View more on these topics

Era of automated valuations dawns

Automated valuation models will play a much larger part in the mortgage industry in this country now rating agencies have given them the green light, says Frank Eve

The mortgage market is poised to see the use of automated valuation models as part of the application process. In the drive for competitive advantage, lenders are looking to enhance their service propositions by providing online instant offers.

This has largely been facilitated by the rating agencies accepting the use of automated valuation systems, which in turn will allow mortgages originated using AVMs to be securitised. This is particularly important for lenders whose business models rely on the ability to securitise their mortgages – a model used by most lenders in the non-standard mortgage market.

All three major rating agencies have now given the green light to using AVM-valued assets in their mortgage portfolio analysis. Standard and Poors and Fitch have both published guidelines on the treatment of AVM-valued assets although Moody’s is reportedly awaiting more market data before issuing its guidelines.

It is not the place of rating agencies to endorse or encourage the use of AVMs but merely to give an opinion on the associated risk if and when they are used by lenders. It is clear from the rating agencies’ analysis that there is enhanced risk when using an AVM and this is demonstrated by the fact that when analysing AVM valuations rating agencies will apply certain ‘haircuts’ – in other words reductions in valuations.

This reduced valuation is based on the confidence level that the AVM provider sets on each valuation and these vary depending on how difficult the property is to value. Haircuts are also based on the rating scenario under which the analysis is being carried out.

Each rating agent has a slightly different haircut level but it is important to note that on reasonable confidence levels, even at high ratings haircuts are only a few percent and represent a limited restriction.

AVMs are used to value seasoned portfolios for risk assessment and sale purposes. When assessing more seasoned loan portfolios which have been revalued using an AVM, the effects and treatment are significantly better for the lender than when using the traditional methods, such as indexation.

Indexations are severely discounted by rating agents with haircuts of 50% and no acceptance of upside for the past 18 months.

Using AVMs in this way can have a significant and positive effect on LTV and hence potential loss severity. This ultimately filters through to capital efficiency in funding structures and funding cost.

Hometrack continues to dominate this country’s AVM market and is well positioned to take advantage of this area. It has achieved its dominant position by providing an accurate, predictable and technically robust automated valuation model. This is borne out by its client base and the rising number of valuations using AVMs.

Next week I’ll be exploring Hometrack’s view on what the future holds for house prices.


Only 57% back Conservative Right to Buy scheme

Just 57% of Mortgage Strategy Online readers think the Conservatives’ revamped Right to Buy scheme is a vote winner. This is despite a recent poll showing the Conservatives to be finally making headway and ahead of Labour. This week Mortgage Strategy asks: “Would you advise a first-time buyer to take out a ‘death bed’ mortgage?”

Buy-to-let market remains stable says Paragon

New data from Paragon Mortgages Buy-to-Let Index shows that rental yields remain stable as confident landlords continue to invest in additional properties. In the first half of 2006, the private rented sector performed strongly, with renewed demand for rented homes from inward migrants and other types of tenant, leading investors to grow their portfolios. According […]

Poll shows disaffection for Brown

Figures from a Guardian/ICM poll show that just 37% of Britons feel that chancellor Gordon Brown should take credit for the success of Britain’s economy since Labour came to power. A whopping 83% of people also agree with the statement that since Labour came to power in 1997 the average person finds it harder to […]

New lenders face a tough market, says Pink’s MD

Tony Jones, managing director of Pink Home Loans, has questioned whether now is the right time for new lenders to enter the market. He says the uncertainty of the housing market and predictions of an increase in the number of repossessions will not make it easy for new entrants. He adds: “There are a lot […]


Case study: administration — managing group life schemes

Our client leads the global market in high-tech electronics manufacturing and digital media. The trustees of the company’s final salary pension scheme insure death-in-service lump sum and dependants’ pension death benefits for active employees, as well as dependants’ pension benefits for deferred members (those who have left service).


News and expert analysis straight to your inbox

Sign up