Valuations have been a hot topic of debate recently. If it is not accusations that properties are being down-valued to slow the housing market, it’s an on-going discussion about valuation fees and the pro’s and con’s of automated valuation models (AVMs).
Essentially a mortgage valuation is the most basic form of survey and is required by lenders in order to ascertain the suitability of the property as security for their loan so that in the event of a repossession, the lender will not be out of pocket. Although it is for the lender’s benefit, the customer foots the bill.
Recently Thomas Reeh, chief executive of brokerage blackandwhite.co.uk, accused valuers of making assessments about the credit worthiness of mortgage applicants and sometimes taking an extra cautious stance when valuing properties for clients they know are non-conforming. They do this by valuing a property for less than it is worth, dubbed a ‘down-val’. Although he refused to name the lender involved, he said valuers could be doing this because they may be concerned about deals going wrong. After all, if a forced sale or repossession takes place, it is the valuer’s professional indemnity that is on the line.
He says: “At blackandwhite.co.uk we have now moved away from informing the valuer who the lender is, and hey presto – fewer down-vals. We know that a well known non-conforming lender in the market uses the same tactics. Let’s face it, do you want to prejudice the valuer’s opinions about a customer’s credit worthiness by letting them know a non-conforming lender is providing the finance, and more importantly is that the valuer’s job?”
Reeh cites a case where the original valuation came back at £125,000 on a non-conforming lender’s paperwork, and a second valuation where no lender was specified came back at £195,000. If this practise is widespread it has significant ramifications for both mortgage intermediaries and consumers. For brokers, a ‘down-val’ can often mean the difference between a deal and no deal. Consumers face the same issue or they may end up paying a higher rate if the loan-to-value is artificially high.
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However Reeh’s claims were dismissed by fellow brokers and lenders alike. David Hollingworth, head of communications at London & Country Mortgages, says he cannot point to anything to suggest that lenders are instructing valuers to down-value properties and that it does not really make sense. “A mortgage lender can easily alter the risk profile of acceptable borrowers or properties if it wants to dampen the level of demand rather than trying to manipulate the valuation,” he says. “There have always been down-valuations and these can come about either because the valuer is more cautious about the market and so comes in on the low side or it could simply be perhaps that the borrower is over-optimistic. This can sometimes be a case of comparing with neighbouring properties that actually carried a greater valuation for a tangible reason.”
Paying the price?
Another common problem that the valuation process throws up for brokers is delays in the instruction, or the carrying out and writing up, of the valuation. This holds up the mortgage offer which is obviously a key stage in the mortgage process. However, technology has assisted with this, not only with the introduction of AVMs but in terms of almost immediate instruction of the valuation. These slicker processes have been leading to speedier offer times – but consumers are paying the price.
According to financial comparison website, MoneyExpert.com, lenders are charging average basic valuation fees of nearly £190 with some firms charging as much as £405. Some customers borrowing larger sums facing much higher fees. For example, on mortgages of £300,000, valuation fees can go as high as £565.
Dutch-owned bank ING Direct recently entered the mortgage market boasting a fee-free mortgage. Its two mortgage products have no higher lending charge, no telegraphic transfer fee and no exit fees. ING Direct also boasts free valuation and legal fees on remortgages, while the basic valuation fee is refunded on completion for purchases. The lender is using Hometrack’s AVM model to provide valuations.
Other lenders that have introduced AVMs this year include GMAC-RFC, Kensington Mortgages and edeus. AVMs are essentially property valuations that have been generated by a computer. Traditionally there has been a delay between the lender issuing a mortgage decision-in-principle and a mortgage offer, as a physical valuation has to be instructed and carried out to confirm that the property is worth the value that has been stated on the application form. With an AVM, however, this valuation can be instructed immediately and carried out within minutes.
AVMs establish a current market valuation for a property using calculations that are based upon a number of factors such as comparable sales prices from the Land Registry, valuers databases, property characteristics and historical price appreciation.
Undoubtedly they look set to revolutionise the mortgage market by dramatically cutting the time it takes a customer to receive a full mortgage offer, but questions have been asked about AVM’s accuracy and whether it is fair to charge a customer the same fee as if a site inspection valuation had taken place.
Kensington offers AVMs free of charge to brokers and packagers. They are available on remortgage applications submitted online for loans up to a maximum of £150,000 on properties worth up to £500,000, and with a maximum loan-to-value of 75 per cent. But although it offers free AVMs, the lender defends others who charge.
“Some mortgage lenders are now using automated valuations as a means to cut application times. The technology that enables them to do this is by no means industry standard and these lenders have invested a great deal of money in developing what is in effect a premium service to benefit their customers. As such, and because they are offering a premium service that is unavailable through many of their competitors in the market, it is understandable that some lenders have decided to charge for this service,” says Kensington PR manager, Alex Hammond. “An individual AVM may cost very little, but the development to create the system that enables the AVM to work effectively would have been very costly. Therefore, if mortgage borrowers do have to pay for an AVM it is because they are buying a premium service that has taken a lot of time and money to develop.”
