TEGoVA Counsels European Banking Authority
TEGoVA Positions on the EBA’s Future Consultation and RTS on Mortgage Lending Value and independence of valuers
In recent months the European Banking Authority has been drafting regulatory technical standards impacting the valuation profession covering Mortgage Lending Value (MLV) methodology in the context of implementation of the Capital Requirements Regulation and independence of valuers as part of implementation of the Bank Recovery and Resolution Directive. TEGoVA has issued a position paper on MLV and responded to a consultation paper on independence.
MORTGAGE LENDING VALUE
Article 124(4)(a) of Regulation (EU) No 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation) requires the EBA to develop draft regulatory technical standards to specify: "the rigorous criteria for the assessment of the mortgage lending value …" defined in Article 4(74) as follows: 'mortgage lending value' means the value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. This presents a unique opportunity of elevating the concept of MLV from an analytical tool to a respected "basis of value" positioned alongside Market Value in the valuation hierarchy.
TEGoVA emphasised the need to provide for a sufficiently flexible approach in order to allow European MLV rules to be adapted to the diversity of national mortgage finance systems and real estate markets in EU Member States. If the regulatory technical standards provide the flexibility to take proper account of national and/or even local market conditions, uptake of the concept will be facilitated.
Whilst requiring that independent and competent valuers should follow a rigorously prescribed methodology, the regulatory framework should not extend to laying down minimum or maximum valuation adjustments or inputs. These should be left to the discretion of the competent valuer. This is because the appropriate valuation inputs and adjustments will inevitably vary from country to country, and even within a country as well as between and within different property sectors, and can only be properly and accurately derived by an experienced and properly trained valuer following an in-depth analysis of the local market.
Whilst the Regulation may prescribe the recognised valuation approaches (comparative, income and cost) the choice of the approach that is most appropriate to each case should be left to the valuer.
It will generally be a matter of the nature of the type of property, its market and the available evidence as to whether a comparative or income based approach is most apt (or, indeed, if both are used). With the diversity of possible properties and circumstances, the standards must provide the flexibility to allow that choice by the professional valuer undertaking the work.
In order to ensure professionalism and consistency at European level, any regulation on MLV should stipulate that property valuers must be qualified and independent, both in accordance with European Valuation Standards.
In response to the consultation on the independence of valuers, TEGoVA pointed out to the EBA that: "Independence of the valuer must be ensured at every level of the bank resolution valuation chain including for valuations of real estate collateral, in which case the independence criteria must be adapted to real estate valuers."
Though 'valuation' in the sense of the Directive does not encompass in the first instance real estate valuation, there will be situations in which the valuing auditor values the asset side of the balance sheet, i.e. the mortgage loan, and in order to determine the fair value of the loan, has to assess the value of the underlying collateral. This might occur in cases of high LTV mortgage loans where the value of the security has an impact on the value of the loan. It could also occur when the resolution authority imposes on the auditor to systematically value the underlying securities, e.g. in the case of a mortgage bank to be resolved. In such cases, if the bank auditor is not qualified to do the property valuation, he will outsource to qualified property valuers. Either way, it is important that the independence of the valuer be ensured for property valuers as well. Thus, auditors valuing property or property valuers brought into the process must be qualified in property valuation and independent in line with European Valuation Standards (the relevance of EVS for valuers' qualifications also stemming from its organic link to TEGoVA's Minimum Educational Requirements).