Automated Valuation Model

Automated Valuation Models (AVMs)
USES & USAGE
Luke Brucato
Three letter acronyms
IRR
CRD
SSM
EBA
LTV
RWA
LCR
ECB AQR
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LGD
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Current loan-to-value?
LTV
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LTV danger
Default rate by LTV
Default rate by property value
Capital impact
Source: CRIF RES and EURISC
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What do the regulators think?
Recommendations on asset quality reviews
Annex II – Good practice for performing asset quality reviews:
Collateral management and assessment
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•
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evaluate how responsibility for collateral evaluation is allocated (internal versus external
appraisal) and their independence for loan underwriting;
gather evidence on the frequency of appraisals, reasons for revaluation, age of
appraisals;
assess how haircuts and valuation parameters are derived and validated and
whether they are based on historic data. Additionally assess the link to provisioning,
specifically if this data (internal collateral values) is used to derive the level of
provisions;
assess statistical revaluation tools for small real estate assets and investigate
parameter estimations and how they are validated
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What do the regulators think?
«On examining the correlation and variability analyses, the indexed loan-to-value
(ILTV) is the variable which most significantly influences RW variation»
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Indices
 House Price Index (HPI)
 A broad measure of the movement of single-family house prices over the course of
time
 What do they require?
 Market value (correct!) at origination
 Thousands of pertinent observations
 What do they give back
 Indices and price ranges per square meter according to city, ZIP code, area (central,
semicentral, suburban) and in some cases by property state (new or used)
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Take it to a street level
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Take it to a street level

Same area, same city, same neighborhood, same ZIP code, same street and same state (used)

SAME HPI PROVIDED!
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What would be best?
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Next best thing?
A technology which is capable of simulating the
work of a valuer to an acceptable degree of
reliability for certain purposes
AVM (Automated Valuation Model)
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First Italian AVM

Automated Valuation Model (AVM)
–
A system that provides an estimate of value of a specified property at a specified
date, using mathematical modelling techniques in an automated manner.
Hometrack is a privately owned property analytics business with offices in London and Sydney. A combination of
unique data, industry expertise and analytical excellence has made it the trusted leader in their field, supplying an
estimated 90% of all AVM services in the UK.
Leading provider of property valuation services in Italy with well over half a million full internal and external
residential valuation reports, considering over 120 property characteristics
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Applications
> Residential mortgage portfolio monitoring
> Capital requirements
> LGD model
> Securitization (RMBS)
> Residential Mortgage Covered Bonds (CBs)
> Whole-loan portfolio trading
> NPL management
> Quality control
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How does it work
Dati
immobiliari
minimi
AVM
Valore di
Mercato
Confidence
Level
La performance di un AVM comprende diversi aspetti tra cui la Copertura, l’Accuratezza e
l’affidabilità dei Confidence Level:


Copertura: fa riferimento alla capacità degli AVM di produrre un risultato accettabile
Accuratezza: fa riferimento alla capacità di un AVM di produrre un risultato il più vicino
possibile al Valore di Riferimento di ogni immobile

I Confidence Level (CL) esprimono l’accuratezza del valore AVM su una scala da 0 a 7
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Confidence levels
>
L’attendibilità dei CL e il fatto che siano rapportabili alle FSD sono alla base del
trattamento di favore di cui gode l’AVM da parte delle Agenzie di Rating in UK:
>
“Guidelines for the Use of Automated Valuation Models for U.K. RMBS Transactions” –
Standard & Poor’s, 20 Febbraio 2004
>
“Guidelines for the Use of Automated Valuation Models for U.K. RMBS Transactions” –
Standard & Poor’s, 26 Settembre 2005
>
>
“Criteria for Automated Valuation Models in the UK” – Fitch, 22 Maggio 2007
“Moody’s Approach to Automated Valuation Models in Rating UK RMBS” - Moody’s, 21
Agosto 2008
>
“Criteria for Automated Valuation Models in EMEA RMBS”; “Addendum - Criteria for
Automated Valuation Models in EMEA RMBS” – Fitch, 20 Novembre 2008
>
“Criteria for Automated Valuation Models in EMEA RMBS”; “Automated Valuation Models in
EMEA RMBS – Special Report” – Fitch, 12 Agosto 2011
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Wrap up
> Il nuovo approccio alla vigilanza richiede una governance dei dati
sugli asset diversa dalla precedente
> La European Banking Authority è chiara su monitoraggio delle
garanzie, haircutting e LTV corrente
> La maggiore accuratezza empirica degli AVM permette al risk
management di:
> Applicare haircuts minori rispetto agli indici e perciò di liberare
capitale, a prescindere dal risultato AVM
> Dimostrare all’ente di vigilanza una più attenta governance del
rischio di credito ipotecario con un controllo andamentale delle
singole posizioni (Bankit Circ. 263/ vers 15)
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