Edging towards automation

A century on and those words ring true for a mortgage industry that is undergoing dramatic change across the board.

Technology has revolutionised mortgage lending. With conditional loan approvals already available in seconds, automated valuation models (AVMs) now blast through a valuation in the blink of an eye thanks to the marriage of technology with property data.

But while an injection of speed is a blessing to what was a previously cumbersome process, it is only part of the story.

Finding their feet

As technology becomes more sophisticated, the reliance on human interaction de-creases. For property valuations there is accordingly concern over the reliability of electronic valuations. Moreover, AVMs are still finding their feet in the market.

While most lenders advocate the integration of AVMs into their businesses, they are essentially viewed as a tool, albeit it an important one, in the valuation process.

"Recent technological developments in the valuations sphere have been positive for the whole lending industry, but at the end of the day getting the valuation right has to be the most important consideration," says Steve Weston, head of distribution for wholesale finance at non-bank lender Challenger.

While Weston is keen to support the technological advances made by valuers, including the implementation of data-based plat-forms, he says the Challenger group will continue to use onsite valuation methods for the foreseeable future.

"Until the data is rich enough, mistakes can, and will be made," says Weston.

"Valuations are the last line of defence for a lender; the extra cost and time of performing an onsite valuation is a worthwhile exercise to reduce risk."

Hot on the heels

Australia is slowly catching up with the UK and USA, where AVMs make up approximately 30 per cent of all valuations. While slow to embrace AVMs until now, a renewed campaign by online information services providers is seeing the ground quickly made up.

"We are seeing an increase in demand for desk top valuations and AVMs as lenders become more confident working within the product's parameters," says Adrian Winskill, national manager of group sales at Valuations Exchange.

The desire for speed is the driving force behind the valuations industry — a feature which was once considered the stumbling block of the loan process. However, speed does come at a cost.

"New data-driven valuation methods create a wider range of options for lenders, but it comes at a price/risk trade off," explains Winskill.

Winskill believes that lenders looking for a fast turnaround on property valuations which are less that 70 per cent LVR should feel confident in using AVMs.

Instead of a radical change to AVMs, the industry is moving towards a sliding scale of cost-for-value —which involves a mix of traditional valuation methodologies with new processes.

According to Greville Pabst, CEO of WBP Property Group, the industry has only seen the tip of the iceberg when it comes to the mass of products that will soon be released for statistical-based valuation models.

Pabst's enthusiasm for the industry's development is tempered however by a realistic attitude towards the use of data-based models currently available in Australia compared with the accuracy of traditional but slower on-site valuation methods.

"In reality," says Pabst," a well-researched professional valuation can-not be performed within 48 hours and for $150."

Pabst sees the future of the valuations industry as one of a scaled approach. Physical inspections will attract a higher fee; however there will be hower fee and faster options like AVMs, desk top or kerbside valuations for lower LVR loans where the risk is less.

"The process will be multi-layered. With basic statistical AVMs an answercan come back in seconds. The standard deviation may be higher and the risk for error in a fast changing market can be greater though," says Pabst.

"In the short-term these models are best used as part of the check process for low-risk assignments."

A price on peace of mind

Graham Mirabito, CEO of property information company RP Data, believes there isn't a lender around who isn't considering adopting AVM models into their daily business practices — if they haven't already. RP Data has created Australia's first comprehensive property database.According to Mirabito, 3.5 million properties are assessed every week, including the 10,000 weekly sales Australia-wide.

Accuracy is the chief concern when it comes to assessing risk for a lender, he says stressing that databased models act as an extra safeguard in the loan process.

"Though AVMs can be used as the sole method of valuation, in some scenarios their real benefit is in minimising the risk for the lender," says Mirabito.

By running an AVM in conjunction with other valuation methods Mirabito believes that fraud is easier to identify. In the event of a major valuation discrepancy, AVMs can compare similar properties in the area and draw on the sale history.

As the industry moves closer towards an automated future, one of the key by-products of multiple valuation models is the additional layer it adds to the process in terms of combating fraud.

Fraudsters in any area of the lending process are a concern.

"Prices can be manipulated using electronic valuations reviews (EVRs) leading to inflation, but they're definitely getter better at catching them," says Challenger's Steve Weston."

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Tools of the trade

THE SAFEST
Valuation method: Full valuation
Best use: Properties under $2 million with higher LVRs
Average price: $180-$500
Pros: Most accurate method available – valuation includes a full physical onsite inspection of the property combined with market data to produce a price estimate for the property
Cons: Price and speed – a drawn-out valuation could put a lender at risk of losing a client


THE STANDARD
Valuation method: Desk top
Best use: Suited to loans with an LVR lower than 70%
Average price: $80-$100
Pros: Accurate and not too costly; the valuer estimates the value of a property using data and information provided by the owner
Cons: Information provided won’t be as comprehensive as an onsite valuation and can be more easily manipulated. Unsuitable for loans with higher LVRs


THE FASTEST
Valuation method: AVM
(automated valuation model)
Best use: AVMs are best used for lower LVR loans or in conjunction with other valuations
Average price: $45-$50
Pros: Becoming increasingly sophisticated, AVMs use information stored in a database combined with market statistics to quickly estimate a property’s value. With an almost instantaneous turnaround they are an excellent support tool and research method.
Cons: Only provides a price range estimate instead of an actual figure