Call It A Comeback: Why Lenders Should Reconsider Using AVMs

Automated valuation models (AVMs) have been around for decades, having evolved from homegrown tools that institutional investors originally developed back in the late 1990s to more quickly determine the value of the collateral securing mortgage-backed securities portfolios.

As technology has evolved and improved over the years, AVMs have seen increasing acceptance among mortgage lenders and investors as an accurate and reliable alternative to traditional appraisals. Today, lenders and investors are leveraging big data and analytics to arrive at home values with surprising accuracy. Still, most people in the mortgage space agree that traditional appraisals are still very much needed and are not going away any time soon.

At the same time, it cannot be denied that technology is helping to speed the valuation process and reduce the industry’s reliance on traditional appraisals, which, obviously, are more costly, as they involve a “truck roll” and physical inspection of the property by a human appraiser.

312582ab3e977efda76eb841e0228488 Call It A Comeback: Why Lenders Should Reconsider Using AVMs

To learn more about how AVMs have evolved over the years and why they are rising in popularity, MortgageOrb recently interviewed Tim Smith, co-founder and president of FirstClose, which offers AVMs to its mortgage lending customers.

Q: How did AVMs first come into use?

Smith: The concept of the AVM was introduced in the late 1990s, but lenders really began utilizing this technology in the early to mid-2000s. At that time, there were only a few AVMs on which lenders could rely heavily in their analysis of residential property.

The introduction of AVMs allowed lenders, for the first time in history, to depend on innovative technology to provide them with a residential valuation report that could be obtained in a matter of seconds. Instead of waiting for appraisers to painstakingly survey each and every property, lenders received the market value for the property, the tax assessor’s indication of value, the recent sales history and comparable sales analysis of like properties with no wait time.

Q: What happened to make AVMs less popular?

Smith: In short, the recession of 2008 eliminated the widespread use of AVMs. Unfortunately, leading up to the crisis, many lenders chose to back mortgages solely based off of the AVM, without having ever actually looked at the property being financed. This heavily contributed to the housing market crash and resulted in lenders feeling extremely wary about using AVMs in any capacity moving forward.

312582ab3e977efda76eb841e0228488 Call It A Comeback: Why Lenders Should Reconsider Using AVMs

In addition, loans lacking income verification, as well as “drive-by” appraisals, in which an appraiser does not even enter the property to be appraised, aided in the collapse of the housing market. Often, a drive-by appraisal was ordered when the loan officer had already been tipped off about something illegal on the property, such as an illegal basement apartment or severely damaged room.

Q: Why are we seeing a comeback of AVMs now?

Smith: Fortunately, the industry has come a long way since 2008, and consequently, we are seeing a comeback of AVMs, especially among home equity line of credit and home equity loans. One reason for this is that technology has improved drastically, and there are many more AVMs to choose from than there were 10 years ago.

With the inclusion of so many more comparables available online, lenders have access to much more accurate information. In addition, AVMs are now equipped with confidence scores, ranging from 50 to 100. Lenders can customize their AVMs and choose to only utilize those with scores of 80 or higher.

Q: What are the advantages for lenders using AVMs?

Smith: The biggest advantage for a lender to use an AVM is speed. Millennials are a huge part of the buying market, and they are used to receiving anything they need at the touch of a button. Although an appraisal may take up to three weeks to return, an AVM is instant.

Second, the rate at which young people are entering the appraisal career track is rapidly declining. The job requires a lot of certification and at least two years of work as an apprentice before earning any substantial income. With the average age of appraisers remaining around 55, it is wise for lenders to start relying on other appraisal tools.

Of course, this does not mean that lenders should make the same mistakes they’ve made in the past and solely rely on technology for appraisals. In fact, post-recession guidelines state that when using an AVM, the lender must accompany the report with physical inspection of the property.

Using an AVM in conjunction with a physical inspection is the way of the future. It is faster and more cost-effective than relying solely on an appraiser and will remain an important part of the industry if and when used correctly.

1 COMMENT

  1. Another hype for use of valuation methods that were over used, inaccurate, and developed from urban settings that are now not allowed as primary source of value per Dodd-Frank Act. If inspections are performed by either listing agent or selling agent, I would propose that you then lose the independence since both agents are a paid advocate in the transaction. Also, many agents have poor skills in measuring and inspecting the home on independent basis.

    Appraiser shortage may be factual in some areas but that is in part from the lender’s disdain for the appraisal industry and now do not know how to handle valuations in the future when more appraisers retire.

    Even with technology improvements, (mostly in isolated urban areas) increased risk for lack of inspection will again create a financial fiasco to be faced in the future.

LEAVE A REPLY

Please enter your comment!
Please enter your name here