AVMs may reduce mortgage insurance claims

Automated valuation models are being employed by banks to mitigate risks from other approaches to property valuation in Australia, such as identity fraud and overstated valuations by intermediaries.

AVM use has skyrocketed in the local market over the last three years, according to vendors of these services, with lenders and major mortgage insurers seeking time efficiency and cost saving methods when valuing and underwriting properties, or reviewing securitisation portfolios. Providers, though, may only just be beginning to make money. Provider internal fixed costs remain high, compounded by the sales process that may stretch up to a two-year period for a major banking or insurance client.

One niche supplier in this market is Hometrack Australia, which entered the Australian AVM market with a commercially viable product in early 2008.

There is money to be made though providing AVMs in Australia, according to Brendan Darcy, chief executive officer at Hometrack.

"It is profitable. Fixed costs are high. You need very talented people to build and distribute the rocket ship.

"The AVM is one of the most sophisticated products in all of financial services. To take the raw data from multiple sources and deliver a highly reliable and calibrated AVM requires huge investment."

The AVM testing to implementation timeline will vary depending on the size and valuation requirements of the end user, with Darcy adding Hometrack clients are very accepting of AVMs and vary dramatically in size.

"From the point where an AVM initiative has sponsorship within the ADI, there is typically two to six months of testing, and implementation of two to six months after that," Darcy said.

"We deal with all sizes of ADIs, from major banks, second tier banks, non-banks, and the mutuals. Of the dozens of ADIs we deal with, I can't think of one that resists AVMs in principle."

Identifying the loan to valuation threshold for an AVM, or other non-full valuation methods such as desktop or kerbside, will be a function of the user and varies depending on internal risk scenarios.

Darcy adds the LVR threshold can't be viewed in isolation.

"Usage is a function of the LVR and the Confidence Level (a measure of AVM accuracy)," Darcy said. "Generally speaking ADIs are comfortable lending up to 85 per cent for very high confidence levels and lower LVRs for moderate confidence levels."

With the primary purpose of an AVM remaining a risk mitigation tool to identify valuation discrepancies and frauds, this places much of the responsibility for an incorrect AVM valuation back on the lender.

"If a lender implements an AVM prudently the vast majority of its valuation risk will lie with the remaining physical valuations, not the AVM. Having said that, AVMs will continue to improve. Hometrack views AVM development as in the early stages, and in ten years AVMs will be unrecognizable compared to today."

Hometrack has recently extended its electronic valuation capabilities to desktops, which Darcy considers will continue to form an important part of the Australian property valuation industry moving forward.

"Geospatial integration of data and imagery is a major part of the future valuation industry. Lenders don't want just a report, they want a process with independent verification at the heart of it. We've built something that is just the first step in that journey."