By now, lenders likely know the following numbers by heart: U.S. homeowners are collectively sitting on $32 trillion in home equity, roughly $299,000 for the average homeowner. Because many homeowners with mortgages have first mortgage interest rates that are two or three percentage points below current rates, these homeowners are reluctant to use traditional refinancing to tap into their home’s equity. All of which are making home equity products attractive options for homeowners.
The competition for this business is intensifying as new players, including fintechs, shared-equity investors, and independent mortgage banks, have entered the market. However, the home equity market is not growing as some would have expected. In July 2024, the Mortgage Bankers Association (MBA) released its 2024 study on home equity lending in 2023, and it contained some expected and unexpected findings.
In the unexpected category, the study found that the total home equity market in 2023 hadn’t grown dramatically - it was only up by 1.5% over the previous year. However, other industry reports expect the market to grow by 3.5% to approximately $37 billion by 2029. In the expected category, the study confirmed that competition was increasing and that lenders were widening their credit and loan-to-value (LTV) tolerance to attract more customers. The study also found that lenders used automated valuation models (AVMs) in 75% of the transactions. The trend towards using AVM in home equity has been developing for some time.
There are several reasons for the popularity of AVMs in home equity lending. Home equity products are generally considered less risky than first mortgages. Traditionally these products have been marketed as low- or no-cost offerings for consumers with fast decisions and minimal paperwork. The appraisal threshold is now $400,000, as adopted by the FDIC and NCUA. An AVM plus property inspection can be used in lieu of an appraisal in most home equity lending situations. This solution speeds up the process and saves hundreds of dollars in origination costs.
The need to tightly control settlement services costs and, at the same time, deliver underwriting decisions in days versus weeks all play to the strengths of AVMs. These strengths include being highly accurate, nearly instantaneous, and costing only a fraction of a full appraisal.
As lenders widen their credit criteria and home prices in various markets begin to cool, using the lender-grade AVM solutions in the First American Data & Analytics Procision™ AVM Suite, provides lenders with a high level of confidence in determining loan size, assessing collateral risk, and creating effective marketing campaigns.
Procision Premier was designed to comply with the new joint agency rules on AVM performance and bias that take effect in the Summer of 2025. These rules, the regulators noted, will apply to AVMs used for home equity lending. Procision Premier is great for home equity lending, especially when the property has not been transacted in many years. That is because Procision Premier does not use listing or sold data in the model, like other AVMs that rely heavily on this data. Most AVMs in the market have a “snap to” list or sold price embedded in their models, which can make it seem like the AVM is very accurate. However, if there is no listing or sold data for the subject property, the AVM can be far off from the true market value. This is why Procision Premier is ideal for properties that have not been listed or sold in many years, which would encompass the majority of prospects for HELOC lending.
Procision Direct is designed to deliver the highest possible hit rate, returning values on over 120 million U.S. properties. Thus making it ideal for developing targeted home equity marketing campaigns. AVMs play a critical role in helping lenders identify quality prospects with high equity. Using this AVM, a lender can quickly assess opportunities within its own portfolio or use it to prospect for non-customers within its lending footprint. Lenders can combine our AVM with open lien data to find additional prospects with no involuntary liens.
In addition to identifying potential customers, lenders can use this information to create targeted offerings that might improve pull-through, an industry challenge that was also highlighted in the MBA study. With AVM-generated data, certain candidates might be offered a pre-approved loan limit. An example of this would be prospects with a high amount of equity being offered a better interest rate, a streamlined approval process, or perhaps a no-cost HELOC.
Because lenders are increasingly using online calculators to create customer engagement, Procision Power, the general-use AVM in the Procision suite, can be integrated into lender websites. This AVM can give customers an early indicator of how much equity they might have and/or how they could use this equity to consolidate more expensive consumer debt. This is particularly timely since credit card debt is currently at an all-time high, and in a recent survey of homeowners, 49% said they would use their home equity to pay off their credit card debt. Procision Power is also a lender-grade AVM designed to comply with the new joint agency rules on AVM performance and bias that take effect in the Summer of 2025.
By staying informed about advancements in AVM technology and incorporating these tools into their decision-making processes, lenders can enhance their ability to seize opportunities and manage risks effectively.
Whether you’re just starting to get into the home equity space or looking to enhance your existing program, accurate and reliable AVMs are great tools to help reach your goals. AVMs are the primary valuation tool in underwriting home equity loans, providing a fast, highly accurate, and up-to-the-minute property valuation solution. The First American Data & Analytics Procision AVM Suite is key to success in the competitive home equity space.
To learn more about the Procision AVM suite and get a sample of our data, click here.