The Federal Regulators have proposed a new rule that has elicited a significant degree of interest among mortgage originators and issuers of mortgage-backed securitizations relying on automated valuation models (AVMs). The focal point of the proposed rule centers on the utilization of AVMs for determining the value of real estate collateral.
For those unfamiliar, AVMs are complex proprietary models typically designed by commercial entities, which employ algorithms to analyze real estate data and feed it into mathematical models for property valuation. A congruence of the imperative role of such property valuation in underwriting mortgages and the increasing employment of AVMs has led regulators to contemplate oversight.
What distinguishes this proposition is its flexibility and principles-based approach. This approach may encourage institutions to implement quality control standards independently. However, the pending rule might also incorporate examples of explicit policies and denoted practices or guidance. By doing so, it would provide significant insight enabling institutions to design their own quality control standards.
In the wake of closing the comment period, the main question now revolves around what happens next. Notably, the pending approval of the proposed regulation and subsequent implementation reminds both the legal profession and the financial industry to keep a keen eye on the development of this particular case.
This has the potential to transform the way valuations are done using AVMs, and shift the control towards the institutes using these models. This move potentially brings a high degree of autonomy to how quality control standards are defined and implemented in relation to the use of AVMs.
It is recommended for all parties invested in this context – from legal professionals in the financial sector to mortgage issuers and originators using AVMs – to refer to and study the details of the proposition thoroughly while awaiting further developments.
While waiting for final approval and the consequent execution of the proposed rule, the foreword by Dechert LLP gives an idea of the potential shakeup that lies ahead for institutions using AVMs in their financial operations.