By SAM GARCIA
The last time second mortgages were in vogue, the options for appraising the property securing the loan were minimal. Although today’s home-equity lenders and investors have a wide range of real estate valuation options to match their appetite for risk — many are underutilized.
When home-equity lending was last growing prior to the 2008 financial crisis, home-equity valuation choices were slim, Mark Walser said in an interview. Pre-crisis options included a full appraisal, a drive-by appraisal, a broker-price opinion, or an automated valuation model.
“We have so many more products available than were available in 2008,” said Walser, who is president of Incenter Appraisal Management.
The pandemic brought change to valuations as on-site inspections became impractical. Incenter addressed the change by launching in September 2021 its own product, RemoteVal, which propelled the company to a wider audience of lenders and appraisers.
“In my particular part of the world, that’s what’s changed,” Walser said.
Still, many lenders skip an inspection and choose only to utilize AVMs, often footing the bill for the report. A few other risk-averse lenders are obtaining a full appraisal report for each of their home-equity transactions.
“There is a middle ground between purely relying on data, like an AVM, and punching the dial all the over to a full appraisal where you’re spending $450, $500,” he said. “Somewhere in the middle there now lies, thanks to technology, an option for you as a lender to say, ‘I can get eyes on the property; I can get veracity of what the condition and quality and potential risks are of this property, and I can get a range of value; and I don’t have to spend a huge amount of money to do it.’ ”
Today’s lenders can pick and choose other valuation options like a hybrid that uses a home inspector to do an on-site inspection and an appraiser to do a desktop appraisal. However, Walser said the quality of an inspection by a non-appraiser might suffer because the appraiser knows exactly what to look for.
Another option available today is an AVM combined with a remote inspection that has location-verified photos taken from the homeowner’s phone with a live person remotely guiding them through the process.
Today, banks aren’t required by federal banking regulators to obtain an appraisal on loans under $400,000 — an amount that includes a wide swath of home-equity transactions. Some states also have appraisal requirements. But financial institutions often elect to implement their own rules requiring a valuation that go beyond federal and state requirements.
Walser, however, estimates that 80 percent of home-equity lenders just use an AVM with no inspection or desktop appraisal. He cautioned that lenders often don’t get to see the real state of the property when skipping an inspection.
“I think there is a risk always associated with not knowing what you are lending on, not having visual sight of it, not having at least current photographs, and knowing the current condition of the property,” he warned.
He recommends that home-equity lenders — mostly community banks and credit unions — utilize a photo capture system that authenticates location and time. He also suggests that lenders use all types of available valuation tools as options based on risk.
“If they can add this into their arsenal, they can figure out for themselves not only what it is applicable to, but where in the risk profile it exists, and deploy it,” Walser explained. “And by doing that, you lower your cost, you lower your risks, and you increase the veracity of what’s in your portfolio.”
He additionally recommended that second-lien lenders not be pigeonholed into a few valuation options by a vendor that doesn’t have a full range of today’s wide array of products. Other vendors should be investigated for offerings that can be added to their set of valuation tools.
Walser noted that his company’s home-equity business has been increasing, though home-equity activity only accounts for less than 10 percent of their total business.