The need for speed

Alan Cleary

Technological development is leading to rapid changes in the way that professionals perform their business and we in the mortgage industry are no exception. One of the changes is the introduction of AVMs used in basic residential valuations - the times when lenders issued offers with a “subject to valuation” stamp are over, or at least can be over if a customer chooses so. Whether involved in a race to get a contract signed or trying to meet the deadline on a new build property deal, instant offers through AVMs can help those up against the clock as they are effectively removing the need for a physical valuation. AVMs can estimate the current market value of a home based upon various analytical methodologies and data elements e.g. comparable sales prices, home characteristics and historical property price appreciation, which enables lenders to issue unconditional & binding offers in minutes. Additionally funds can be released by lenders as soon as satisfactory certificate of title is received - AVMs clearly speed up the whole application to completion process and will become more and more important in our industry. Not only do they give the client certainty and speed, they also give brokers a competitive edge because they can quickly proceed to their next case. Some people say that there is an element of risk involved and their argument is based on the premise that physical valuations are “always right”. But those trying to knock AVMs probably can’t afford the technology themselves and it seems that they are hiding their lack of resources behind their indisposition. Obviously not all properties are suitable for an automated valuation - the more unique a property is the less data will be available on it. A thatched cottage in the Lake District will be more difficult to value using an AVM than a three bed Semi in North London. However, as time goes by and more data is gathered more and more properties will fall into the AVM net. Same applies to the Buy to Let market, as we gather more data about different rental yields in the UK, AVMs will become available for Buy to Let investors, too. Automated valuations are growing in acceptance and it’s clear that they will continue to do so. Any lender serious about offering genuinely competitive levels of service will need to embrace them fully. They have a huge potential, and the more data AVM providers like Hometrack collect about the UK housing market, the faster and more efficient the process becomes for everyone involved. To edeus and the other most advanced lenders, AVMs are synonymous with a high standard of service and other lenders will learn to recognise that. Those refusing to take them on board will fall further and further behind the levels of service being offered by their competitors and face a rapidly shrinking market.

Iain Williamson-BM

Automated Valuation Models (AVMs) have received a substantial amount of attention in 2007 with a number of specialist lenders announcing their implementation. After significant development and testing by their providers AVMs have been welcomed by the great majority of industry pundits and their arrival in the mortgage market has been well documented.

Currently only a handful of lenders utilise AVMs and so it is early days to cast in stone what their future will be. One thing which does seem certain is that an increasing number of lenders are intending to implement AVMs in the future and as such their prospects look relatively rosy. Those utilising AVMs at present may do so under a maximum LTV limit reducing exposure and I am sure that they couple this with well structured and expert affordability models and risk modelling.

The FSA have recently issued their guidance on the use of AVMs, a confident nod to the expected prevalence of these valuations throughout the industry. Given that the monitoring of property values is intrinsic to risk management for any lender, the FSA's decision not to implement an industry-wide LTV limit is an encouraging tick in the box for AVMs.

Brokers have openly welcomed AVMs, and where they eliminate the five day turnaround time expected of a standard valuation, this optimistic position comes as no surprise. As far as consumers go, it's still early days for your average borrower to have a full grasp of the numerous benefits of AVMs.

With this is mind, many will continue to seek their brokers' advice when it comes to selecting an appropriate valuation method. Research from BM Solutions One Specialist Survey found that 86% of brokers believe that they should get a full choice of valuation, suggesting that although brokers expect increased AVM usage; it will not be at the total expense of conventional valuation reports.

Following the implementation of AVMs, the obvious benefit to brokers and consumers alike is that lenders can now issue offers at point of sale. In an ever competitive industry, this provides a valuable string to a lender's bow.

With AVMs accepted as a core valuation choice for the future market, it's important that we continue to educate consumers to appreciate the suitability of these valuations according to their circumstances.

Another significant step forward will be the use of AVMs for Buy to Let applications. Relying on the automated determination of rental assessment in addition to property valuation is big move for lenders, but one that is already beginning.

AVMs are still enjoying a honeymoon period in the market, but brokers have made it clear that there is a real expectation for all lenders to be able to provide the choice. As with anything in the dynamic mortgage market, it's impossible to accurately predict what the future holds for AVMs. But as more lenders look to implement AVMs, and others expand their usage across schemes, the future looks like it could be bright indeed.

Pete Thomson, Sales Director, Mortgages plc

AVMs are being heralded as the big breakthrough in mortgage lending, because they enable the offer process to be fast-tracked. There is no doubt that without AVMs instant point of sale offers would not have become a reality, but that doesn’t mean that AVMs are perfect in every instance.

To understand their strengths and weaknesses, you need to understand how AVMs work. In simple terms, a property’s value is assessed based on the value of similar property in the same geographical area. So, for example, a 3 bed semi on a housing estate which is opposite a similar house worth £280,000 and next door to another similar house worth £280,000 is probably going to be worth……..£280,000!

In circumstances such as low LTV remortgages, an AVM is good enough. Even for purchases where the buyer needs a quick offer, an AVM may be fine. However, there are circumstances where they don’t work quite as well.

If, for example, the property in question is of a unique design and there are no similar properties in the area against which an accurate comparison can be made, it may not be possible to provide an AVM. If the LTV is also very high, the lender may be unwilling to use an AVM. AVM providers such as Hometrack give a measure of confidence (Hometrack’s ranges from zero to seven with seven giving the highest measure of confidence and hence accuracy). For lenders who securitise mortgages, this level of confidence is particularly important. The proportion of securitised loans that use AVMs will increase over time, but on a gradual basis as investors and rating agencies become used to them.

It also needs to be remembered that, as useful as AVMs are in speeding-up the offer process, they give borrowers no insight into the true state of the property they are about to buy. A physical inspection of a property may still be required which will, of course, be an additional cost to the borrower.

For packagers AVMs are a double-edged sword. On the one hand, they threaten income because they remove the need to instruct a valuer. With margins under pressure, this is not necessarily good news. On the other hand, the ability to make a quick offer usually means the applicant is happy to proceed and less likely to pull out or go elsewhere. AVMs can therefore help reduce the number of aborted cases, which has to be good news.

Will the use of AVMs increase in the future? Inevitably, but they are not the perfect panacea that some industry commentators are making them out to be. They have their strengths but also their weaknesses and brokers as well as lenders need to bear both in mind when advising clients.