Home Equity: Tax Assessments Gain As Cheap Alternative To Property

when evaluating property as collateral for home equity loans. "Everybody is looking for a competitive edge, not only in points and fees but in turnaround time," said Michael H. Cox, a vice president at U.S. Bancorp, Portland, Ore., and a member of the Consumer Bankers Association's committee on home equity lending. That competitive edge, said Mr. Cox, is the use of tax assessments. Until recently, most home equity lenders used appraisals, but they cost as much as $400 each and sometimes take as long as a week. Tax assessments are more advantageous, lenders say. By using the official evaluation for payment of local property taxes, lenders get a fast, low-cost fix on a home. Cutting origination costs is getting even more crucial because customers now demand home equity loans and lines of credit with no points or fees attached. At Banc One Corp., obtaining tax assessments can cost as little as $5. "The cost savings far outweigh the risk," said Christine Caldwell, a vice president in charge of direct lending at Columbus, Ohio-based Banc One. Banc One, which started using tax assessments a year ago, has cut its property evaluation costs in half, Ms. Caldwell said. Washington Mutual Savings Bank, Seattle, has been using tax assessments for home equity loans for more than a dozen years. The technique was so successful that the bank began accepting such valuations on first mortgages earlier this month. Washington Mutual now uses tax assessments on 60% of its second mortgages. "We have done very well by it in general," said Steve Freimuth, a Washington Mutual senior vice president. But lenders warned that there are problems with tax assessments. They said tax assessments, which tend to cover a neighborhood and not a particular house, are often done infrequently and vary in quality. And they don't often reflect the true value of the property. Mr. Freimuth said tax assessments in the areas where Washington Mutual does business generally value homes at 85% of actual worth. He said that makes tax assessments a more conservative valuation than appraisals. Despite their conservative valuation, most securitizers do not accept tax assessments. Nancy Gigante, a director at Standard & Poor's in New York, said tax assessments were not considered the best valuation tool. "We would definitely be concerned with someone who took that strategy," Ms. Gigante said. She has found that tax assessments are not as conservative as appraisals. And she said the assessments are not done often enough to be sufficiently accurate. Mr. Cox, of U.S. Bancorp, said tax assessments work best in metropolitan areas where there are tract houses with similar values. But it's best to do frequent testing to be sure that tax assessments are relatively accurate, said Ms. Caldwell of Banc One. "If we can show that tax assessments are, in general, more conservative than appraisals, I think that mitigates the concern anyone might have," she said.