HELOC driveby appraisal
Loan originators are becoming more efficient and creative every day in streamlining HELOC application and approval processes. One area that’s been heavily reengineered is the HELOC driveby appraisal process.
An appraisal is an essential part of the home equity lending process. Establishing the home’s current market value is the starting point for determining how much can be borrowed and how much security (collateral) is available to protect the lender.
But the drive for more efficient appraisals may be partly to blame for an emerging problem in the mortgage lending business - overstated appraisals. According to Consumers Reports, “computerized mortgage underwriting programs and drive-by appraisals, which lenders increasingly use in the mortgage process, may provide additional opportunities for error, manipulation, and fraud.”
Pressures to overstate an appraisal or meet a lender’s target value can be significant:
- borrowers seeking a cash-out mortgage or home equity line of credit amy want the appraisal to come in as high as possible to maximize their credit;
- loan officers and brokers are typically paid by commissions which they receive only when a deal closes. An appraisal that comes in too low can nix a deal and the broker’s commission;
According to the Appraisers Institute, sixty-two percent of appraisers report that they had lost work for failing to meet a lenders target value.
HELOC borrowers may feel they “win” when a high appraisal come in - after all, they qualify for an even higher line of credit. If the line of credit is left largely untapped, risk is minimized. But HELOC borrowers who use their credit lines aggressively could find themselves “underwater” (i.e. owing more than their true equity) if housing prices decline. This risk is always present but is heightened when the original appraisal is overstated.
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By N2H