Automated Valuation Models are a bit like iPods – they are the latest in technology and everybody wants one. But just like iPods, PDAs, satellite navigation systems and all the other modern gizmos, they’re pretty useless if you don’t know how to use them properly.
The mortgage industry seems to be indulging in a game of technological one-upmanship at the moment with many lenders claiming to have the newest, most advanced software and hardware at their fingertips, announcing faster and faster mortgage processing times as if they are looking for a place in the Guinness Book of Records.
Technology is important and automated valuation models will undoubtedly bring further benefits to mortgage processing, as long as it this part of a comprehensive and coordinated solution that does not forsake people in favour of machines in a bid to slash operating costs to a bare minimum.
AVMs are not new and many lenders have been using them in some way for a number of years, but recently they have been promoted as the next great leap forward. In a nutshell, AVMs allow lenders to value a house without carrying out a physical inspection by comparing the specification, size and location of the home with similar properties on a huge database.
Depending on which AVM provider is used, other factors such as house inflation are used to generate a fairly accurate market value for certain properties.
By combining this fast valuation method with other internet-enabled tools such as credit checking and electronic identification it is possible in some cases to give an almost instant decision in principle for a mortgage application, and even complete the deal in a matter of days.
But that’s not the whole story as there are many situations in which AVMs are not suitable, particularly in the specialist lending sector. If the property is individual, old or has been extensively remodelled it is unlikely to have a comparison on the database so a real survey is still required. If a borrower is looking for a higher LTV most lenders will still require a valuation as they are committing a lot more money in relation to the value of the property.
The government got itself into a pickle by suggesting that AVMs would be the answer to the lack of a valuation element in Home Information Packs before the industry outcry made it rethink its stance on HIPs and decide that the Home Condition Report would not be compulsory, leaving the open way for traditional surveys to continue supplemented by AVMs where appropriate.
AVMs are an important development and some lenders have worked hard to build them into their online mortgage systems.
Going for technology for its own sake is a dangerous path to take as not only does it mean that a lender relies massively on an automated process but it also overlooks the fact that the mortgage market is a people business, based on relationships between borrowers, intermediaries and lenders. And if the lender dips out of that chain just to save money, some of its flexibility in providing individual solutions for individual customers will be lost, perhaps forever.
It was only a couple of years ago, in the run-up to mortgage regulation, that technology was being seen as a headache for the mortgage industry. Companies were spending millions of pounds on computers and software to make their systems compliant, with most of them still struggling to get problems ironed out well after Mortgage Day.
There was a widespread fear that technology would make the business too complicated, intermediaries would not be able to adapt to automated Key Facts Illustrations or would perhaps even be cut out of the sales equation completely as providers used the internet to go directly to customers. On the other hand there were those lenders who made it clear that technology was the way to go – so much so that entities such as packagers would not be required.
Two years later, and the mortgage industry is in great shape. Intermediaries are not only coping admirably with technology, they are harnessing it to make their service to their customers more effective. As for packagers, rather than disappearing, the good operators with diversified business models have become stronger and are doing more business.
The common factors here are relationships, customer service and choice. Technology only works when it is part of a true multi-channel offering that is sensitive and responsive to customers’ needs, whether they are brokers or borrowers. Yes, it must deliver speed and convenience but it must also support choice for customers.
Ask any broker what they most look for in a lender and they will tell you reliability and consistency of service. Of course good products and keen interest rates are important but in such a competitive market they want to know that when they recommend a mortgage to a client they can be certain that the deal will be available and the application process will be smooth.
If it is not and they suffer at the hands of poor processing or are forced to go back to a client to inform them that the mortgage they wanted has fallen through, bad service is likely to stick in that broker’s mind for a long time no matter what claims lenders make. For example, a super-fast decision in principle means nothing to a broker or their client if the decision is not honoured or if the next time around the automated system cannot cope with a slightly more complex case and the borrower is turned down.
Let’s welcome AVMs but let’s be careful not to create an AVM-based generation of lenders that fall into the same trap as the iPod-generation- so wrapped up in their technology they forget how to communicate in the real world.
Pros and Cons of Automation
But critics in the US and the UK point out that while using a database might provide consistent valuation for similar properties – particularly estate-type homes – they cannot take into account factors such as the condition of the house.
The two most popular AVM systems are the hedonic system which collates the details of property sales and produces valuations based on data such as property, size, location and number of bedrooms, and the repeat sales regression system which uses Land Registry data to predict the value of property based on sales over time.
The UK’s leading AVM provider uses a system that combines hedonic and repeat sales regression techniques.