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The Shift to Automated Valuation Models: A New Era for Mortgage Lenders

An exciting development for the mortgage industry has occurred: Lenders have been given the green light to utilize automated valuation models (AVMs) to make credit decisions.

With this development, of course, comes additional ones. The most prominent one being that six federal regulatory agencies issued a final rule implementing quality control (QC) standards for AVMs. This rule was issued on July 17, 2024, and will be put into effect on October 1, 2025. Here’s what lenders need to know to prepare:

What Are AVMs & What Are the Advantages of Leveraging Them?

Before we dive into the specifics of the new final rule for AVMs, let’s talk about why it’s worth understanding in the first place.

Automated valuation models are software-based property pricing tools that can be used to determine home values. They algorithmically calculate property values by leveraging mathematical or statistical modeling as well as existing databases.

Here are key reasons why you should take advantage of the opportunity to use AVMs over appraisals to make mortgage lending decisions:

Lower Cost

Automated valuation models don’t require a licensed appraiser, making them immediately more cost-effective than traditional appraisals. While the average appraisal price is $500, you can leverage AVMs for a very small fee since an automated system doesn’t require any expensive manual labor.

Faster, More Accurate Valuations

Traditional appraisals, which require in-person visits and appointments, typically take weeks to complete. AVMs, on the other hand, can generate property valuations in a matter of seconds with instant access to much more sales comparison property data than appraisers.

With enhanced access to data and no chance of human error, AVMs are capable of evaluating a high number of comparable properties very quickly and accurately, as the Mortgage Bankers Association points out in their State of Automated Valuation Models Report.

Unbiased Decisions

Appraiser bias plays a role in the devaluation of homes based on race, ethnicity, and/or national origin. According to a report by The Brookings Institution, “Black neighborhoods are valued roughly 21% to 23% below what their valuations would be in non-Black neighborhoods,” and appraisal bias plays into 9% to 19% of these statistical values.

AVMs eliminate human discriminatory tendences and can be trained to fairly evaluate properties. What’s more, the AVM QC standards being implemented by the federal regulatory agencies are meant to prevent bias in the home valuation process.

Key Takeaways from the Final Rule

Now that you know how leveraging AVMs can benefit your mortgage company, we can take a closer look at the final rule…

According to the Federal Housing Finance Agency (FHFA), the rule was “designed to help ensure the credibility and integrity of models used in valuations.” As such, it applies AVM quality control standards and requires mortgage originators to adopt policies, practices, procedures, and control systems to ensure they adhere to the standards.

The desired outcomes include:

  • Confidence in estimates
  • Protection against data manipulation
  • Conflict of interest avoidance
  • Regular testing and performance reviews
  • Nondiscrimination law compliance

Best Practices for Implementing AVMs & Meeting Requirements

In order to take advantage of AVMs without facing costly consequences later on, you need to establish a robust quality control framework that enables you to mitigate potential risks. Here are some steps you can take to do just that:

Conduct Periodic Validations

Regular validation and testing are crucial to ensuring AVMs are performing as they should. It’s a good idea to assess AVM accuracy across various criteria, including property types and geographic locations. This will allow you to identify any volatility over time.

Keep AVM Processes Separate

It’s vital that automated valuation model selection and validation processes are not conducted by loan production or loss mitigation teams. Ensuring AVM processes remain separate from other areas of your business can help prevent inappropriate use by maintaining valuation objectivity.

Closely Monitor Algorithmic Bias

Earlier in this post, we explained that AVMs can reduce bias. The key word in that statement is “can.” Since the software needs to be trained by humans, it is not immune to bias. For that reason, it’s important for lenders to regularly review data sets to ensure they’re diverse and representative – especially for communities that have historically faced discrimination. If trained and maintained properly, AVMs can help you meet fair lending standards.

Leverage Third-Party QC Services

Staying up to date on the latest regulatory requirements for AVMs and ensuring your organization is meeting them is both crucial and difficult. That’s why partnering with a trusted mortgage quality control company that offers AVM reviews as part of their collateral risk services is key. The right mortgage QC partner will help you find peace of mind knowing that you’re meeting the requirements that will be put in place when the final rule goes into effect on October 1, 2025.

Your Partner in Ensuring AVM Final Rule Compliance

MetaSource is that right partner. With decades of experience in mortgage quality control and a dedicated team of seasoned industry professionals who always stay current on regulatory requirements, we are dedicated to helping our clients ensure mortgage compliance.

For that very reason, we offer automated valuation model reviews as part of our collateral risk analysis service. While these reviews are optional for our clients, we highly recommend taking advantage of them, so you can meet standards once they’re implemented next year.

Want to learn more about these particular services? Contact us to chat with an expert. Looking to gain more information on what makes a QC partner the right pick for your organization? Download our comprehensive guide.

Your Guide to Finding the Right Mortgage QC Partner

The right mortgage QC partner can help you increase efficiency, drastically reduce costs, overcome obstacles, and ensure compliance. Learn how to make the right decision in our guide!

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