While the surge in mortgage refinance opportunities during the past few years may be slowing due to interest rate increases, credit unions have continued to maintain a strong presence in the mortgage market - not only for new purchase mortgage loans, but also for home equity lending.
Long a favorite product type for credit unions, home equity lending is making a comeback in many parts of the country where home values are on the rebound. Certainly, home equity loans and lines are much more likely to become part of credit union portfolios than any other mortgage product. Even so, as credit unions grow their home equity loans/lines, new mortgages and refinances, they face increased concentration risk as real estate loans become a larger percentage of their overall assets.
To help manage real estate loan portfolio risk, credit unions have traditionally relied on credit score analysis to look at credit trending and property valuations to calculate current loan-to-value ratios. While in the past, there hasn’t been a tremendous amount of focus on the type of Automated Valuation Model (AVM) used to render a valuation, in our opinion, that’s about to change.
In January 2014, several new regulatory requirements will go into effect. As a result of Dodd-Frank and new Consumer Financial Protection Bureau (CFPB) regulations, the NCUA is expected to ramp up enforcement initiatives on several fronts. For example, the collateral risk management practices for real estate portfolios will be under the microscope more than ever before -- which means that credit unions must ensure that their AVM standards are both proven and compliant.
The enforcement of new regulations is also expected to bring about greater scrutiny regarding compliance with current regulations, such as those set forth in the Interagency Guidelines that were released in December 2010. Those guidelines clearly assign responsibility for ensuring accuracy to the lenders, and require credit unions to test the AVMs they use by brand, by model, across different geographies, and for different property types.
This level of testing can present a significant challenge for credit unions that don’t have the time or money for such an undertaking. Nonetheless, credit unions must be ready to meet the rigors of these requirements and have solid answers to questions about how an AVM was selected and what the ongoing testing protocol is to ensure accuracy and reliability.
Fortunately, there are vendor-neutral cascade AVM solutions that can auto-select the best AVM for a given geography. The ideal cascade AVM solution is one that is independently tested quarterly by a third-party authority. Using this type of solution helps alleviate the time credit unions dedicate to AVM selection and testing, while helping to ensure that the letter and the spirit of the Interagency Guidelines are met. This is certain to bring added peace of mind to credit union compliance officers as well as risk management executives.
As the concentration of credit union real estate loans continues to increase and regulatory enforcement measures intensify, credit unions must ramp up their efforts to clearly understand the risk associated with the collateral assets that back the real estate loans in their portfolios. Pulling credit scores and values alone is no longer enough. Today’s credit unions can act smart by making sure that their chosen AVM partner delivers results that meet the highest possible standards -- for valuation accuracy, ongoing testing and regulatory compliance.
