Hello,

I am new to the forum and I hope someone can point me toward the appropriate regs to answer my question. I am in the process of evaluating our HELOC portfolio to determine which lines should be reduced.

The purpose of this project is to identify HELOCs where the collateral value has deteriorated and thus reduce the line amount to bring the CLTV in line with our current risk tolerance.

I understand that a physical appraisal is needed to justify the line reduction, but I would really like to know which regulation(s) governs this rule. There are a couple of properties that I am having a hard time getting drive-by appraisals done for and I need to know if there is any room in the regulations to make a concession on the appraisal type.

Thanks in advance for your reply.

If you don't have an appraisal or evaluation of the property then how can you document the value has significantly decreased?

Reducing the line to come within your CLTV is not a valid reason under 226.5b to suspend or terminate the line. You must be able to demonstrate the properties value had deteriorated.

FDIC FIL - http://www.fdic.gov/news/news/financial/2008/fil08058.html

We do have AVMs for each property as a starting point to identify which HELOCs may be candidates for line reduction. Then we are requesting drive-by appraisals for the list of reduction candidates to determine a more concrete CLTV.

We only approve and originate HELOCs at 100% CLTV or less, therefore, if the CLTV is higher than 100% based on the new appraisal, we consider that to be a deterioration in value and then reduce the line amount. I just wanted to know if it is allowable to make the determination of deterioration in value based on an aVM or desktop appraisal rather than a full or drive-by appraisal if it is not possible to obtain one.

Thank you very nuch for the document link you provided. That is very helpful to me. I hope to find something similar within the NCUA archives as we are a federally chartered credit union.

You have to follow the new appraisal guidelines and AVMs are no longer acceptable as a stand alone evaluation.

Simply because the value increases your LTV in excess of 100% most likely will not give you sufficient means to suspend or reduce the LOC (especially since you went to 100% LTV to begin with). You have to determine if equity in the home has reduced by 50%. If you did not read the FDIC guidance linked above then I suggest you do.

I"m still a little confused about how to determine the current value of the property without doing a full appraisal. I can't find anyplace where it says you can't use a AVM.

You will have to review the new appraisal guidelines where it discusses the use and verification of AVMs. Here's one reference from the guidelines.

. . . Further, the Agencies revised the Guidelines to confirm that the result of an automated valuation model (AVM), in and of itself, does not meet the Agencies’ minimum appraisal standards, regardless of whether the results are signed by an appraiser.

We are considering restricting or capping some of out HELOC's and I am researching how we can get "real" market values of the homes without spending an arm and a leg on a regular appraisal. I know that we would have to analyze the unencumbered equity of each property to see if it has declined 50% or more in order to restrict the line. Any suggestions. Am I correct in my interpretation that we could take advantage of the appraisal exemptions and use an evaluation if the transaction value is $250,000 or less?

Yes, but you will have to follow the new evaluation guidelines and you must be able to demonstrate the person or persons performing the evaluations are qualified to do so.

A couple more exerts from the guidelines.

. . . Examiners will review the steps taken by an institution to ensure that the persons who perform the institution’s appraisals and evaluations are qualified, competent, and are not subject to conflicts of interest.


. . . An institution should maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. . . .

One last question, is an AVM for complance purposes subject to the same criteria as an evaluation performed by someone?
Thanks for your help. have a nice weekend!

Therefore, an institution should have policies and procedures that address the need for obtaining current collateral valuation information to understand its collateral position over the life of a credit and effectively manage the risk in its real estate credit portfolios. The policies and procedures also should address the need to obtain current valuation information for collateral supporting an existing credit that may be modified or considered for a loan workout.

and

AVMs are computer programs that estimate a property’s market value based on market, economic, and demographic factors. Institutions may employ AVMs for a variety of uses such as loan underwriting and portfolio monitoring. An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines.