As the lending landscape shifts beneath our feet, so too must our understanding of risk.

While credit risk has traditionally taken center stage, the evolving landscape of the lending industry necessitates a more balanced approach. Namely, collateral risk needs a seat a little closer to the head of the table.

While credit scores, debt-to-income ratios, and other financial metrics are vital, they are not the sole determinants of a loan’s risk profile. Relying solely on these factors can lead to an incomplete risk assessment, particularly in an industry that is increasingly complex.

Why Collateral Risk Matters

When we say the industry is increasingly complex and the landscape is evolving, we’re referring to things like:

1. Regulatory Changes: New regulations may require more stringent evaluations of collateral, affecting how loans are underwritten and approved.
2. Economic Fluctuations: In a high-interest-rate environment, property values can be volatile. This makes the assessment of collateral risk more critical as fluctuations can impact the loan-to-value ratio.
3. Technological Advances: The rise of automated valuation models and other tech-driven appraisal methods can change how collateral is assessed, making it more important to manage this aspect carefully.
4. Market Trends: Shifts in consumer behavior, like the move towards remote work, can affect property values in certain areas, thereby affecting collateral risk.
5. Alternative Valuation Methods: With the industry gradually moving from traditional appraisals to more comprehensive valuation management, there’s a broader range of methodologies to consider when evaluating collateral risk.
6. Competitive Pressures: As lenders look for ways to differentiate themselves in a crowded market, a more nuanced approach to risk assessment, including collateral risk, can be a competitive advantage.
7. Risk Management Practices: As financial institutions become more sophisticated in their risk management practices, there’s a growing understanding that a more holistic view of both credit and collateral risk is necessary for long-term sustainability.

Given these continually evolving factors, a comprehensive risk assessment must include an increased focus on collateral risk.

The Role of Valuation Management in Collateral Risk

In this context, the term “valuation management” is a more appropriate descriptor than the traditional “appraisal management.”

This is particularly important because a fundamental aspect of balancing credit and collateral risk is the ability to match each loan’s credit risk profile with the appropriate type of valuation or valuation product.

For instance, if a transaction has a low credit risk profile and is under the de minimis loan amount, an evaluation (at most) is probably more appropriate than a full appraisal. Similarly, a loan under the de minimis with a high credit risk profile may still require a full appraisal.

By tailoring the valuation process in this manner, loan policy can not only better reflect the total risk of a given loan, it can also contribute to significant cost savings for the lender and, by extension, their borrowers. By avoiding expensive valuations for lower-risk loans, both time and financial resources can be conserved. This is particularly crucial in a high-interest-rate environment where lenders and borrowers alike are increasingly cost-conscious.

How Equity Valuation Partners Addresses Both Risks

What lenders need, therefore, is an AMC partner who not only understands this balancing act, but is both willing and able to facilitate it. That means offering the full array of valuation products and crafting an intelligent valuation management solution that matches each client’s loan policy and credit culture.

That’s the future of valuation management. That’s EVP.