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Accurate and transparent property valuation is essential to the mortgage lending business as it promotes confidence in the collateral system. In this respect, property valuation represents one of the major building blocks of the mortgage system. The lender requires certainty that the asset being taken as a guarantee for a housing loan is of a sufficient value to cover the outstanding debt should the loan default. This confidence in the property value is one of the elements, which make mortgage debt a low risk, inexpensive way of providing housing finance and which in turn makes homeownership a reality for many throughout Europe.
The need for transparency is ever-present in a Union which will continue to grow and diversify into the future and where cross-border activity will increase. Moreover, the recent economic crisis, which rocked the EU and continues to be felt, has underlined the importance of transparency for the safety of EU mortgage markets. Transparency in valuation techniques and methodologies across borders plays a fundamental role in managing the risks associated with mortgage lending. Appropriately managing these risks, and even reducing them, is, in turn, fundamental in securing confidence in European mortgage markets on the part of consumers, lenders and investors.
Finally, the performance of the European Covered Bond market is primarily driven by the quality of the underlying asset. One of the key elements defining credit quality will be the asset’s original valuation when the mortgage was advanced and then subsequent valuations monitoring the value of the underlying asset. Only if the valuation process is transparent, accurate and consistent will investors be willing to purchase Covered Bonds.
With these previous considerations in mind, at EU level, the adoption of the Capital Requirements Directive in 2006 and its subsequent reviews, the latest of which is currently underway, have been of particular relevance for property valuation. One of the main purposes of these rules is to make capital more risk sensitive, which means making better and more accurate judgements about the risks faced by institutions, resulting in a more efficient allocation of capital. This has several implications for the valuation of property for lending purposes due to a number of requirements across the different approaches (standardised, foundation and advanced), including minimum standards for valuation, the frequency of the monitoring of valuations and who this should be done by.
With a view to promoting the transparency in property valuations referred to earlier, the EMF’s Valuation Committee has regularly updated and revised its Study on the Valuation of Property for Lending Purposes, which was first published in 1998 and most recently in 2009, with a view to providing a deeper understanding of the context and technicalities of valuation practices in the EU.
The result is a comprehensive commentary on the valuation practices in 17 Member States, focusing on the valuation itself (regulation/self-regulation, bases and methodology, valuation report, Automated Valuation Models (AVMs)), the valuer (regulation/self-regulation, qualifications, use of title, indemnity insurance), and valuation in the context of the Capital Requirements Directive. An Executive Summary brings together the key elements of the national chapters in a comparative form. Interestingly, the Study also includes a chapter devoted to Independence of the Valuer, including a set of EMF Guidelines drafted by the Committee’s Chairman, José Ramón Ormazabal, and the EMF’s Note on the Independence of the Valuer, and the Mortgage Lending Value.