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21 / 05 / 2014

AVMs have a role to play

AVMs have a role to play

By John Bagshaw, Corporate Services Director, Connells Survey & Valuation

To many in the industry, the phrase Automatic Valuation Models, or AVMs, can trigger alarm bells. An over-reliance on these methods is often associated with the worst excesses of the last housing boom, and even for causing some of the overvaluation of mortgage loans which triggered the US sub-prime crisis.

In the past, AVMs have been used in isolation, without being sense-checked by experienced property professionals. However, in the right hands, a “valuer-assisted” approach to AVMs not only has a role to play, but is vital to the continued growth and robustness of the UK mortgage industry.

Consider the current state of the mortgage market. Gross mortgage lending has grown by over a third in the space of twelve months, which has thrown up huge challenges for the professionals that support such progress. Mortgage Strategy has covered the ongoing ‘valuations shortage’ in some detail, and it is fair to say that the issue of capacity has not yet gone away.

Despite widespread recruitment initiatives, it will probably take three to five years for surveyor headcounts to significantly improve, as the industry rebalances in the wake of an ageing workforce retiring and a new cohort developing the necessary skills and experience. In the face of such shortages, a responsible approach to AVMs could help the industry to tackle some of its capacity issues without compromising on the quality of valuations.

AVMs are only currently used in certain, carefully evaluated situations. Properties requiring valuation are pre-assessed, depending on the property type, mortgage product and risk level.  For some homes, a detailed inspection is required in order to accurately assess the value. For others, a “drive-by” assessment suffices, where a valuer will view the exterior, but will not enter the property.

Historically, both techniques have given good results when used in the right circumstances. But this leaves a gap between a physical inspection and leaving the entire process to an AVM running quietly on a server somewhere. A valuer assisted AVM would be a fundamentally different process, an important third option where a skilled valuer can confirm the value, or flag the case for inspection. This desktop approach would introduce an intermediary step in which valuers could consider the AVM results alongside their valuations database and local knowledge.

The local geographic area, type of property, borrower profile, and the proposed mortgage product and AVM confidence factor will all come into play. After taking into account such factors, valuer-assisted AVMs would extend the number of acceptable AVM valuations, increasing the number used in remortgage cases and extending into lower risk origination cases particularly in high density urban areas where transactional comparables are widely available.

Following MMR, prudence is the order of the day, and rightly too. But reducing risk doesn’t mean that we should shy away from new opportunities to improve our capacity and output.  With any mortgage, there is a risk from both the borrower and the property. While MMR can effectively mitigate risks from the borrower, it is up to the surveying industry to help address risks from the property. A more imaginative approach to valuations, with effective ways of managing risks, is vital for a healthy mortgage market in the long-term.

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