Back to basics – why don’t all lenders do desktop valuations or AVMs?
Paul Brett is managing director – intermediaries at Landbay
There was joy and a huge sigh of relief when the government announced that valuers could once again carry out physical valuations.
The lack of valuations in the first two months of the lockdown was a big contributory factor to the standstill that happened in the property market.
Brokers’ concern about this was apparent in Landbay’s first webinar with Mortgage Introducer on 1 April link when a third of all the questions received were on the subject of valuations.
Even after valuers were back out and working through the backlog, the questions continued on our second webinar together link.
During the two months valuers couldn’t enter people’s homes, many mainstream lenders made great progress updating both their Automated Valuation Models (AVMs) and their Desktop Valuations.
Some lenders became able to adopt these much more widely than they had before. The questions from brokers therefore, were why were buy-to-let and other specialist lenders not doing the same thing?
There are a few structural reasons why this was not possible, so let’s go back to basics, what is the difference between and AVM and a desktop model and why are buy-to-let lenders not using them?
A desktop valuation still relies on the experience of an RICS qualified chartered surveyor to manually investigate comparable property valuation data, together with geographical location and other factors without actually going to visit the property in question.
The valuer will look at details of the property being mortgaged and will use photographs and any other data they have access to.
They then compare this to other properties of a similar type in the adjacent and surrounding area. Based upon this empirical information, a valuation figure will then be provided.
As no physical visit to the property is undertaken, it is the lender who takes extra risk in this instance. Therefore, they will generally restrict their loan to value ratio in order to cover the possibility of any loss, should the property not be worth what the desktop valuation thought it would be.
This would show up should the property eventually need to be repossessed and any unforeseen defects remedied or the property sold at a discounted rate.
An AVM (automated valuation model) is what it says on the tin…automated. It is similar to a desktop valuation but is often completely automated, with little or no intervention. The automated software will examine and compute a wider range of empirical house sale data, not asking the price, and will provide a valuation based upon such data, with no human intervention.
These systems can work well if someone is buying a standard house, of standard construction, in an area where there are lots of properties of a similar type.
Many residential two, three or four-bedroomed homes are like this, particularly on a housing estate. These houses are typically quite popular and there can be quite a lot of movement with people buying and selling, which means there is usually a similar type property that has been sold in the past few months to compare to.
Where these systems work less well is where you have homes that are more bespoke, so where there are fewer buildings of the same type, or if they have been converted to houses of multiple occupation (HMOs). This means that not only is it harder to find another property in the area to compare to, but they may not have been bought or sold very recently.
In high risk areas like on flood plains, or where there has been mining and subsidence lenders wouldn’t want to use AVM or desktop methods.
Where desktop valuations or AVMs are used, lenders will often put valuation ‘caps’ in place so they will only use them for lower risk loans at lower LTVs.
Such models are based largely on historical data, similar properties sold within the last three months for example, but we’ve had a big gap in historical data with few, if any, properties sold which may make them less accurate.
Automated systems are also not good at forecasting forthcoming cliff edges where property prices might drop.
Non-bank lenders have an additional challenge. Because the money they lend comes from ‘wholesale’ sources, such as large banks or the global financial markets rather than savings and deposits, it is usually a condition of their funding that they must carry out a physical valuation.
Even lenders with their own money will not generally allow desktop valuations or AVMs if they intend to recoup the capital utilised in creating their mortgage book, via a securitisation, or via ‘whole loan mortgage book’ sales.
If you don’t have physical valuations on every single property, regardless of LTV and regardless of whether it is for a remortgage or a purchase, those mortgages will not be desirable, so are not currently acceptable assets for securitisation or onward sale.
This is particularly the case for US investors and banks. Under a piece of legislation called the ‘Dodd–Frank Wall Street Reform and Consumer Protection Act’, to be involved in securitisation properties have to have physical valuations. It doesn’t matter even if they are only 20% LTV, the Federal Reserve and the US Government has insisted that any US company involved in securitisation only buy mortgages backed by a physical valuation.
So, there is scope for development in this area, and some of the mainstream banks have developed their propositions a lot, particularly since March.
While it can be frustrating that not every lender can do this, the fact that so many lenders could continue lending shows that positive lessons were learnt from the credit crunch so that funding remained available.