Guide to AVMs

AVMs – take the chance, not the risk

Guide to AVMs

Whether they are considered a curse or a blessing, AVMs look set to stay. Many lenders are already making use of the latest desktop technology to generate valuations in minutes and then following that up with a point of sale offer (POSO) in the shortest possible time.

Not surprisingly however, there is a fair degree of caution amongst many lenders who feel uncomfortable with new procedures and technology that will see them relying less and less on traditional valuations. If they can satisfy themselves that they have achieved efficiency without compromising their exposure to risk, they will surely welcome new procedures more enthusiastically and extensively.

It’s here where valuation insurance plays a crucial role – it not only offers greater protection for lenders’ loan security, it also gives them an edge that will keep them one step ahead of the competition. By allowing mortgage offers with a ceiling ‘Loan to Value’ level of up to 95%, insurance helps lenders push the boundaries of AVM usage as their exposure increases.

Changing times

Predictions about the pace at which we will see the use of AVMs grow over the next few years vary enormously depending upon what you read, but it’s impossible to ignore the fact that market forces are bringing the switch inevitably closer. While supporters of AVMs may question why all lenders are not already embracing desktop valuations, you need only consider the nature of the lending industry to understand that it will traditionally wait and see what develops, and then only proceed with caution.

It’s difficult to pick up any newspaper or financial journal at present without reading about at least one of the factors impacting on the way lenders approach property valuation and security for mortgages. A combination of consumer demand for even faster decisions from lenders, coupled with legislation and a Government determined to speed up the mortgage process and reduce the number of transactions that fail, is pressurising lenders to shorten the process of issuing a mortgage offer.

Driving factors

The Home Information Pack, the Basel 2 Capital Requirements Directive and lenders themselves questioning the role of traditional valuations within the mortgage process, have all created a background that makes change unavoidable. Within this, AVMs look set to play a key role and dominate lenders’ future strategies. The Government too is on record as saying that its aim is to make all aspects of conveyancing available electronically by 2009. It’s a tall order and clearly there’s still much to do, but add to all this the recent rises in interest rates and the inevitable prediction of rising repossession figures that follow, and the outlook over the next two years is one of significant change.

Valuation insurance explained

So how does a valuation insurance product help lenders? Essentially, the policy covers the lender against the potential difference between a desktop valuation and the actual market value of the property that existed at the date of the mortgage. Losses may come to light if the borrower defaults and the lender is forced to exercise a power of sale of the property. When applied across a whole mortgage portfolio, this could amount to serious losses.

Using insurance linked with AVMs allows lenders to adapt to the changing market and meet the challenges head-on without having to worry about the potential impact on their loan security. Valuation insurance includes a number of key benefits.

• Diminishing uncertainty and increasing flexibility. Using AVMs alongside insurance, a lender is able to produce a mortgage offer almost immediately and with a ceiling Loan to Value (LTV) level of up to 95%, gives a competitive edge to those lenders prepared to use insurance.

• Saving and clarifying costs. The administration of dealing with AVMs and recording a risk on a monthly insurance bordereau is cheaper than the current system and at the same time will help the lender satisfy the CML and FSA's rules on transparency of fees.

• A better remedy for the lender when a problem is identified. An insurance solution is quicker, cheaper and more certain than issuing proceedings against a valuer for negligence. This insurance pays for losses when they occur.

• Minimising the amount of auditing to satisfy the Basel 2 directive on capital requirements. Although a lender will still have to make some judgement that the valuation of their book of mortgages is adequate to protect their potential liabilities, the existence of valuation insurance will allow them to do this by applying basic indices to the original valuations instead of having to commission specific auditing valuations.

One size fits all?

With the number of players competing in today’s highly commoditised personal insurances market, it is not unusual to discover a common perception when it comes to insurance, that one policy suits everyone. This is clearly not the case when dealing with lenders who strive to be different and individual in their approach.

Excel’s Valuation Insurance is designed to be individual, not standardised. It recognises that lenders have different performance standards in relation to arrears and repossessions and may wish to use the product according to their own product range and client profile.

While the policy wording is identical for each case, every lender’s individual procedures are dealt with specifically and, for example, the policy will also include:

• precise details of the lender’s products where cover can be agreed

• the levels of loan to value ratios under which cover can be offered

• full details of premiums

• any restrictions or instructions required for the lender’s solicitors

How much will it all cost?

Premium terms are dependant on the size of the mortgage portfolio, the average value of each loan, and the potential for specific products linked to the cover. Lenders themselves can choose which mortgage products they wish to buy valuation cover for.

With mounting pressure from the FSA for lenders to demonstrate absolute transparency in respect of fees for valuations, the premium for valuation insurance must be competitive enough for the customer to believe that the combination offers a worthwhile saving over a traditional valuation.

Moving forward

When it comes to mortgage offers, lenders face a number of challenges over the coming months, and whether they want to or not, it’s looking increasingly likely that one major decision they will have to make is how to handle the transition to AVMs. By removing the uncertainty while simultaneously enhancing loan security, valuation insurance can make that decision a formality and leave lenders free to meet the growing expectations of both customers and industry regulations.