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Automated Valuation Models (AVMs)USES & USAGELuke Brucato
Three letter acronymsIRRCRDSSMEBALTVRWALCRECB AQRLuke Brucato2LGD24/02/2015
Current loan-to-value?LTVLuke Brucato324/02/2015
LTV dangerDefault rate by LTVDefault rate by property valueCapital impactSource: CRIF RES and EURISCLuke Brucato424/02/2015
What do the regulators think?Recommendations on asset quality reviewsAnnex II – Good practice for performing asset quality reviews:Collateral management and assessment evaluate how responsibility for collateral evaluation is allocated (internal versus externalappraisal) and their independence for loan underwriting;gather evidence on the frequency of appraisals, reasons for revaluation, age ofappraisals;assess how haircuts and valuation parameters are derived and validated andwhether 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 ofprovisions;assess statistical revaluation tools for small real estate assets and investigateparameter estimations and how they are validatedLuke Brucato524/02/2015
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»Luke Brucato624/02/2015
Indices House Price Index (HPI) A broad measure of the movement of single-family house prices over the course oftime 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)Luke Brucato724/02/2015
Take it to a street levelLuke Brucato824/02/2015
Take it to a street level Same area, same city, same neighborhood, same ZIP code, same street and same state (used) SAME HPI PROVIDED!Luke Brucato924/02/2015
What would be best?Luke Brucato1024/02/2015
Next best thing?A technology which is capable of simulating thework of a valuer to an acceptable degree ofreliability for certain purposesAVM (Automated Valuation Model)Luke Brucato1124/02/2015
First Italian AVM Automated Valuation Model (AVM)–A system that provides an estimate of value of a specified property at a specifieddate, using mathematical modelling techniques in an automated manner.Hometrack is a privately owned property analytics business with offices in London and Sydney. A combination ofunique data, industry expertise and analytical excellence has made it the trusted leader in their field, supplying anestimated 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 externalresidential valuation reports, considering over 120 property characteristicsLuke Brucato1224/02/2015
Applications Residential mortgage portfolio monitoring Capital requirements LGD model Securitization (RMBS) Residential Mortgage Covered Bonds (CBs) Whole-loan portfolio trading NPL management Quality controlLuke Brucato1324/02/2015
How does it workDatiimmobiliariminimiAVMValore diMercatoConfidenceLevelLa performance di un AVM comprende diversi aspetti tra cui la Copertura, l’Accuratezza el’affidabilità dei Confidence Level: Copertura: fa riferimento alla capacità degli AVM di produrre un risultato accettabileAccuratezza: fa riferimento alla capacità di un AVM di produrre un risultato il più vicinopossibile al Valore di Riferimento di ogni immobile I Confidence Level (CL) esprimono l’accuratezza del valore AVM su una scala da 0 a 7Luke Brucato1424/02/2015
Confidence levels L’attendibilità dei CL e il fatto che siano rapportabili alle FSD sono alla base deltrattamento 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, 21Agosto 2008 “Criteria for Automated Valuation Models in EMEA RMBS”; “Addendum - Criteria forAutomated Valuation Models in EMEA RMBS” – Fitch, 20 Novembre 2008 “Criteria for Automated Valuation Models in EMEA RMBS”; “Automated Valuation Models inEMEA RMBS – Special Report” – Fitch, 12 Agosto 2011Luke Brucato1524/02/2015
Wrap up Il nuovo approccio alla vigilanza richiede una governance dei datisugli asset diversa dalla precedente La European Banking Authority è chiara su monitoraggio dellegaranzie, haircutting e LTV corrente La maggiore accuratezza empirica degli AVM permette al riskmanagement di: Applicare haircuts minori rispetto agli indici e perciò di liberarecapitale, a prescindere dal risultato AVM Dimostrare all’ente di vigilanza una più attenta governance delrischio di credito ipotecario con un controllo andamentale dellesingole posizioni (Bankit Circ. 263/ vers 15)Luke Brucato1624/02/2015
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. 12 Hometrack is a privately owned property analytics business with offices in London and Sydney. A combination of
