The hybrid is in fashion. From the uber-trendy hybrid car seen at a Hollywood driveway not-so-near you, to the roller trainers kids want to walk/glide down the street on, bringing together two elements to form a new idea can bring businesses incredible rewards.
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The mortgage market is itself always looking for the latest innovation to try and keep pace with the housing market and attract customers. The continuing elevation of automated valuation models (AVMs) is a case in point and the last year has seen its potential realised through the creation of instant offers. Yet, limitations do exist with AVMs, as recognised by lenders. Unusual properties, such as the country property without any surrounding housing to compare it to, cannot easily be put through an AVM and a low confidence rating can hinder lenders’ decision-making. So is it time for a hybrid AVM?
A lack of confidence
Richard Sexton, business development director for e.surv, certainly thinks so and believes it could come in the form of an AVM filtered and reviewed by a chartered surveyor. He says: “AVM use is growing, though lenders today use them for a relatively small proportion of cases. They like and understand the concept, but there is a natural cap for when you can use them. If the AVM thinks it’s not accurate it will say ‘nil return’ or it will back the valuation with a confidence rating. Each AVM has a different rating, but Hometrack is widely used and uses one to seven. Lenders will rely on one to three, but if it’s lower than that, they will reject it.
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“Therein lies the problem. The AVM may well be right, but lenders don’t have the confidence in them yet. If you take it to a surveyor, they might be able to say that it is right or it’s completely wrong and a drive by valuation is needed. It’s not a raw AVM, but a combination of the two, without going to a full inspection.”
The idea is supported by lenders keen to widen the use of AVMs. Jeff Knight, director of marketing at GMAC-RFC, comments: “Because of the way AVMs work, they can’t capture all properties and something like this to help widen the net is good for the industry. AVM technology will progress and, as the market changes, AVM use will increase. Whether it will ever be used for 100 per cent of valuations I don’t know, but never say never. It’s moving from being a differentiating facility to being a market norm.
“Its increased use will be positive for customers. People are too reliant on valuations, which, historically, are only done for the lender. AVMs, which aren’t seen by the borrower, encourage people to go out and get their own valuations.”
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Paul Hunt, head of marketing at Platform, points out that as AVMs are still a relatively new technology, lenders using them continue to review the system and see how it can be improved. “The ideal scenario is that we can provide AVMs for the majority of cases. We want it to be a typical scenario for all. Pure AVMs will have a greater part to play in the mortgage market moving forward, but there will be a certain number of cases where they are not enough. If there is the facility or ability to support whatever comes back on the AVM quickly and without delay, then that’s reasonable and we should look to develop it.”
Allaying fears
Sexton says the hybrid could also allay lenders’ fears surrounding the fact that there is much less personal indemnity insurance (PI) with AVMs. He adds that this is particularly pertinent in the potential scenario – yet to be tested – where a property bought using an AVM is repossessed and found to have been inaccurate. “As long as the market keeps rising, the property’s increased price will compensate for the inaccuracy. But if property values start to decline and borrowers shouldn’t have been lent the money in the first place, there could be a problem and someone could take a lender to court. A lender’s defence would be the report is not for the applicant’s benefit. This is why most lenders do not disclose AVMs to borrowers and I can understand why.”
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However, Knight disagrees there is a potential problem and believes AVMs are always subject to opinion, as a property is only worth what people are willing to pay. Hunt likewise feels there is potential for slight errors with both AVMs and a standard valuations and the risk for a lender remains the same regardless of which system is used.
Whether problems with the use of AVMs do materialise in the future remains to be seen. Yet, we can be certain that the development of the mortgage market will continue apace and the creation of a hybrid AVM could well be what the industry needs to push it further into use, be it through the use of chartered surveyors or some, as yet unexplored, alternative. A lender’s willingness to seek out these types of innovation will determine whether it is at the forefront of the business.
