Automated Valuation Models (AVMs)

USES & USAGE

Luke Brucato

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Three letter acronyms

LTV ECB

AQR

LCR

SSM CRD

RWA EBA

IRR

LGD

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Current loan-to-value?

LTV

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LTV danger

Source: CRIF RES and EURISC

Default rate by LTV Default rate by property value

Capital impact

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What do the regulators think?

Collateral management and assessment

• 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

Recommendations on asset quality reviews

Annex II – Good practice for performing asset quality reviews:

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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)

Luke Brucato

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.

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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

First Italian AVM

24/02/2015

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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

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

Dati immobiliari

minimi AVM

Valore di Mercato

Confidence Level

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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)