Last month, mortgage lender Platform said it had broken the industry’s very own sound barrier – the completion of a same-day mortgage offer.
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The case, a conforming self-certification remortgage, was largely made possible through the use of automated valuation technology.
The application, which took five hours, was submitted by broker Peter Woods of Park House Associates. Platform, via its online decision tool, ‘clickdecision’, was able to agree to lend the money without carrying out an on-site survey using an AVM supplied by housing data and information company, Hometrack.
Paul Hunt, head of marketing at Platform, said that despite the apparent breakthrough, which he did attribute largely to use of automated valuations, there was still a long way to go.
He says: “The use of AVMs is still very much in its infancy. We need to use the technology for a while before we can really roll this out, and make same day applications a regular occurance.”
Because they remain a relative unknown, Platform remains reluctant to use AVMs where a prospective borrower needs a mortgage of 75 per cent or more loan-to-value.
“Other mortgage lenders are being more bullish but for the moment we are going to see how things go,” adds Hunt.
How AVMs work
AVMs work by drawing on comparable data from several sources, such as Land Registry data and previous valuations. By doing this they can, in some cases, replace physical valuations and enable lenders to improve the speed and cost-savings in the home buying process.
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AVMs have been used in the USA and Canada for several years and collate detailed statistical information such as property size, location, characteristics, orientation, social statistics and demographics. This information comes from official sources including the Land Registry, historical valuations as well as sales prices relating to type of property or area. The information is then used, via further analysis, to value a property.
Once they are compiled, an AVM will include an upper and lower valuation confidence limit, which then also takes into account contemporaneous factors such as market confidence and the number of sales in the area. Properties given a high confidence AVM are considered to be more accurate.
The AVM may also include a list of the final price of properties sold in the nearby area, estate agent prices and trends and the percentage of estate agent valuations received at sale.
AVMs are currently used in around 20 per cent of mortgages. However, Hometrack, a provider of AVM data, predicts that over the next two years this figure will grow to 60 per cent of mortgages.
However a number of lenders have raised questions as to whether the benefits of AVMs outweigh their disadvantages. Linda Will, managing director of Accord Mortgages, says there are lots of practical reasons why AVMs will not be considered by lenders.
She points out that not all properties can be valued using AVMs. For example, older properties, rural properties and those in areas where few transactions have taken place are normally unsuitable simply because comprehensive data is not available.
Secondly, each AVM comes with a confidence level, which is in itself still a generalisation. She says: “Given that property’s unique location, the AVM provider will be able to provide a value subject to a greater or lesser tolerance level – the level of confidence.”
“So in any given portfolio of properties, some properties will either be unsuitable altogether or the level of tolerance too low to be relied upon.”
The higher the overall loan-to-value, the more important the levels of confidence to the lender.
“A percentage of properties will simply not fit this model which, I imagine, would lead to a ‘mix and match’ approach employing both indexation and AVMs,” Will adds.
Cost benefits
Katie Tucker, technical specialist at John Charcol, believes AVMs have an important role to play in the market, with the cost benefits of AVMs by far their most useful aspect.
She says a basic lender valuation on a property of £300,000 costs in the region of £375, whereas an AVM on the same property costs nothing with many lenders.
She says: “The good thing about AVMs is that they speed up mortgages, meaning that if you are remortgaging from a high rate such as the lender’s standard variable rate to a low rate you could complete quicker and save money almost immediately. Brokers’ and lenders’ admininstration time will also be reduced, which will ultimately benefit their customers.”
Despite this, Tucker has many reservations about the quality of many AVMs. She says they do not account for differences between properties in the same road and give no additional value to corner plots or to home improvements.
Tucker argues that they may also make no reference to a property’s condition and state of repair.
“While such lack of detail can be overlooked in the case of some simple remortgages, automated valuations on purchase mortgages give dangerous scope for error prior to exchange of contracts.”
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Ruling out AVMs
Some lenders have ruled out use of AVMs. Beacon Home Loans, a non-conforming lender, feels the use of third party data, an AVM, is not appropriate .
Nicola Severn, marketing manager at Beacon Home Loans, says: “AVMs are a useful tool if a mortgage application is straightforward – remortgaging, for example. But we will be avoiding using them as a direct replacement to a standard valuation. We are very much a bespoke lender, and we will continue to use the three main types of survey as a means of valuing a potential portfolio.”
That said, Severn admits Beacon Home Loans is considering using AVMs as mortgage audit tool.
