Automated Valuation Models (AVMs): A Cornerstone for Modern Lending

Automated Valuation Models (AVMs) are not just a single tool in the housing finance professional’s arsenal; they’re a cornerstone technology woven throughout the entire lending lifecycle, from initial application to long-term portfolio management. Let’s explore how AVMs, like Veros’ VeroVALUE AVM, contribute at each stage:

1. Loan Origination: Setting the Stage

The lending journey begins with the borrower’s application. AVMs play a crucial role in these early stages by providing a rapid and cost-effective initial property valuation. This speed is crucial in today’s competitive lending environment. 

• Example: A borrower applies for a mortgage on a home listed for $400,000. The lender uses an AVM to obtain an immediate estimate of the property’s market value. If the AVM output is close to the list price, it provides initial confidence in the deal and allows the lender to proceed with further due diligence. However, a significant discrepancy may raise red flags and trigger further investigation. 

• Fact: AVMs expedite the pre-qualification process, enabling lenders to quickly assess the loan-to-value (LTV) ratio and determine if the loan is within acceptable risk parameters.

2. Underwriting: Deeper Dive and Risk Assessment

Once the initial screening is complete, the loan moves to underwriting. Here, AVMs provide a more in-depth valuation analysis. 

• Example: The underwriter compares the AVM output with the borrower’s estimated value and, if necessary, a traditional appraisal. If these valuations align, it strengthens the collateral assessment. Conversely, if there’s a significant divergence, the underwriter may require additional documentation or a second appraisal. 

• Fact: AVMs are often used alongside other underwriting tools, such as credit scoring and income verification, to create a comprehensive risk profile of the borrower and the loan. This multi-faceted approach enables more informed lending decisions.

3. Loan Closing: Finalizing the Transaction

While the AVM’s primary role is in valuation, its accuracy also contributes to a smoother closing process. 

• Example: Maintaining a consistent valuation throughout the process—from origination to closing—minimizes potential delays or last-minute renegotiations due to valuation discrepancies.

4. Post-Closing and Servicing: Monitoring Loan Performance

The journey of the AVM doesn’t end at closing; it continues to be vital in loan servicing and portfolio management. 

• Example: Lenders use AVMs to track property values over the life of the loan. This monitoring is crucial for assessing the performance of their loan portfolio and identifying potential risks, such as declining property values in a specific geographic area. 

• Fact: AVMs are employed for mark-to-market valuations, which are essential for regulatory reporting and for evaluating the overall health of a lender’s portfolio.

5. Portfolio Management: Proactive Risk Mitigation

At the portfolio level, AVMs become powerful tools for proactive risk management. 

• Example: A portfolio manager utilizes AVMs to analyze trends in property values across various loan pools. Identifying a cluster of loans in an area experiencing declining values allows the lender to proactively reach out to borrowers, offer refinancing options, or take other steps to mitigate potential losses. 

• Fact: During economic downturns, AVMs are especially critical for identifying and managing distressed assets. They allow lenders to proactively assess their exposure and make informed decisions about loan modifications, foreclosures, or other loss mitigation strategies.

6. Securitization: Enhancing Investor Confidence

AVMs also play a role in the securitization of mortgage loans. 

• Example: When mortgage loans are pooled and securitized, AVMs can provide independent valuations of the underlying properties, enhancing transparency and investor confidence in mortgage-backed securities (MBS).