As we start to take the first, tentative steps out of lockdown, the mortgage industry is faced with the same key questions as all other areas of the economy: what is the immediate impact of the lockdown and continuing epidemic on my market, my customers and my business, what are the medium and long term implications and what actions should I be taking now and going forward?

What is becoming increasingly apparent is that the Covid-19 crisis, as well as bringing new issues of its own, is highlighting and accelerating others which had been brewing anyway at both a business and societal level.

One clear example is that of mortgage valuations. At the outset of the lockdown, a critical practical problem was how to progress the pre-offer mortgage pipeline with no physical valuations possible. This forced lenders to look at the valuation process to find an answer to the immediate problem but also prompted them to consider whether this was just a Covid-19 issue or part of a longer-term review of risk management and process efficiency.

To my mind, the combined needs of risk management and operational effectiveness speak to two, probably inter-linked solutions: technology and insurance, and I will look at the current and potential solutions available from both.

RICS research

There have been moves in recent years to provide a better control of the valuation process than the manual ‘tick box’ exercise which typified the process in the past. Some of this flowed out of the RICS independent Commission review in 2014 by Dr Oonagh McDonald CBE following research by RICS which had demonstrated that the valuation market was not functioning as it should.

The report made eight key recommendations including that Valuation Specific Professional Indemnity Insurance (VSPII) and Valuation Risk Management (VRM) or equivalent contingent insurance products should be carefully assessed and introduced, with recognition by RICS.

VSPII required property inspection data to be captured on a portable electronic data device with a standard format for use by all lenders, allowing free text to be used to capture any unusual features of the property or problematic aspects which would affect the valuation.

Handheld technology

Since 2014 great strides have been made in implementing the technology required and we have seen a steady improvement in the use of handheld technology to conduct the valuation and to combine other databases such as Land Registry, valuer comparable tools, AVMs, mapping and satellite imagery among many others.

All this was happening before Covid-19 but the last few weeks have seen more progress being made through necessity.

Remote valuations

So what has been achieved and is now available? CoreLogic UK has been at the forefront of delivering this technology, providing mobile working tools for surveyors here in the UK as well as markets such as the US and Australia.

One key development is to allow a valuation to be carried out remotely by a surveyor who has relevant local knowledge. Their offering brings together information about the property, AVM data, surveyor comparable tools and satellite and mapping imagery and now also combines imagery which is captured by the occupier of the property, which is both date and geotagged so we know it’s the correct property and matches Land Registry data.

Okay, so you cannot use a damp meter or look for subsidence cracks but remember, this is a valuation report not a full structural survey. For the large majority of properties, using web-based data and imagery relevant to the property, allows a reasonable and accurate assessment of the value and suitability of the property for mortgage purposes.

AVMs

Some lenders are using this technology with their valuation partners and others are just using AVMs as a stop-gap. Over reliance on AVMs would worry me at the best of times let alone now as we move into who knows what kind of property market. At the very least, we are obviously going to see a gap in data gathering since lockdown and with the house purchase market likely to remain subdued for a while.

The ONS has suspended its house price index based on lack of data and others, whilst still publishing them, are warning that the lack of data points could render them less reliable in the short term.

We are also trying to predict if there will be a house price fall and if so by how much and for how long. I’ve seen reports ranging from 4% to 13% and beyond. The truth is we just don’t know.

AVMs are created on historical data and may not be so good at predicting future falls or cliff edges particularly if you throw in the likely highly variable regional and even micro-regional economic impacts.

Right now, I would use an AVM as part of a risk management tool to help validate a valuation or for lower risk, low LTV lending where the margin for error doesn’t matter so much. Others seem to agree: typically, lenders relying on desktop remote valuations and AVMs have done so with an LTV restriction. But this is now changing.

As confidence grows in the use of remote valuation solutions using the type of technology described, expect to see lenders move up to at least 85% LTV lending where the property is of a standard construction and not in a high-risk locality.

The role of insurance

Increased use of ever more sophisticated technology makes complete sense, not least from a cost effectiveness and efficiency standpoint. The better the technology and the more effective the surrounding controls, the more effective will be the risk management. However, a prudent lender will want to mitigate their risk as fully as possible with robust contingent insurance.

Dr McDonald concluded that there is a role for either VSPII or lenders contingent insurance. One way for a lender to gain more confidence in a valuation, whether desktop, remote or physical is to wrap the risk with a contingent insurance policy that limits the lender’s exposure in the event that a valuation was subsequently found to be in error.

Insurance now exists where losses caused by an incorrect valuation, whether physical or remote desktop, can be insured at minimal cost and certainly substantially less than the savings generated from a more efficient and streamlined process.

Risk management and mitigation

As we move into a challenging period in which, unless we are very lucky, there will be high levels of unemployment, increased defaults and an uncertain property market, lenders focus is inevitably moving even more to risk management and mitigation.

Many lenders have mortgage indemnity guarantee (MIG) insurance already in place to mitigate loss on higher LTV portfolios. Many either don’t consider it necessary or are put off by long memories of claim problems back in the day.

However, now, in my view, the time is right for lenders to revisit the risk mitigation benefits of this type of cover. Particularly if lenders are to continue to offer prudent, higher LTV lending in an uncertain property market they have to look constructively to this type of risk sharing solution, otherwise we risk real stagnation in the property and mortgage markets.

Many of the real or perceived issues that tarnished the view of mortgage insurance have been addressed and these include certainty of cover and timelines of payment. Soon I think we will see MIG morph into a new type of instrument which will allow banks and building societies to obtain capital relief in a way that is not so straightforward today.

The risks of borrower default, property declines and valuation risk are inter-twined. In my view, even those lenders with mortgage insurance already in place should consider reinforcing this with valuer protection, particularly as they move down a more technology driven approach.

And lenders who don’t currently take an insurance supported approach should think deeply about the benefits of risk management, not to mention price efficiency, of such combined cover.

Lime Risk Agency, a specialist financial risk team, is a leading provider of these types of cover and has pioneered this market.

Direction of travel

For some time now I have been writing about the oversupply of mortgage lenders and the onward march of the largest lenders to simplify products, processes and risks to allow an industrialised approach to lending. This allows them to be quicker, cheaper and more efficient.

Automation of many aspects of the valuation process together with better risk management is going to be part of this and I can see that the largest lenders are going to be the early adopters in taking a more active role in the valuation process. Only last week, Santander announced that it is going to continue its policy of relying more on remote valuations than in the past.

More active lenders will use technology to triage cases and risk assess them before they are sent for a physical valuation. Straightforward low risk cases will in all probability have an automated/remote valuation. The use of technology coupled with insurance protections that are now available will enable this to happen.

This allows the lender to focus their attentions and those of the valuer on the higher risk cases. This will be where the loan advance is large, the LTV is high or where the property is of non-standard construction or in a higher risk location. By using combinations of technology and insurance, processes will be streamlined and frankly risk will be better managed.

These changes are here to stay and the progress towards a more active use of valuation technology and risk insurance is a core part of the risk management and process.

Covid-19 might have given these initiatives an acceleration in development and adoption but, ultimately, they were in train long before and we will now see them adopted more widely.

They have been a long time coming!