“We are looking at ways of incorporating AVMs as a way of checking our system but we are not considering any other use of them.”
Advisers are also wary of wholescale AVM use by lenders. According to research carried out by BM Solutions earlier this year, 86 per cent of brokers wanted to be given a choice over what valuation their clients received.
Just under 70 per cent of the 200-plus intermediaries it spoke to also said it was unfair to charge a premium price for using AVMs.
Matthew Grayson of BM Solutions admits that the use of AVMs is currently limited because intermediaries are still wary of using them.
“We only apply AVMs where a case is below 85 per cent LTV. Even then we still give the adviser and client a choice of valution.”
Grayson says the best utilisation of AVMs is with remortgaging cases because they are, in most cases straightforward.
BM Solutions argues that, with its mortgage book being largely buy-to-let mortgages, AVMs are irrelevant; buy-to-let properties need to be traditionally valued because AVMs cannot accurately predict rental income.
He says: “You can’t use AVMs with buy-to-let, because you have to take into account rental yields, something that an AVM doesn’t provide. It may be that they do in the future, but until then they can’t be used.”
Inevitable
Even so, increased use of AVMs is inevitable, claims Oliver Hughes, an economist at Hometrack.
“The fact is they will improve the home buying process and they will – within a few years – be the main point of reference for mortgage lenders.”
Another upshot is that use of AVMs will allow lenders who use securitisation to develop more accurate risk-based pricing on products.
Hughes says indexation is a less accurate form of house pricing and that with AVMs lenders have a more accurate way of totting up their total exposure to property on a value basis.
He says: “The indexation and AVM valuation may not be that different, but the AVM will be the more accurate measure. Indexation is too general as a valuation tool.”
Hughes argues that because lenders will know, more or less, their exact exposure to property risk, they will in turn be given a better rating from agencies like Standard & Poors. This in turn may allow them to lend more.
Hometrack surveyed 100,000 loans using both AVM and the more traditional indexation valutaions and concluded that, on the whole, using automated valuations tended to reduce the lender's exposure to risk.
For example, one lender with a £8.7 billion mortgage portfolio, saw the value of the property lent on grow from £15 billion to £19.2 billion. On a LTV it worked out the lender was on average lending at 45 per cent, compared to 57 per cent using the traditional valuation.
To finance its lending the particular mortgage lender would require a capital of £175 million compared to £253 million, seeing its exposure drop by £78 million.
Hughes said: “In this particular scenario there is a potential £78 million capital saving, which represents nearly 90 basis points on the original loan amount.”
A matter of good practice
Andy Frankish, managing director of Mortgage Talk, says that AVMs are a tool that gives brokers the ability to deliver an enhanced service to clients, speeding up applications and in turn generating more business.
“They are groundbreaking but it is a long way off before they replace the traditional valuation. As the remit of an AVM expands to take into account the likes of rental calculation and new developments, they will become ever more indispensable.”
Frankish says that for the moment advisers should continue recommending traditional valuations.
“AVMs are still too general. For the lower LTVs, which are less risky, they are a good tool, but if someone is buying a house do they really want to be relying on a computer report?”
Frankish says as a matter of good practice all advisers should be making sure clients pay for a home buyer report at the very least.
He says: “AVMs are still too much of an unknown. Buying a house is the biggest purchase you’ll ever make, especially if it’s a house. Getting a surveyor to look at it insures you against any losses you may make if there are serious problems with a property. An AVM or even a basic valuation may not be enough.”
With Home Information Packs due to be implemented this Summer, all properties put up for sale will need to have been awarded an Energy Efficiency Certificate, something an AVM will not include.
Tucker of John Charcol agrees that good brokers and estate agents should be offering detailed home buyer reports on purchases as a matter of good practice.
“In fact they will have more reason to do so now because carrying out one of these would actually put you in a better position than if you would previously have been satisfied with a lender’s basic valuation report.”
She says that in real terms there should not be an increased cost as typically a Homebuyers report arranged privately is similar to a basic valuation arranged via a lender’s panel.”
Financial consequence
One consequence of AVMs may be a financial one. Tucker points out that the income intermediaries and packagers make from valuations is a valuable part of their profit margin.
She says that although any added admin fee is often small, the additional payments received from lenders are in some cases considerable and can make a big difference to smaller brokers.
She says: “A new risk that businesses will be taking into account will be the potential loss of that income as more lenders switch to using AVMs instead of traditional valuations – will lenders and brokers make their revenue up another way?”
