Ten years ago a mortgage broker was never allowed near a valuation report for a mortgage loan that was submitted to a lender. The mortgage broker was kept at arm’s length from this process, primarily for risk and governance reasons, and the valuation report and the process for procuring it was regarded as the exclusive domain of the lender or mortgage manager.
Times have changed.
Today mortgage brokers are far more engaged in the valuation process and have much greater visibility about the status of each valuation report as it is being prepared. Brokers are even able to order an AVM from some lender portals and gain an instant assessment of the estimated value of the property.
Prior to the global financial crisis, ‘valuation shortfalls’ (valuation amounts coming in short of the owner’s estimate or even the contract of sale amount) were extremely rare; typically in less than 5% of cases. The primary focus of the mortgage broker in those days was therefore focused on the first two Cs – credit and capacity and not the third ‘C’ – collateral.
It was accepted practice that the lender or mortgage manager would typically instruct a valuer to prepare either a full valuation of the subject property (internal and external inspection) or perhaps just a drive-by or kerbside (external inspection only). In the minority of cases the lender/funder may have accepted the contract of sale price in lieu of a valuation. Historically it was customary for the valuation report to take up to a week to come back and that a ‘conditional approval’ would be given in the interim. That is, the deal would be approved subject to the valuation amount being acceptable. Often this was enough to appease the borrower and the mortgage broker and effectively take the borrower off the market.
The changing nature of Australia’s property market since the global financial crisis, the evolution of different valuation methodologies and the technology to deliver those methodologies have changed those dynamics. Further, lenders have worked hard to seek greater engagement with their key broker partners and streamline processes for efficient loan assessment processes with minimal re-work. Lenders have also sought to design their processes to offer an unconditional ‘Yes’ as soon as possible so as to take the borrower off the market.
THE CHANGING MARKET
Looking at the changing nature of the property market first, the percentage of valuation reports coming in short of owners’ expectations has increased from around 5% pre-2008 to approximately 15% in today’s market. This has occurred as a result of the soft and fragmented nature of the property market since 2008, with a particular emphasis on sub-segments including Queensland coastal markets reliant on tourism, off the plan developments, and house and land packages on capital city outskirts.
This issue causes considerable angst for lenders, borrowers and brokers. Clearly lenders prefer not to invest the time, effort and expense in assessing credit aspects of a deal that ultimately falls over because the collateral valuation does not meet expectations. As a result, lenders have invested considerable effort to work with industry partners to redesign the valuation processes to obtain the valuation assessment at the earliest possible time, through a combination of leveraging alternative valuation methodologies and driving improved service level standards.
Second, the improved reliability in alternative valuation methodologies such as AVMs and desktop valuation reports, together with the valuation cascade rules that drive the use of those methodologies depending on the loan characteristics, has meant that lenders, brokers and borrowers often have a view of the collateral valuation assessment far earlier in the loan origination process.
Technology developments and the utilisation of mortgage platforms such as ValEx and VMS, each owned by RP Data, have also permitted lenders to separate the valuation ordering and management processes from the governance controls necessary to ensure that brokers are not ‘gaming the system’. In the same way funders have for years permitted mortgage managers to order the valuation report from a panel of valuers approved by the funder, lenders now will permit their preferred brokers to order a valuation assessment (which may be an AVM, desktop, drive-by or full valuation, depending on the nature of the proposed deal) from a dedicated website or portal which incorporates the lender’s business rules, often returning AVM outputs within minutes.
These developments have a range of benefits:
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borrowers are able to avoid the frustrations associated with valuations coming in short after considerable effort has been expended on the loan application process;
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brokers obtain similar benefits and have the added benefit of having much greater involvement and visibility into the collateral assessment process than ever before; and
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lenders are able to enjoy productivity benefits associated with the loan assessment process and also ‘take the borrower off the market’ by providing a “yes” rather than a conditional “yes” sooner than in the past.
Future developments in this area provide the opportunity for even greater innovation, including the potential for banks to offer pre-approved valuation assessments of a wide range of properties. Whilst this concept has many attractions to all parties, it should be remembered that the collateral is the last line of defence and that the first two Cs of credit and capacity should always be the primary focus for lenders and brokers.
