Automated valuation models (AVMs) are now an established and indispensable force within the mortgage industry, but already their use is evolving far beyond that of a valuation tool.
Having achieved commercial acceptance by the UK lending community over the past three years, Hometrack’s AVM is currently used in some form by lenders representing over 90 per cent of the UK mortgage industry.
The advantages of AVMs are well known. Standard & Poors and Fitch Ratings, two of the leading rating agencies, have rigorously tested AVMs and have issued guidelines on their use. The substantial reductions in cost and time that they allow have huge implications for the mortgage industry, making protracted and significantly more costly physical valuations redundant in the majority of cases.
As a result, Hometrack is expecting business volumes to treble in the next two years as lenders increasingly choose to use online valuations as a means of providing borrowers with a more efficient and streamlined service.
This surge in activity is partly due to the introduction of the instant mortgage, which has resulted in buyers receiving a mortgage offer at point-of-sale via automated valuations and credit checks. With specialist lenders GMAC-RFC, edeus, BM Soltuions and ING Direct already committed to instant mortgages, Hometrack expects the remainder of the market to follow suit within the coming year.
Never standing still
Progress never stands still and Hometrack’s AVM is rapidly developing into much more than a valuation tool for the residential market. The next stage in the evolution involves using the service to analyse more complex asset and risk factors for loan decisions. Hometrack’s AVM is based on an advanced computer model comprising a database of extensive property data which incorporates a wide range of economic and social information. This data can be used to provide a more rounded picture of what’s driving and potentially affecting property values, or indeed putting them at risk. Much of this data is now being accessed directly by lenders for the first time.
A growing number of our customers are starting to explore our model’s potential when considering loans for individual properties and portfolios. However, as well as establishing the true value of a property, they are able to assess wider influencing factors to which they can assign a corresponding ‘asset and risk score’ when evaluating a loan.
By way of example, the current state of the local property market and its projected rate of growth, the performance of different types of housing stock, from large family homes to one-bed flats are just some of the market factors that can be considered.
Furthermore, Hometrack’s other data services can be used to assess the demographic profile and economic backdrop of an area, as the models provide information relating to the ratio of different age groups, employment levels and private sector rents within the local vicinity.
For example, lenders offering a loan to a buy-to-let investor would ‘asset score’ a property by identifying its true value as well as evaluating the level of demand, local competition and investment returns. This would be achieved by calculating factors such as the ratio of the most common rental age group, the volume of different types of stock and the private sector rents.
As well as being used for considering loans on individual properties for mortgage origination, remortgage and point-of-sale approval, AVMs also enable new applications for rapid mass valuation at unprecedented levels of accuracy, e.g. audit, balance sheet, risk assessment – Basel II, for example, capital efficiency, securitisation and marketing.
The sophisticated use of data required for these applications is set to become more common as lenders gear up to technological advancements and the need to carry out a more comprehensive risk analysis.
Not a full replacement
Despite this revolution in lending however, AVMs are unlikely to ever replace physical valuations entirely as there will always be properties where the valuation is difficult to derive due to a lack of comparable properties, or the diverse nature of stock in the area. In addition, where the lending risk is unacceptably high, more traditional valuation methods will be needed.
In recent years, the mortgage industry has been revolutionised by AVMs which provide a streamlined and diverse business solution to property valuation. Nevertheless, Hometrack believes that it is through the use of its extensive database that AVMs will really come into their own, enabling lenders to use the model not only as a valuation tool but as a comprehensive asset and risk indicator.
