Peter Izard is senior manager corporate accounts at GMAC-RFC
These days technology always seems to be one step ahead of the mass market. Look at the iPod; launched in 2001 by Apple, yet only more recently has it become the ‘must have’ accessory. CDs replaced cassettes; DVDs have almost wiped out the old VHS tapes and Blackberrys are not just a small black fruit anymore.
Comparisons could be made to automated valuation models (AVMs), as while they have been about in the UK for over two years, it is only recently that lenders are beginning to acknowledge the extent of the benefits AVMs can bring to the home buying process.
AVMs have been an established feature of the US mortgage market for the last five years, so why are they such a hot topic for discussion now? Arguably this is due to lenders using AVMs to produce instant mortgage offers. In the past, AVMs have been used more traditionally for validation by other lenders. However, competition is hotting up and AVMs are likely to receive much more attention going forward.
The in’s and out’s
An AVM does not require a physical valuation. Instead, through an AVM provider, lenders can access a database of property information to confirm a property’s value. Depending on the provider, these databases collect details using Land Registry data as well as property size, location and characteristics, such as how big the garden is.
There has been much debate in the industry on the extent to which AVMs can deliver significant savings in the mortgage process. Ultimately, the AVM is quicker than a physical valuation and is available at the click of a button. Yet despite these efficiencies, there are still those in the industry who are reluctant to rely on AVMs.
However, sceptics out there should consider research completed by Standard & Poor and Fitch. These two ratings agencies have put AVMs through some rigorous testing and concluded that, over an entire portfolio, there was no material difference between AVMs and physical valuations – a pretty strong endorsement.
At GMAC-RFC since launching instant offers using an AVM, we are close to our prediction of 60% of offers having an AVM for both our Partners and Intermediary products.
Getting physical?
It is important to highlight that not all properties can be valued using AVMs. This type of property includes newly built houses and flats, or houses in particularly isolated areas. In this instance a physical valuation of the property will still be required; although with processes getting slicker and systems enhancements, valuations are being instructed automatically and the valuation data can be uploaded electronically to speed up the process. So even when an AVM is not applicable, the new process is quicker than the existing arrangements which can hold customers up for weeks.
Physical valuations have always been perceived by technology-phobes as being more reliable. But this simply isn’t the case. Physical valuations are not exempt from error and can in fact cause many problems for the broker. For example, if a property is down-valued there will be loan-to-value (LTV) implications for the borrower, which could lose them the home of their dreams. AVMs eliminate the problem of subjectivity when it comes to valuing a property, which can cost a borrower thousands of pounds.
With AVMs we could see more borrowers instruct their own surveys, which will be good news. Valuation reports by lenders are designed for the lender, rather than the consumer and with an AVM, there is no valuation report to hand to the customer.
A look to the future
As we get closer to the end of 2006, it is likely that more lenders will have embraced AVMs to enhance their service. This can only be a good thing for the client, and we should see the application to completion turnaround time reduced. Indeed, we have already experienced a 48-hour application to completion for a Scottish remortgage.
At the moment we are only dipping our toes in the water when it comes to using AVMs and there is much potential for their development. We may find that buy-to-let properties could qualify for an AVM further down the line, something which is not possible now.
To take you back to the iPod analogy, we have seen advancement from the standard iPod to the iPod Shuffle, Mini iPod, and iPod Nano. Today you can even watch videos, short films and some TV programs on the iPod Video. And, like the iPod, AVMs are set to become more widespread for everyday life, and online technology in general will become increasingly advanced.
