As it turns out the problem was fairly short-lived and attention moved into other areas including dealing with a surprising uptick in mortgage volumes on the back of the stamp duty holiday.
This meant little real time was given to better ways for risk assessment going forward or future proofing businesses against future valuation lockdowns.
This needs to change.
We are now in a new national lockdown in England, after Wales just exited its shorter version.
Disappointing as this is to be repeating lockdowns, it can’t come as a total surprise to anyone following the data and political responses around the world.
So turning to valuations, how important are they? Very is the short answer.
When making a mortgage, from a risk perspective there are only a handful of things that really matter:
- Does the borrower exist?
- Does the property exist?
- Is the property being offered as security the same as the one being valued and subject to a legal charge? It may seem obvious but believe me ‘accidents’ have been made in this respect before.
- And, taking all relevant things into account, is the value correct?
- Have I got a valid, subsisting first legal charge?
Focussing on the valuation
Ideally lenders like to send a qualified valuer to visit the property.
This has been getting harder as valuers are an ageing population and there are now far fewer of them practicing. Professional Indemnity Insurance is also becoming scarcer.
At the same time, technology has been advancing.
We have had automated valuation models (AVM) for many years now and accessibility of data and sophisticated technology has improved the risk management process.
Some lenders are happy to rely just on AVMs for lending, particularly where the loan is low risk such as a sub-60 per cent loan to value (LTV).
While that’s all well and good I think there are better ways to improve the risk process.
This can be by incorporating a valuation review, which uses other data sets such as an AVM; Land Registry data, showing where the title is for the property that needs valuing incorporated with Ordnance Survey map data; and date and value of last sale.
Environment Agency data is also necessary for flood, mining and subsidence, as well as comparable tools that search for similar properties, either for sale or sold, with pictures both internal and external, satellite and street imagery.
So, if a qualified valuer, or the lender for that matter, can access all of this information it is possible to deal with all but the last one on my list of five bullet points above.
And if a lender is unhappy to take this leap into a new way of assessing the risk of a property it is entirely possible to take out insurance protection against the value being wrong and also covering the final bullet point being the first legal charge. Game set and match.
This is where the industry is heading, and some forward-thinking lenders have already got there.
Others are lagging.
But what about securitisation?
I often hear that this is a barrier to implementation and less understood rules about the US Dodd Frank Act are paraded as part of the problem.
Simply put they are not and there is nothing inherently in securitisations that stop us from using these more developed risk management techniques.
It frustrates me that, as one of the earliest practitioners in the European securitisation markets, we thought of ourselves as innovative and cutting-edge.
But that was 1985 and the residential mortgage backed securities (RMBS) market hasn’t kept pace with risk management techniques and technology.
In effect the RMBS market still relies on 1985 processes. It is time they were revisited.
This is not just about lockdown and scarcity of valuers but focussing on the real risks and adopting better practices to ensure better risk outcomes.
Lenders, originators and issuers need to spend time with their investment bank funding partners in educating them about how things could be done better and then take this to the rating agencies. This will not change unless lenders get behind it.
The other benefit of course is that future lockdowns needn’t stop pipelines completing if physical valuations get suspended again.