There are few in the industry who remain unfamiliar with the term ‘AVM’, or who don’t know what it stands for.
In the few years since automated valuation models (AVMs) have been available in the UK, they have taken quite a significant hold on the mortgage market. According to a number of estimates, they now account for up to 20 per cent of all mortgage cases. You only have to look at the trade press to see the extent of their uptake among lenders.
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London Mortgage Company, Preferred and Southern Pacific Mortgages – all owned by Lehman Brothers – recently announced the launch of AVMs.
Platform has unveiled a ‘same-day’ mortgage offer using AVM technology and its Click online system.
Praxis Mortgages has teamed up with Kensington to launch its first product designed specifically for borrowers who want a fast-track offer using the new technology.
There are not many lenders who haven’t already got an AVM proposition in place, or who are not in the process of planning one.
Indeed, within the bridging sector, Cheval is shortly to link with UKValuation and become the first to have an AVM-backed bridging product that will greatly speed application turnaround.
The ins and outs
AVMs work on the basis of taking detailed statistical information such as property size, location, social statistics and demographics and translating them into a value. This information comes from established sources such as Land Registry, historical valuations and sales values and complex algorithms are then applied to the data resulting in a valuation.
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A typical valuation will give an estimated value of a property and a probable value range showing an upper and lower limit with a 10 per cent margin either way. This takes into account factors such as the state of the internal structure, confidence in the marketplace and recent sales in the area. The valuation can then be modified in the light of the precise circumstances of the property, and is then given a confidence rating.
The convergence of AVMs with physical valuations has been helped by the recent release of up-to-date Land Registry figures, which has boosted the quality of data.
Currently, the UKValuation model returns nearly four out of every five valuations within 10 per cent of the reference value, which is a 40 per cent improvement on three years ago.
This impressively accurate valuation methodology has given the mortgage industry the confidence to embrace the technology, where in the past it might have been reluctant.
Right technology, right time
Lenders and brokers have also come to view AVMs as the right technology at the right time. The desire to deliver swifter mortgage offers has never been more marked and AVMs are a great tool in speeding up the process.
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All sides of the industry want the certainty and convenience of rapid valuations. The traditional approach of appointing surveyors and then waiting for valuation reports has slowed the mortgage process and acted as a brake on case turnover.
The new technology takes out the uncertainty of what can be a two-week-long wait with certain mortgage lenders, and helps provide enhanced service; reductions in cost; and increased speed of turnaround. This is good for business in terms of referrals, repeat clients and case volume.
Speed is becoming a big differentiator for lenders. If you can get an offer to the customer quicker than your competitors, then you have an edge. The difference between an offer in hours and one in days will decide where a customer takes their business.
Fortunately, the coming of age of AVM technology has been recognised by the rating agencies for UK residential mortgage securities. This acceptance has been a key step forward for AVM credibility and is thanks to big improvements over the last few years in accuracy.
The rating agencies are apparently convinced that the difference between AVMs and previously-recorded conventional survey inspections is now very small.
Not without drawbacks
The AVM process is not without its drawbacks, however. Under-valuation and over-valuation can pose problems for lenders. If an AVM under-values a property, then this could ultimately impact the lender’s case volumes with too-low AVM valuations preventing a borrower and lender from proceeding.
If the AVM over-values a property, then the risk is an increase in default costs as the lender discovers that its security, as measured by the LTV, is significantly lower than was understood at the time the loan was agreed.
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AVMs are currently most suitable for individuals who are looking to remortgage, or buyers who have a high level of knowledge about the property in question.
Some maintain that AVMs do not work on certain types of property. They say newly built houses and flats, or properties in isolated areas, cannot be accurately assessed. Many insist that buy-to-let properties also need to be traditionally valued, as AVMs cannot accurately predict rental income. However, it should be noted that the technology is still developing and a number of lenders have announced buy-to-let products backed by AVMs.
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Some lenders question the impact AVMs will have on ‘Treating Customers Fairly’ (TCF). The concern is that, when a client is potentially at risk, the industry has to think about TCF. Either brokers in their advice, or lenders in their paperwork, have to highlight the risks of not taking out a conventional survey.
This last concern should have been allayed in part by the recent Financial Services Authority (FSA) ruling that lenders must have an independent valuer to assess AVMs. The FSA has ruled that, under Basel II, all results must be traced back to a suitably qualified individual who can offer an independent opinion on the risk.
This means the use of AVMs must be within a process that can be ascribed to an independent valuer.
Despite these teething issues, the popularity of AVMs can only grow. I expect their use to become much more widespread. The Council of Mortgage Lenders’ research predicts that they will account for 40 per cent of all mortgage valuations by 2012.
The issues outlined above will be overcome as the sophistication of the modeling advances. Buy-to-lets, new builds and flats will soon be accepted as suitable for the use of AVMs.
The genie cannot be put back in the bottle.
