A new mortgage loan is triggered with consideration of two numbers: the borrower’s credit worthiness (FICO) and the worth of the collateral pledged for the loan (a valuation).
FICO scores and other measures of credit worthiness are trusted and instantly available. Valuations, on the other hand, currently don’t share the same benefits. This fact impacts the entire lending industry as mortgage rates continue to rise and refis decrease. The result is demand for home equity loans, which presents a tremendous opportunity to close loans quickly.
According to TransUnion, 1.6 million homeowners will open a home equity line of credit in 2018, increasing to an estimated 8.4 million lines opened from 2019 to 2022. Further, mortgage rates have risen over the past 18 months (3.75% to 4.5%), with continued increase expected through 2018. After all, we certainly don't want to touch our 30-year mortgage fixed at 3%, yet we still want the boat, pool, new car, or to pay for college or a wedding.
As lenders look to capitalize on this demand, there are a few considerations regarding valuations:
- The proliferation and availability of data in the residential property world is as good as it has ever been. Lenders have a unique opportunity to trust today’s data and build processes and lending approaches that are data-based, maximizing efficiency and reducing costs.
- New technology and automated valuation model solutions give lenders an instant understanding of the collateral they are dealing with at the point of application. Physical characteristics from national databases ensure comprehensive coverage and accurate information, while analytics tell a lender what’s going on in the neighborhood and if the home will be a complex valuation assignment.
- Time and costs matter a great deal in HELOC lending. This is because loan origination costs are typically held by the lender rather than directly by the borrower. Competition is high to secure HELOC borrowers, and loans are typically held in a portfolio on the lender’s balance sheet.
The rise of valuation platforms
When it comes to valuing collateral, lenders are best served with a vendor-neutral valuation platform. They need a platform that is cost-effective, efficient and compliant, such as the CoreLogic Valuation Platforms, which are vendor neutral, allowing lenders to choose preferred service providers.
Without a valuation platform between the lender and its vendors, it is difficult to avoid single points of failure or to monitor the process. Platforms allow lenders to select vendor(s), effectively exercise third-party oversight, monitor performance, optimize redundancy and extra capacity, and easily adopt new products and processes.
Lenders also can build out a risk-based collateral valuation approach that considers both collateral valuation and compliance risks in conjunction with the borrower, or overall loan risks. Intuitively many loans do not need a full appraisal and can utilize an AVM with a Property Condition Report, including loans with low LTV, low market complexity and borrowers with high credit.
Ensuring a successful program
Effective monitoring is required for lenders to deploy an AVM program of this nature, and today many successfully maintain compliance while adopting valuation programs. Lenders can install a monitoring program themselves or select a reputable third-party provider to monitor and provide an AVM cascade, ensuring the best AVM for any given geography and property type.
When selecting a third-party vendor, a best practice is to use an appraiser-based valuation product. When risk is tied to a loan and the associated value of collateral, human judgment is necessary. For example, using a PCR combined with an appraiser’s analysis of the condition information, public physical characteristics and market data can provide a solid basis for a risk analysis by a lender’s underwriter and is cost effective.
Valuation platforms can allow lenders to create a custom format and/or tool for selected vendors (AMC or direct engagement) that eliminates complexity and risk of error caused by multiple vendors.
Automating the quality control and risk-screening process is also key to success and compliance, creating consistency, compliancy and efficiency in the HELOC lending process. This way, lending experts can avoid wasting their time, help reduce costs without increasing risk and focus on loans that may cause a policy exception.
Compliant, cost-efficient collateral valuation for HELOCs is possible in today’s environment with the use of proven platforms. When a HELOC is combined with an automated valuation cascade and automated risk-based review process, lenders are in a great position, and this evolved valuation is easily within reach for lenders of all types and sizes.