Last year the mortgage industry saw what many considered a significant technological development with the introduction of automated valuation models (AVMs). Hailed as the panacea of the home loan world, many regarded the move as a much-needed cog in the mortgage processing wheel.
Although AVMs were designed to help lenders decide whether to offer a loan more swiftly than before, it seems there are inevitable flaws in the system. Some have questioned the validity of AVMs as a tool going forward, particularly as they appear to work more effectively on remortgages and on clean mainstream cases as opposed to all mortgage cases.
While the benefits lenders gain by using electronic valuations is clear, questions remain over the value AVMs offer consumers and brokers.
Terry Pritchard, consultant at Case Consultants, says: “AVMs, in some respects, can be seen as a slight gimmick. While the model fits better for remortgages, in the event of purchases there is still a very real need for a full valuation. There’s no doubt that AVMs are here to stay, but as an industry we need to ensure it’s properly reviewed and monitored.”
Too early in the process
While AVMs have helped speed up the process for remortgagors, many believe that for purchases, it is still too early in the process to solely rely on AVMs.
Simon Read, business development director at Victoria Mortgages, says there is still a need to carry out a full survey for purchases, which takes features and structural damage into account.
He says: “The problem with AVMs, particularly in the non-conforming sector and purchases arena is that they do not take into account any structural defects the property may have. Obviously this can cause problems if there is subsidence for example, which would not be picked up on the AVM, as it would be the client’s responsibility once they had moved in to the property.”
Another element of AVMs that is causing concern is the use of ‘drive by’ valuations. Although these have proved useful in remortgages as proof that the property exists, warnings have been raised over the validity of this process.
Chris Rispin, technical director at Allied Surveyors, says: “Drive bys are not a good idea as they just look at the front of the house and do not look round the back for any damage that can not be seen from the street. Nowadays, this is not a good method, especially if people want to borrow 50 per cent loan-to-value (LTV) as the sums being borrowed are larger.”
Here to stay?
However, as many lenders have adopted the practice, with names such as GMAC, edeus, Abbey and Kensington all providing AVM solutions, it looks like the practice is here to stay. But what new changes will 2007 bring in the AVM arena?
Martin Reynolds, director of corporate accounts at edeus, says: “AVMs have certainly brought about the potential to speed up the mortgage process. While this has happened primarily in the remortgage sector initially, it is likely to become more prevalent on purchases in 2007.”
He adds that when this occurs, it will be up to consumers to source a surveyor to carry out a real valuation once the AVM has been completed and the loan offered – putting responsibility firmly in borrower’s hands.
He says: “In the case of AVMs on purchases, we would expect the client to find a surveyor to carry out a valuation once the loan is offered. AVMs may primarily benefit the lender, but the consumer is happy because they can have the loan. It’s up to their broker to advise them on any additional security.”
However, Pritchard adds that the move towards AVMs could also spell trouble for surveyors who may be forced out by the growing trend towards electronic valuations. This, he suggests, may prompt a surge in the cost of valuations for consumers.
He says: “If AVMs continue to develop then they will ultimately be taking work away from surveyors. This could drive up costs for consumers going forward as they will be few and far between. Also, the challenge with AVMs is that they rely on historical data – but over a five or 10-year period, the market can fluctuate substantially. Ultimately, it is a good processing tool for lenders, but it is not good for consumers and surveyors if supply falls and costs rise.”
However, Reynolds points out that any competition should provoke a flurry of activity in the surveyor market. “AVMs should benefit the whole industry as they will encourage surveyors to improve their service and innovate to stay ahead of the game.”
Rispin agrees: “The popular view is that AVMs will see the demise of the surveyor market, but this is not necessarily the case. AVMs are still in the early stages of development and if the volume on which the data is based is too small, then a valuation cannot be done. There will always be times when a valuer is needed, particularly in cases where there is a mixture of residential property or in rural settings where expertise is needed. The key for all those involved is to understand where AVMs can work and where a more detailed approach is needed.”
