ICE’s John Holbrook talks about important valuation risk considerations for home equity loans and lines of credit with Valuation Review

When assessing home equity loans and lines of credit (HELOC), there are many valuation solutions lenders rely on, including traditional valuation methods such as full appraisals, drive-by appraisals, or automated valuation models (AVMs) combined with property condition reports (PCRs). However, these approaches must align with certain collateral risk policy requirements, which differ significantly from GSE collateral policies.

John Holbrook, Senior Manager, Product Management, Valuation Analytics, spoke to Valuation Review about important risk management considerations relating to AVM and valuation usage for home equity loans HELOCs.

“Home equity loans and lines of credit don’t fall under the same collateral risk policies of the GSEs (Fannie Mae and Freddie Mac),” said Holbrook. “Instead, lenders are held to standards set by the Interagency Guidelines (IAG). The IAG are issued by multiple regulatory agencies, including the OCC, FDIC and Federal Reserve, to help ensure consistent and effective oversight of financial institutions.”

“For in-house loans, like a home equity loan or HELOC where the loan amount is at or below $400,000, IAG allows for a financial institution to use evaluations to support the collateral risk assessment,” he added. “For instance, combining an AVM with a PCR is allowed to assist in determining the value of the property - so long as the financial institution has a sound policy on when AVM use is considered appropriate. If the loan amount exceeds the $400,000 threshold, then the engagement of a real estate appraiser to perform an appraisal is required.”

How Validate can help assist with property valuation

Validate, ICE’s mobile customer-facing solution, allows the borrower, real estate agent, appraiser or other individual to capture specific photographs and input property data regarding the structure, site and location. Validate leverages ICE’s comprehensive property records data, GPS-tracked photos and computer-vision technology to provide a fast, cost-effective way to gain early insights into the property, helping to expedite the borrower’s time to close.

Validate can be leveraged for several use cases, including when a lender orders an AVM with a PCR. If the risk metrics for the AVM exceed the lender’s internal policies or the PCR reveals factors that are better understood by an appraiser, then an appraiser with the appropriate scope of work and client engagement can leverage Validate’s PCR to perform a desktop appraisal, without needing to revisit the property.

Further, if an appraiser raises concerns regarding credible assignment results after reviewing the PCR, they can inform the lender that they would like to see the property in person. Ultimately, the early insights and detailed property characteristics provided by Validate assist in determining the type of appraisal needed and streamline communication between the lender and the appraiser.

IAG regarding lender expectations

The IAG state, “The Guidelines clarify the Agencies' longstanding expectations for an institution's appraisal and evaluation program to conduct real estate lending in a safe and sound manner. Further, the Guidelines promote consistency in the application and enforcement of the Agencies' appraisal regulations and safe and sound banking practices.”

Also, “An institution should not select a method or tool solely because it provides the highest value, the lowest cost, or the fastest response or turnaround time.”

Holbrook provided further insight on the best practices for lenders to properly leverage AVMs with their provider and the current process when a reconsideration of value (ROV) is requested.

“Lenders should work with their AVM provider to establish policies and procedures for leveraging various valuation methods or tools that support these guidelines,” Holbrook said. “AVMs are tools. They provide insights to a property and the market around the property that can help a lender understand the market complexity in getting a credible value, whether estimated by a computer or provided by an appraiser.”

“Lenders are responsible for determining their own risk policies when it comes to using AVMs. First and foremost, they should adhere to any regulatory requirements or guidelines, such as IAG,” Holbrook said. “Additionally, a lender should consider using an AVM provider who regularly tests and validates their models to ensure credibility and transparency.”

“A ROV is a request made by a borrower to their lender, to reconsider the conclusion of value after an appraisal has been completed. Historically, lenders managed their own appraisal processes to support borrowers when they requested an ROV on their property,” he added. “In 2024, new guidelines were introduced to help ensure there are controls in place to provide borrowers with a voice and promote valuation accuracy. Lenders must address the borrower’s concerns, balanced with AIR (Appraisal Independence Requirements) concerning the appraiser during appeals to find a resolution.”

Holbrook also mentioned how imperative testing is in establishing credibility.

“Rigorous testing and validation of AVMs provides the support and evidence that the AVM confidence scores are reliable. ICE’s AVMs are compared to benchmarked recent sales data, including public records and MLS data, to produce a reliable valuation that is directly correlated to the forecasted standard deviation (FSD)/confidence score,” Holbrook said. “We also look at the market from a portfolio and local geographic level comprised of an aggregation of properties and determine which percentage of valuations are within 10 percent of the benchmark value, which measure as a PPE10 (Percent Predicted Error) metric.”

“This process helps ensure confidence scores for AVM use, and the confidence score is as important as the value of the subject property produced by the AVM,” he added. “When the confidence score is high and all other collateral risk concerns are addressed, then an AVM is viable option for the ‘V’ in LTV (Loan-to-Value). When the confidence score is less confident or lower than a lender’s policy thresholds, then an alternative appraisal method will be needed.”

How to leverage AVMs for home equity lending

“Running an AVM early in the home equity workflow helps provide early insights into a loan to properly set borrower expectations,” Holbrook said. “Lenders can also run a portfolio of properties through an AVM to quickly identify properties that have equity for borrower engagement.”

“Lenders using AVMs should engage a provider that helps them understand the strengths and weaknesses of an AVM for their given lending footprint, and when the results of an AVM are trustworthy or not,” he added.

Read the full Valuation Review article to learn more about how leveraging an AVM early in the process can help the lender set expectations with the borrower regarding the price of the appraisal or how long the appraisal may take to complete.