Using Evaluation Alternatives for Real Estate Loans That Don’t Require an Appraisal

by Blair Rugh

Under the agencies real estate appraisal guidelines a complete appraisal prepared by a licensed or certified appraiser is not required for loans of $250,000 or less secured by 1- 4 family residential real estate. There is also an exemption for the renewal, modification or extension of certain real estate secured loans. In circumstances where a complete appraisal is not required banks have used what are referred to as evaluation alternatives, most prominent among them being Automated Valuation Models (“AVMs”).

In November, 2008 the agencies published proposed Interagency Appraisal and Evaluation Guidelines to replace the guidelines published in 1994. To date the proposed guidelines have not been finalized but I anticipate that they will be soon, fundamentally as written. One of the reasons that the proposed guidelines were promulgated was to provide guidance and standards for the use of AVMs. Appendix B to the proposed guidelines provides requirements for the use of AVMs as well as limited guidance on the use of Tax Assessment Valuations.

Many bankers misunderstood the thrust of the proposed guidance and believed it was a prohibition or discouragement on the use of AVMs until the guidance was finalized. That was not its purpose at all. The regulatory agencies recognized and approved the use of AVMs long before the proposed guidance was published. The purpose of the proposed guidance was not to approve the use of AVMs as that was already the agencies’ standard. The purpose of the proposed guidelines, and the final guidelines when they are published, is to provide a set of standards for using AVMs. Before the proposed guidance was published there were no standards or best practices for AVM use. Now there are. I recommend that banks using AVMs follow the standards set out in Appendix B to the proposed guidelines. Certainly do not use the fact that the final guidelines have not been published as a reason not to utilize AVMs.

Another excellent use of AVMs is in portfolio monitoring. For this purpose an AVM may be used for loans that exceed $250,000. Both the proposed and existing guidelines require that a bank have a program for monitoring and updating collateral valuations. AVMs are a useful tool for updating the value of residential real estate collateral, particularly for unseasoned loans that were made at higher loan to value ratios or loans that are experiencing payment delinquencies.

If a bank determines that it will utilize AVMs it should obtain from its provider information about its sources of data, the frequency it is updated and its modeling techniques. The bank should then establish standards for validation testing and monitoring. Also a bank using AVMs should establish standards for the types of property, location, condition and price range for which AVMs may be used.

AVMs can be a useful and relatively inexpensive tool in a bank’s real estate evaluation process. If a bank is not using AVMs it should investigate their usefulness and consider their use. TriNovus offers an excellent AVM resource called TriVALU. For information about TriVALU or to obtain a demonstration of the product go to TriNovus.com or call them at (205) 991-5636.