AVMs have multiple uses including valuing whole mortgage books, point-of-sale valuations, spotting fraud and identifying risk. Jonathan Upton explains
The old adage goes, “a rising tide lifts all boats”. Conversely then, a retreating tide must beach them. The question for investors at the moment is therefore, which lenders have procedures and capital in place to ensure that they can see out the low tide until it rises again?
In the current marketplace, a number of lenders will be facing calls from stakeholders both internally and externally to retrench from their association with automated valuation models (AVMs). Some now seem to see them as dangerously faddish, and a feature of the marketplace over recent years that is best ignored for a while, at least until liquidity conditions improve.
To adopt this approach though, is really to ignore the ways in which AVMs can be used as part of a lender’s valuation mix and the ways in which they can act to mitigate rather than expose lenders to risk. AVMs aren’t just a point-of-sale (POS) tool, they can be used to re-assure a jittery market that lenders are doing all they can to understand their mortgage books and their capital bases, and are managing their risk appropriately.
Part of the solution, not part of the problem
As we all know by now, the biggest problem facing most lenders at the moment isn’t a want of customers or falling house prices, it is their inability to obtain funds to lend. This arose because of a failure of confidence in the credit worthiness of other banks and led to an increase in costs of inter-bank lending which has been the life-blood of many lenders over the past few years.
But the best antidote to failing confidence is not secrecy, it is transparency. Lenders with nothing to hide are being punished equally with those who do because the market feels it has no alternative, and here AVMs can help.
Whole loan books can be valued more or less instantly by AVMs and at a very low cost. Auditors can therefore be re-assured about the capital adequacy of good lenders, and quarterly reporting can be based upon property valuations which are cheaply and quickly marked to market rather than based upon inaccurate indices. This is not a market where adherence to minimum disclosure requirements is necessarily helpful; investors are re-assured by lenders going the extra mile to provide clarity.
Mortgage fraud
Another problem faced by lenders which is becoming more apparent as liquidity ebbs away and house prices stagnate is mortgage fraud. Whilst house prices were rising strongly, this was generally less of an issue (although repossessions and instances of fraud did seem to concentrate in a few areas that have now become synonymous in lenders’ collective consciousness with financial crime). The issues encompassed by fraud seem to range from cases where pressure has been exerted on individual surveyors to achieve a valuation to outright manipulation of the process by sophisticated gangs operating throughout the property chain on a multiple property basis.
AVMs can be used to spot mortgage fraud, both at the point of origination, and retrospectively. Calnea is working with lenders and surveyors to build pre- and post origination fraud detection tools.
In addition, we have developed a Lender Early Warning System to help lenders apply geographical exclusions to their origination criteria before they expose their loan books to undue risk.
POS valuation
This may seem counter-intuitive, but point of sale valuation by AVM can help you avoid writing risk into your mortgage book. Obviously many lenders are tightening their lending criteria and raising rates – but if Einstein’s definition of madness holds true (doing the same thing, over and over again but expecting a different outcome) we should be looking hard at processes to help lenders identify risk before it contaminates their loan books.
Last October at the Council of Mortgage Lenders conference on valuation, Calnea Analytics called for a pricing model for AVMs which enabled them to be used on every property valuation, even if they couldn’t be used to underwrite the eventual mortgage application. We still think that this holds true.
If surveyors are under pressure to get mortgage applications through, and people are desperate to secure a given mortgage deal, having AVMs that can be used as a benchmark for surveyors’ valuations just provides underwriters with an additional piece of information that could be invaluable in preventing risky lending, when right now, lenders only want the good stuff.
Conclusion
AVMs are here to stay – credit crunch or not. They have become an integral part of the lending process for origination, and are becoming increasingly useful for evaluation of portfolio performance, and as the tools develop, for fraud detection and prevention. This means that advocates of a retrenchment from technology like AVMs are not proposing a reduction in risk, merely a blinding of lenders to a useful source of information on it. To stretch the metaphor, when the tide rise again, and the boats start to lift, the boats able to move fastest and more nimbly will be those with the best lookout.
Jonathan Upton is business development director at Calnea Analytics
Date: 1st, May, 2008
ADVICE TO READERS
While this website is checked for accuracy, we are not liable for any incorrect information included. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions.
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