Home Equity Mortgage: Compliant Condition Matters for Banks
Home equity mortgages have exploded
Rising home prices have created a tremendous amount of home equity1, and homeowners are projected to continue accessing that equity at a rapid rate. Bank of America forecasts new home equity originations in 2024 will amount to over $100 billion2 ($60 billion of close-end home equity loans and $50 billion of home equity lines of credit). With average loan balances typically less than $100,000, that is a lot of units!
This opportunity hasn’t gone unnoticed, and non-bank and fintech market entrants are pursuing it aggressively. These firms have pushed the customer experience forward significantly, with firms like Figure publicly offering “approval in 5 minutes, funding in 5 days.”3 Banks have been working to compete in the category but have found themselves substantially less competitive, with cycle times averaging 41-44 days.4
Banks work hard to keep up
Banks have been leveraging automated valuation models (AVMs) in their home equity origination processes for decades and are aware that market regulations require that lenders validate a key assumption of AVMs: condition. Guidelines from regulators specifically require that lenders verify the subject property’s physical condition:
— The Interagency Appraisal & Evaluation Guidelines (December 2010)
“A valuation method should address the property’s actual physical condition and characteristics.“
“It would not be acceptable for an institution to base an evaluation on unsupported assumptions, such as a property is in “average” condition.”
“An institution should consider performing an inspection to ascertain the actual physical condition of the property and market factors that affect its market value. When an inspection is not performed, an institution should be able to demonstrate how these property and market factors were determined.“5
“An institution should establish policies and procedures that provide a sound process for using various methods or tools. Such policies and procedures should address the extent to which an inspection or research is necessary to ascertain the property’s actual physical condition.“6
“Institutions may employ AVMs for a variety of uses such as loan underwriting and portfolio monitoring. An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. … For example, to be consistent with the standards for an evaluation, the results of an AVM would need to address a property’s actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in “average” condition.“7
— Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines (October 2018)
“An evaluation should include sufficient information to identify the property, address the property’s actual physical condition, and detail the analysis, assumptions, and conclusions that support the market value conclusion.“8
Historically, banks have satisfied these requirements by pairing an AVM with a human-driven property condition report (PCR). These PCRs average 5-10 days to complete, with some outliers taking more than two weeks. As such, they have been a key impediment to improving processing speeds and the customer experience. While some nonbank market participants can skip this costly step, banks have not had an alternative until now.
Technological advances are helping
CAPE is helping banks solve this issue by offering an automated property condition report (aPCR). Using computer vision applied to high-resolution aerial imagery, CAPE offers lenders an assessment of property condition in seconds. This removes the most time-intensive piece of the home equity lending process, allowing lenders to fast-track approvals, massively reducing their decisioning timeline and substantially improving the customer experience.
Like its predecessor, the aPCR benefits from direct observation of the subject property’s actual physical condition to satisfy interagency requirements. Further, CAPE’s aPCR takes the final step toward realizing the agencies’ (OCC, Board, FDIC, NCUA, CFPB, and FHFA) assertion that “because AVMs arguably involve less human discretion than appraisals, AVMs have the potential to reduce human biases.”9 With CAPE’s aPCR applying a consistent rubric to evaluate condition without human intervention or bias, the process satisfies the proposed changes to the rule even more robustly.
The evolving compliant risk reduction process
Technology has evolved rapidly since the 2010 Dodd-Frank Act that led to these guidelines. The home equity market has seen lenders and issuers use these innovations to improve the process and gain business. These new solutions cannot only satisfy the letter of the regulations but also reduce risk as the regulations intended. Recent market innovations make this possible while simultaneously decreasing processing time and improving the customer experience—key factors in successfully making the most of the home equity opportunity for all.
Learn more about CAPE’s automated property condition report here.
- ICE Mortgage Monitor Report, February 2024, p21 ↩︎
- Asset-Backed Alert, March 28, 2024 ↩︎
- https://www.figure.com/search-why-heloc/ ↩︎
- Curinos, CBA Live 2024 ↩︎
- Interagency Appraisal & Evaluation Guidelines (12/2/2010), Appendix B: Evaluations Based on Analytical Methods or Technological Tools, p13 ↩︎
- Interagency Appraisal & Evaluation Guidelines (12/2/2010), Appendix B: Evaluations Based on Analytical Methods or Technological Tools, p31 ↩︎
- Interagency Appraisal & Evaluation Guidelines (12/2/2010), Appendix B: Evaluations Based on Analytical Methods or Technological Tools, p32 ↩︎
- Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines (October 16, 2018), p10 ↩︎
- Proposed Rule: Quality Control Standards for Automated Valuation Models, 6/21/2023, Federal Register ↩︎