Response to consultation Paper on draft Guidelines on loan origination and monitoring.
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Many millions of valuations have learned us that the statistical precision of the estimated Market Value for any collateral is too low to accept the estimate without a check by a valuer. In practice it turns out that the combination of an AVM with the knowledge of the local or regional market from the valuer delivers a better estimate than either the AVM or the valuer apart.
Given this experience we of course strongly support your choice to require the expertise of a valuer for the valuation at the point of origination (7.1.1).
In our opinion this should hold also with respect to all revaluation (7.2.1). The real estate market changes too fast in time to rely on the outcome of AVM’s even in the case of revaluation. The characteristics of the collateral might not have changed, but its position in the market due to changes in supply and/or demand might have considerably changed. At this point it should be kept in mind that AVM’s rely on data that can be well behind the market heartbeat and sometimes even out of touch. The reality of an AVM is not necessarily the market reality. The collapse of Lehman Brothers and its effect on the housing market is an example of an extreme change, the consequences of which for the housing market taking month’s to appear in the official data.
Every market value from an AVM or a valuer is an estimate with a known or an unknown uncertainty. And the (un)certainty matters.
As it comes to the market value of any collateral the Draft Guidelines do not pay much attention to this, the text more or less presents the market value as a point estimate without any uncertainty. In our opinion more attention should be paid to this fundamental issue.
With respect to the outcome of any statistical model it is important that apart from it’s data and precision the result can be reproduced and explained in market terms (215).
This reaction may be considered public.
We are of course available for further discussion at Momentum Technologies.
Dree Op ‘t Veld, MSc
Momentum Technologies
Papsouwselaan 119 h
2624 AK DELFT
Mobile: +31 6 2706 3892
Phone: +31 15 380 1685
Skype: MTe_DOP
5. What are the respondents’ views on the requirements for governance for credit granting and monitoring (Section 4)?
no opinion6. What are the respondent’s views on how the guidelines capture the role of the risk management function in credit granting process?
no opinion7. What are the respondents’ views on the requirements for collection of information and documentation for the purposes of creditworthiness assessment (Section 5.1)?
no opinion8. What are the respondents’ views on the requirements for assessment of borrower’s creditworthiness (Section 5.2)?
no opinion9. What are the respondents’ views on the scope of the asset classes and products covered in loan origination procedures (Section 5)?
no opinion10. What are the respondents’ views on the requirements for loan pricing (Section 6)?
no opinion11. What are the respondents’ views on the requirements for valuation of immovable and movable property collateral (Section 7)?
Momentum Technologies is a Dutch based firm specialized in AVM’s (automated valuation models) with more than 25 years of experience in the field. The typical form of our product is that of a system, which, given the characteristics of a collateral, provides the valuer with an estimate of the Market Value, the statistical precision of the estimate, together with the data and statistics underpinning the estimate. The valuer decides whether the outcome is plausible or needs reconsideration and adjustment for one or more clear reasons.Many millions of valuations have learned us that the statistical precision of the estimated Market Value for any collateral is too low to accept the estimate without a check by a valuer. In practice it turns out that the combination of an AVM with the knowledge of the local or regional market from the valuer delivers a better estimate than either the AVM or the valuer apart.
Given this experience we of course strongly support your choice to require the expertise of a valuer for the valuation at the point of origination (7.1.1).
In our opinion this should hold also with respect to all revaluation (7.2.1). The real estate market changes too fast in time to rely on the outcome of AVM’s even in the case of revaluation. The characteristics of the collateral might not have changed, but its position in the market due to changes in supply and/or demand might have considerably changed. At this point it should be kept in mind that AVM’s rely on data that can be well behind the market heartbeat and sometimes even out of touch. The reality of an AVM is not necessarily the market reality. The collapse of Lehman Brothers and its effect on the housing market is an example of an extreme change, the consequences of which for the housing market taking month’s to appear in the official data.
Every market value from an AVM or a valuer is an estimate with a known or an unknown uncertainty. And the (un)certainty matters.
As it comes to the market value of any collateral the Draft Guidelines do not pay much attention to this, the text more or less presents the market value as a point estimate without any uncertainty. In our opinion more attention should be paid to this fundamental issue.
With respect to the outcome of any statistical model it is important that apart from it’s data and precision the result can be reproduced and explained in market terms (215).
This reaction may be considered public.
We are of course available for further discussion at Momentum Technologies.
Dree Op ‘t Veld, MSc
Momentum Technologies
Papsouwselaan 119 h
2624 AK DELFT
Mobile: +31 6 2706 3892
Phone: +31 15 380 1685
Skype: MTe_DOP