The Teranet Automated Valuation Model (AVM) is an invaluable tool that assists financial institutions with managing opportunity and risk across the lending lifecycle: from prospecting and acquisition, to funding, to portfolio management and finally to client retention and growth. This blog will dig into when lenders should use an AVM during the lending lifecycle, identify the differences between AVMs and appraisals, and outline the strength of the Teranet AVM.
When do lenders benefit from using an AVM?
As we’ve mentioned, an AVM can be used many times throughout the lending lifecycle. They are most commonly used by lenders for due diligence during the evaluation and adjudication phase of a mortgage transaction to help get a more complete picture of the risk of a potential lending opportunity. Reviewing the various values of a home compared to the sales price helps you understand if the loan-to-value ratio has been calculated accurately and informs your product selection and helps you navigate your underwriting policy.
Lenders can also use AVMs to support ongoing portfolio health by understanding areas where they may be overexposed or underexposed from a risk perspective. Understanding the location of properties in your portfolio, the comparable sales around them, and property attributes including the valuation dimension helps provide clarity on the health of the mortgage lending in your portfolio.
Another common use for AVMs by lenders is during the renewal phase to gain confirmation of the current value of the property. Renewals at moderate LTV’s are excellent candidates for a fast and efficient AVM valuation service.
Risk assessment, Capital Adequacy and Regulatory Reporting are also necessary and complex process workflows which can benefit from current market valuations. The Teranet AVM can be used to ensure your mortgage portfolio balance sheet reflects present day conditions.
A final use case for an AVM would occur during the collections phase of the lending life cycle. In instances where a borrower is no longer able to pay their mortgage an AVM coupled with PurView data will tell a lender how much equity there is in the home and inform the collections process towards the most suitable path for the lender and the client.
So, what’s the difference between an Automated Valuation Model and an appraisal?
AVMs and appraisals are both valuation services, but often should be used to either complement each other, or one may be better suited to the specific circumstances. In some instances, an AVM is a more efficient but just as effective valuation service, depending on the risk policies the lender is following. Many lenders will use an AVM when the mortgage application is submitted to gain insights into their customer(s) and determine whether they want to move forward with a deal; they may request a property appraisal much later in the process when risk or necessary additional due diligence warrants the added time and expense.
Additionally, a lender can gain even more insight when they use PurView in addition to an AVM as they will receive title information, ownership information and many other data points that will help evaluate risk on the property. When a lender accesses the Teranet AVM coupled with PurView data they can be informed of any registered encumbrances, which will help identify if there are any undisclosed mortgages or registered mortgages that look different than what the customer indicated in their application.
Automated Valuation Models are also faster and more cost-effective than appraisals as they are generated digitally, in real-time, and don’t require the manual work and in-person visit of an appraiser. However, appraisals and AVMs work hand-in-hand, as an appraiser can uncover internal property conditions that may affect the value of a property.
The Teranet AVM advantage
Teranet AVM produces its valuations from a proprietary national database compiled with data from public, commercial and proprietary data sources across Canada. Our national database is constantly updated with current sales and property information, which ensures that our AVM consistently reflects current market conditions.
Choosing Teranet as an AVM provider means you’re choosing a partner with commercial strength and over 30 years of experience in the market, with two dedicated data centres, a history of operating provincial land registry systems, and a full set of commercial business units including compliance Teranet is the most complete partner for a mortgage lending institution. Teranet has a suite of solutions available to lenders that can be coupled with PurView and AVM data, making Teranet your one-stop shop for any portfolio health and risk monitoring needs.
To learn more about how Teranet’s AVM can help you optimize your business as a lender, contact your dedicated account manager.
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