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].
