Home prices are on the rise across the United States. Veros’ VeroFORECAST reported residential market values will continue their overall upward trends during the next 12 months, with overall annual forecast appreciation of +3.7%, which is slightly higher than last quarter's forecast appreciation of +3.5%. The fast-rising home values, combined with record low homes listed for sale, and rising mortgage rates have more and more homeowners choosing to stay in their current homes.
According to REALTOR.com, people are not selling because they cannot replace what they have today given the rise in home prices. In fact, today people are staying in their homes an average of 10 years, which is an all-time high, up from six years. In appreciating markets, where the homeowners have the equity and a low interest rate, we are seeing a rising number of homeowners tap into their home equity line of credit to make home improvements.
In fact, a February 2017 survey released by LightStream Home Improvement survey found that more than half (59%) of homeowners plan to increase spending on renovations during this year, with 42% of the planned renovations costing $5,000 or more. Twenty-three percent plan to spend $10,000 or more.
The survey also shows many homeowners will tap into varying strategies to pay for these renovations. Of those strategies, 60% plan to use savings, 29% will utilize credit cards, and 9% are expecting to use a Home Equity Line of Credit (HELOC) to pay for their home improvements.
Reducing costs in a growing market
The rise in HELOCs creates a great opportunity for lenders to continue to serve their borrower, but it also creates a challenge. Lenders face marketing challenges due to the high cost of a traditional appraisal as the increasing appraiser shortage continues to lengthen appraisal turnaround times. HELOCs are usually provided at little or no cost to the consumer and, there is no real certainty that the homeowner will actually tap into the loan and create outstanding balances for the lender. Therefore, it is imperative that the lender originate the product at the lowest possible cost while subject to prudent credit risk.
One of the largest origination costs for lenders is the appraisal product. Drive-by appraisals or interior appraisals are prohibitively expensive. Many lenders have determined that the “cost” of the valuation is not commensurate with the “value” of the information in the underwriting process. This is why AVMs are returning to dominance in the valuation space for home equity lending.
Lenders and servicers today commonly use automated valuation models (AVMs) in the following ways: mortgage prequalification, home equity lending, and portfolio analysis.
With home equity lending, there are two ways lenders use AVMs. The first is to prequalify the property for a home equity loan or line of credit. The second way is after it has been issued to evaluate whether the property has enough value to support it. Essentially, lenders often determine whether to increase, decrease or end the line of credit based on the borrower’s home equity. Home equity lending requires that an evaluation include a property inspection, but does not require a full appraisal, so lenders opt to utilize AVMs in conjunction with a property condition/inspection report.
Lenders are leveraging AVMs for their proven accuracy, quick turn-time, and the fact that they cost 1/10 of a traditional appraisal. With the rise in HELOCs this year, many smart lenders are using AVMs for these reasons. Here’s why…
The best AVMs today deliver estimates with meaningful confidence scores, have remarkably high hit rates, and are rigorously tested. Models today utilize advanced analytics, are constantly being refined, and pull together massive amounts of rich data to produce a real-time market value estimate — providing greater speed and efficiency while maintaining responsible levels of risk management.
If time and origination costs are critical and revenue streams are uncertain at best, why engage in costly valuations like drive-by appraisals? So, AVMs should be used where it makes the most sense — in equity lending, where time and cost is critical, and a low-cost but accurate solution is needed.
Not all HELOCS are created equal
Before firing up the AVM tool, it’s important to recognize that not all HELOCs are created equal. Each borrower has different credit standings which produce different requirements for the lender. Therefore, each lender will deploy varying valuation risk management policies. A riskier applicant may require further valuation rigor, while a great credit standing applicant may be given a wider aperture in terms of property value.
Today, lenders require absolute control over their valuation workflow and credit policies. For added confidence, they require transparent risk management that creates audit trails for decision logic changes related to AVM implementation and usage.
VeroSELECT lets lenders put all their decision criteria into the system and it will make the right decision that is consistent with the lender’s credit policy every time. No matter what AVM you choose, VeroSELECT is the best option.