Data Valuation Transformed: How Avms Can Power Property Valuations For Home Equity Lending

In today’s challenging market, higher interest rates and home values have created a unique opportunity for lenders to grow their home equity lending business. Despite the recent interest rate reduction, the demand for home equity products remains strong. Homeowners want to maintain their historically-low interest rates while waiting for rates sink further in the future. According to ICE’s Mortgage Monitor, tappable home equity has grown by $5.5 trillion from an over 50% rise in home prices since Q4 2019—and average tappable equity per borrower skyrocketed by nearly $95,000.

With increased equity available due to higher home prices, homeowners are turning to home equity products to renovate their existing homes or pay off high-interest credit card debt using their equity. Lenders can tap into this trillion-dollar market by incorporating automated valuation models (AVMs) and digital property condition reports (PCRs) into their collateral valuation workflows. Home equity products, which typically fall under Interagency Guidelines (IAG), do not always require a traditional appraisal, making AVMs an ideal time-and cost-saving solution. 

One of the highest home equity origination costs accumulated is for property valuations. Leveraging credible and reliable AVMs, combined with a thorough PCR, can provide lenders an edge when competing for home equity business. With these AVMs, lenders can deliver faster approvals for borrowers reducing valuation costs. In cases where further confirmation of property value is needed, a desktop appraisal with a PCR can also be a great option.

What are AVMs?

An AVM estimates a property’s value by analyzing its characteristics and recent sales transactions using advanced algorithms and mathematical modeling. AVMs consider various factors to estimate property value, such as:

• Recent sales
• Property characteristics
• Geographic location
• Market trends

Lenders can use individual AVMs or an AVM waterfall to help determine the value of a property. An AVM waterfall uses multiple AVMs, each with their own mathematical formula, data sources and geographical criteria. Every AVM — including the AVMs in an AVM waterfall — provides a confidence score to indicate the level of accuracy for the subject property’s AVM value.

What about the property condition?

While AVMs leverage robust data to estimate a property’s value, IAG also requires valuations for home equity loans to reflect the property’s current physical condition. Lenders can utilize the latest digital valuation solutions to quickly capture the vital property condition information necessary to complete the valuation process. 

ICE’s Validate cost-effectively provides property condition and condition-adjusted property value. 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 property information. Validate also utilizes computer-vision technology to analyze the borrower-supplied photographs to help determine property condition and value.

Combining highly accurate and proven AVMs with real-time PCRs can help deliver the credible results and confidence needed to address collateral risk.

Eligibility criteria for AVMs + PCRs

Eligible home equity loans can begin with an AVM and PCR to deliver a fast and convenient property valuation while helping to reduce costs. Several criteria should be considered when determining the feasibility of using an AVM, without introducing collateral risk. Typically, to use a Home equity product, the property should be a residential home with sufficient equity in an area with reliable market data.

Lenders also consider a wide range of other criteria, including Loan-to-Value (LTV) ratios, borrower creditworthiness, loan amount limitations, property type and condition, property location and additional criteria based on their risk tolerance and regulatory obligations. These eligibility requirements help ensure that using an AVM is an appropriate valuation method for the property.

Leveraging AVM solutions for an enhanced customer experience

Not only can AVMs provide significant time- and cost-savings for lenders looking to grow their home equity business, but they also provide a more streamlined and enhanced experience for the borrower. Early value and property eligibility helps lenders establish the borrower’s expectations while avoiding later frustration when the property’s condition or value does not meet loan requirements. Using an AVM and PCR sooner will help the lender decide if the valuation method meets its collateral risk policy, or if another type of appraisal (desktop or traditional) is required based on the potential risk. 

Remember, when selecting an AVM solution, not all options are created equally. Their accuracy, consistency and objectiveness depend on the data and analytical models used. Selecting an AVM partner that delivers highly reliable AVMs, robust property and public records data, as well as transparent performance monitoring, provides clear advantages to boost confidence and reduce risk when originating home equity loans.