AVMs are less good at putting an accurate value on properties that are-one-of-a-kind or have no obvious comparables in the vicinity.
Lenders are increasingly relying on automated valuation models as part of their process when issuing a DIP, raising the likelihood of question marks over one-of-a-kind property valuations.
A joint paper published by the European Mortgage Federation and the European AVM Alliance has found that in the UK there has been a significant increase in AVM usage in recent years, continuing steadily since 2008.
And it found that the trend is likely to continue.
AVMs operate using statistical algorithms and value properties based on comparables in the area – much like a surveyor does.
They provide much more accurate granularity in terms of how location affects value and also remove previous valuations on a specific property – eliminating the risk of a previously fraudulent or inflated valuation from contaminating the new valuation.
However, they are less good at putting an accurate value on properties that are-one-of-a-kind or have no obvious comparables in the vicinity.
In this situation, the AVM places a confidence level which highlights how accurate the valuation is likely to be and could have a knock-on effect on whether a decision in principle goes through easily.
Luca Bertalot, EMF-ECBC secretary general, said: “In light of the increasing establishment of AVMs in Europe in recent years, it is vital as an industry to have a thorough understanding of their application across jurisdictions.
“The accurate and reliable valuation of property is one of the fundamental cornerstones of the mortgage lending and covered bond businesses.”
In the UK, AVMs are used at mortgage origination for an estimated 30% of all mortgages including purchases, while they are used at mortgage origination for the majority of remortgages.
They are also used extensively as a detection tool against potentially fraudulent or simply negligent overvaluations.
Despite this, there is currently no overt regulation on how lenders choose to apply AVMs.
The paper said: “In the UK the Bank of England has not formally issued any rules or guidance, but all organisations that have become or are looking to become AVM clients do typically conduct extensive accuracy tests and impact analyses before signing up.
“These may be shared with the national supervisor or other stakeholders.”
The paper also found that in the UK, AVMs are used very widely for portfolio valuation with at least four of the top five UK banks revaluing the entirety of their mortgage book on a regular basis using AVMs.
A large number of smaller players also employ AVM portfolio services on a regular or ad-hoc basis.
Portfolio services were found to have been provided by just one AVM provider for approximately50% of all UK mortgage books.
