In today’s mortgage environment there seems to be an ever-growing number of collateral assessment tools that lenders use. In the past, basic appraisals were primarily the only vehicle used for valuation of a property offered as collateral for a loan, but in today’s market, one does not need to dig to deep into the plethora of collateral assessment tools to uncover numerous alternative options, which the lender has at his disposal.

Keeping up with the myriad of various possibilities is almost enough to lead one to drink. Let’s take a look at many, but not necessarily all, of the options we have today. We can begin by basic property inspections. We also have broker price opinions (BPOs), automated valuation models (AVMs). This category can be broken up into appraiser assisted AVMs, desktop appraisals and AVMs with inspection. For that matter we have limited exterior-only appraisals with inspections, limited exterior and interior appraisals with inspections, limited exterior appraisals and limited interior appraisals. There are many more that slightly vary from the ones we’ve listed, but they cover the majority of the range of the alternative evaluation methods that are being used today.

The Dictionary of Real Estate Appraisal, which is published by the Appraisal Institute, defines an evaluation as “an estimate of value for certain real estate transactions that are exempt from federal agencies’ appraisal requirements.” This same dictionary defines an appraisal as “an opinion of value” or “the act or process of developing an opinion of value.”

Our list above actually covers methods of evaluation, such as inspections, which don’t even meet the minimum requirements of evaluations, as well as those that exceed these requirements, according to this dictionary, which states that evaluations must (1) be in writing, (2) include the preparer’s name, address and signature as well as the date, (3) describe the condition and current, as well as projected, use of the property in question, (4) name the sources of information leading to its conclusion and (5) provide an estimate of market value and include any limiting conditions.

The mainstream of alternative evaluations today seems to be tools such as the AVM and BPO. They come closest to meeting the definition of evaluation, yet they may not necessarily meet it, depending upon how they’re structured.

Given all the above information, we could easily throw up our hands while deciding which method of evaluation to use. We are, however, usually directed by the regulatory compliance department of the financial institution that’s going to be funding the loans, so we fortunately have that direction. The financial institution not only has the interest of the organization’s stake, but it also must follow certain banking regulations, depending on the kind of loan it is, what is going to be done with the loan, etc.

Those regulations vary, depending upon a lot of things. For example, if this loan going to be sold on the secondary market to Fannie Mae, Freddie Mac or another lender, it’s going to have more stringent evaluation requirements than those needed if the loan is going to be kept in-house as a portfolio loan. But since its financial institution is probably a bank, subject to bank regulations, they probably are still going to have some requirements as to what kind of collateral assessment they need on a loan.  

In cases where loans are considered to be low risk, the lender usually has a lot more latitude, both with the regulators and with the company management that he is representing. A borrower, for example, with squeaky-clean credit would be considered a low risk. A borrower who has assets that greatly exceed his liabilities would certainly not be considered a large risk. A new house would be conceivably less risky than an older house. A house in a subdivision where there are a lot of similar structures usually is considered less risky than, say, one in an area where there is not a lot of other houses.

Even in areas where there is not a lot of risk involved, there are typically some types of evaluations required. Here, we are usually talking about something like an AVM or, if it’s the bank president who has a lot of money and everybody trusts him to pay off the loan, an inspection with a photo.

In the end, it all boils down to how much must be invested to protect the interest of the lender while bearing in mind that the lender has to keep his front costs down as low as he can so that he can be as competitive as possible in his market. The market, as most of us are aware, is very competitive today, and lenders find themselves competing for loans more so than they have in the past.

Lending Tree is a good of example of the competition that exists today. Who would have thought that there would be lenders who would be signing with a company that offered to have them bid against each other? That is happening in our business today and because of the pressure that causes it to happen, there are going to be more and more reasons for the lenders to try to lower their costs for closing a loan. Using an alternative evaluation method is one of the ways that they’re going to do that.

It is up to those of us who serve the lending community, as appraisers and evaluators of other types, to deliver the product that the lender requires in order to be competitive and to set and deliver the standard that is developed within the lending community as we move forward.