Battle for business
For a broker going to a lender that offers AVMs as opposed to valuations by surveyors, it means that mortgage applications can be processed promptly, without the delay associated with a physical valuation – meaning that customers can get their mortgage offers much more quickly.
“You could argue that it speeds the process up so much that potentially it could save the client money because the purchase may be less likely to fall through, so there won’t be the danger of money wasted on surveys and legal fees,” says Melanie Bien of Savills Private Finance. “There is also the risk factor to consider; if the property is worth much less than the valuation says it is worth, ultimately it could be the mortgage lender who loses out – not the consumer.”
However an AVM is not as accurate as a traditional valuation and so will be accompanied by a statistic expressing how accurate the valuation is likely to be. The accuracy of the AVM is entirely dependent on the quality of the comparable data on which it is based. If there is statistical uncertainty about this data, then the accuracy measure will give an indication of this. Generally, a lender will only use an AVM where it is considered to be an accurate reflection of the value of the property.
Julia Harris, mortgage analyst at moneyfacts.co.uk, reckons that AVMs are part of lenders’ continual battle to keep their products competitive and appealing to both the intermediary and consumer. She says profit margins have been squeezed on many products; causing lenders to focus on alternative benefits in a bid to attract new business.
“Lenders are not only competing on price but in addition are now playing the ‘speed of service’ card to actively promote their products,” she says. “The latest tools being used to woo potential clients are AVMs, which are now becoming a key part of the mortgage package for many existing and new lenders. Traditionally lenders have used AVMs for low loan-to-value applications, such as lower risk mortgages, often in preference to a manager’s valuation and to save the cost of a compulsory professional valuation.”
Harris says the difference today is that some lenders are using AVMs as a substitute to professional valuations on all mortgage applications, including those with high loan-to-value ratios and she questions who really benefits from this.
A more cautious approach
At the moment in a climate of a rising house prices, lenders are comfortable using an automated system, and brokers are, of course, keen to see their mortgage business completed in the timeliest manner to receive their income. However, if the housing market begins to destabilise it will be interesting to watch whether AVMs are so actively encouraged by lenders or used to value properties at high loan-to-values. When lenders’ security becomes at risk it is possible they may adopt a more cautious approach.
Intermediaries and lenders can use AVMs to sell to the consumer as an additional service, should they wish their mortgage to complete in the shortest possible time. But, some critics argue, how many cases in reality truly need to complete within a few days? Consumers could not be blamed for feeling a little cheated when they are paying on average around £200 for a few minutes work inputting to a computer program.
Jeff Knight, director of marketing at GMAC-RFC, says all lenders charge fees, in different ways. Some charge high arrangement fees to compensate for a lower rate, for example. “We operate in a very competitive market and the winner is the consumer,” he says. “Competition makes products more competitive, so whether or not it is fair will ultimately be decided by the consumer. And we should not forget that with GMAC-RFC, AVM technology, combined with other elements, allows a mortgage offer to be delivered in minutes, not days or weeks. This saves the broker and client time and money, giving greater certainty and greater immediacy which consumers want. Technology is responding to the needs of intermediaries and consumers and you can’t get fairer than that.”
edeus’ managing director, Alan Cleary, says there are two main reasons to charge for AVMs. “Firstly, there is an additional element of risk involved in that lenders are advancing money without visiting the property. The fee they charge for the additional risk is very reasonable, less than you would pay to insure your television against breakdown. Secondly, we have invested significant sums of money bringing this innovation to the market and it is perfectly reasonable to expect a return on this investment.”
For the lender’s benefit
Brokers should remind customers that the valuation is for the lender’s benefit, not the consumer, even though the consumer pays for it. It is carried out to ensure that the lender’s money is safe and if the property has to be repossessed and sold, the lender will get its money back. Ideally, the consumer should have their own survey or Home Condition Report done to get an idea of the condition of the property.
“Consumers need to be fully aware of what they are paying for, given the options of alternatives, encouraged to also obtain a professional valuation when necessary, and not advised to choose specific lenders purely based upon the application completion time,” says Harris. “In many cases, even with standard valuations and application times, the mortgage is still the most efficient element of a property transaction.”
BM Solutions plans to launch an AVM system before Christmas but head of PR, Matt Grayson, refused to be drawn on the costs to borrowers having their properties valued in this way. “It’s important for consumers to have choice about the type of valuation they have and they should be able to choose between an automated or standard valuation,” he says. “There needs to be a balance to be struck between passing on the cost savings of an AVM and accounting for the investment necessary to provide an AVM system.”
