyer submits an online mortgage application using the latest miniature supercomputer to connect directly to your loan site. Within minutes, the loan is approved, and in just a few hours, the entire transaction is completed, funds transferred to the home seller's bank account and a key code emailed to the homebuyer to unlock the door to his new home. Does that seem far-fetched? Maybe it does, but 20 years ago, instant messaging and digital cameras you can carry on a key chain would have seemed over the top. Modern technology has already accelerated the pace of the mortgage approval process to an unprecedented level, from the borrower's initial inquiry and pre-approval, to property valuation, loan submission and funding. Borrowers now demand super-fast service and a prompt, reliable response, and that means lenders and mortgage brokers must be dedicated to delivering quickly, or else they will lose business to competitors who can meet the challenge. How much faster can we make the mortgage process? Savvy mortgage professionals continually look for new ways to streamline, shorten and improve their own business practices to provide a better, faster loan experience for their borrowers. The rise of automated valuation models (AVMs) is one solution that the industry is embracing to accelerate the lending process, but along with that speed has come a level of risk exposure for the lender, causing some to shy away from these automated systems. The recent emergence of the warranted AVM offers strong potential for changing that reluctance into wider acceptance as lenders throughout the industry become familiar with its benefits. Mortgage brokers and their borrowers also stand to realize significant advantages in quicker closings and reduced costs as the use of AVMs grows. The warranted advantage Standard AVM systems utilize computer software to analyze data, such as demographics, property characteristics, sales prices, tax assessments and price trends from public and proprietary sources, to calculate an accurate valuation of real estate property. As the systems have grown in accuracy and reliability, their acceptance has increased. Now, with the introduction of the warranted AVM, the automated approach to valuation has become even more appealing to lenders who are looking for a creative, cost-effective way to speed up the loan process with less risk than a typical AVM. What exactly is a warranted AVM? It's an automated valuation system that offers lenders financial protection from the risk of overvaluation. That's good news for lenders, because although most standard automated valuation systems are able to provide accurate results and drastically reduced turnaround times and valuation costs compared to traditional appraisals, there has always been financial risk involved for the lender. The warranted AVM adds comprehensive protection from losses due to inaccurate valuation. It's designed to assist lenders in managing and mitigating loss by providing coverage that can be customized to the lender's chosen parameters, and can cover losses up to and including foreclosure-related expenses. The warranted approach benefits lenders throughout the industry by further accelerating the lending process and mitigating the financial risk associated with the standard models. The best warranted products cover all widely accepted AVM systems, including cascading models that incorporate results from multiple AVMs. By mitigating the risk involved, the protection allows lenders to expand the range of loans that can be appraised via an automated valuation. For brokers, the major benefits spring from the faster process, lower costs and the expanded range of products that will qualify for AVM use due to the lender's reduced risk exposure. The process is simple. When the lender orders an AVM, eligibility for coverage will be set up based on guidelines such as minimum FICO score, maximum coverage, property type and other criteria. The specific coverage depends on parameters the lender selects. If the loan qualifies to be insured, the lender pays the warranty fee when it is closed and funded. If not, only the AVM fee needs to be paid. If there are any issues with the loan after closing or overvaluation is suspected, a manual appraisal is ordered and compared to the AVM results. If the loan is shown to be overvalued enough to make a claim, the lender submits the claim and the overvaluation is covered, plus costs, as outlined in the lender's agreement, including foreclosure expenses. A competitive point Ten years ago, who really thought the approval process could be shortened to hours or even minutes or that computers would offer an acceptable alternative to the traditional in-the-field approach to property valuations? Yet, approvals are almost instantaneous now, and AVMs, which were greeted with suspicion and pessimism in the '90s, have gained acceptance in recent years. The industry now seems ready to embrace an AVM concept that offers benefits to lenders, brokers and borrowers alike by substantially diminishing loss exposure and risk. In an industry where speed has become exponentially more important and competition is fierce, implementing the AVM approach becomes a competitive issue for both lenders and brokers. For brokers, working with lenders who are embracing this technology can offer a definite advantage, as the savings in time and cost get passed on to the borrower. It will be interesting to watch the growth of this new generation of AVMs. How much faster can we make the process? Check in with me in another 10 or 20 years. Allen Johnson is vice president of sales and marketing for Credit Plus Inc., a credit information services provider based in Salisbury, Md. He can be reached by e-mail at [email protected]
Published
Apr 11, 2007
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