by Stephen Knight, Executive Chairman

 

Last week’s press featured two mortgage themes: previous fraudulent over-valuation by valuers causing lenders substantial losses, and current under-valuation by valuers causing economic detriment by reducing mortgage availability.

 

The handful of you who have read my books know that I favour AVMs, for objective risk management reasons. I’ve never met a computer system that tried to defraud me, give me a subjective opinion, or form relationships with local brokers. The best AVM gives honest + or - confidence percentages, will say when it can’t return a value and is updating its factual database every minute of the day. Indeed, by the time you finish reading this blog, it will have more accurate valuation data than it had when you started.

 

I acknowledge, of course, that there is a powerful body of opinion to the contrary, which must be listened to. Checkmate is not in a position to buck that trend. The extent to which we will deploy AVMs when we launch will be in consultation with our funders, some of whom may require 100% manual valuations. We will also comply at all times with the direction of our regulator as to how and when AVMs can be used.

 

I think that the best AVM on the market is from RightMove. If an estate agent wants to include its properties for sale on this the UK’s largest website, it must include all of them. Thus, RightMove has in its database over 90% of UK properties including, in an increasing number of instances, pictures, rental comparisons (for Buy to Let) and recent condition reports. The irony is that this is the database that is often used by valuers to get comparables for their manual reports.

 

For those who are very risk averse-which includes Checkmate-a second, contrasting AVM might be of comfort nonetheless. Calnea tracks Land Registry actuals, an incontrovertibly accurate and factual database. Our AVMs will use both RightMove and Calnea in a unique combination. We blend the values and confidence levels returned by the two arm’s length AVMs, which will not only produce a better and more reliable value, but which will also prevent applicants discovering by their own enquiries what valuation we will use to assess their applications.

 

Lending policy rules will inevitably require manual valuations either before or after the AVM where we and our funders cannot be sure of the equity cover in the property for a variety of reasons. Where the AVM is successful, however, the benefits, in my personal opinion at least, will be no human-inspired over and under valuations and a speedy instant service to mortgage applicants. And we all know how applicants, their advisers, and the market are suffering due to current service levels.

 

This is not a new theme for me. In my first book (’The Art of Marketing Mortgages’, Collins & Brown 1997) AVMs did not exist, but I said in the section on ‘The Future’:

 

“Some of the more forward-thinking lenders are also looking at the possible demise of the house valuation. The application of a property index….could well replace the …mortgage valuation”.

 

Despite teething problems with some AVMs, which I accept have caused some issues, I haven’t changed my mind about this even though, as I say, Checkmate will comply at all times with the wishes of our funders and regulator.

 

As I checked the book for the above quote I found another, related to the same issue. I said in 1997:

 

“If all the valuation fees paid by borrowers were, instead, provisioned against losses directly caused by the property valuation not being what the lender expected, there would be massive profits for both lenders and borrowers.”

 

So I decided to update my maths.  Mortgage losses sustained by lenders last year were a record high-more than the amount of the previous two years added together. In fact the BoE reports a massive £736 million of losses over the three years 06-08 inclusive. If my theory is to stand up twelve years later, it will have to against the backcloth of unprecedentedly high losses.

 

Assuming a 75% application-to-completion ratio, and an average application fee of £250, the application fee income generated by lenders from mortgage applications in 06-08 would have been about £3 billion. In other words, even if every £ lost in the BoE figures was directly attributable to the original valuation (which it wasn’t) , the application fee income was still 4 times higher than the losses.

 

These figures simply give scale, because lenders could not dispense with valuations altogether or they would be selected against. But if every lender paid for a double AVM, the application fee-to-loss coverage would be still be more than three and a half times the losses. In fact, losses could double by ditching most manual valuations - and why would they? - and lenders would still be better provisioned by using the application fee income.