The Mortgage Lending Value: Prospects For Development Within Europe

"The construct ""Mortgage Lending Value"" (MLV) is used almost exclusively within the German-speaking countries. In contrast, until today most other countries haven't paid much attention to this value.1 When funding real estate investments, it is in most cases sufficient to calculate the market value (MV) as the basis for lending decisions. Germany is one of the countries with the longest tradition in the mortgage lending business. With the new German law for mortgage lending, the Pfandbriefgesetz (PfandBG), as well as the draft for the additional ordinance for mortgage lending valuations, the Beleihungswertermittlungsverordnung (Bel- Wert),3 the legislation and framework for the preparation of valuations in accordance with the German MLV are presently being amended. In light of the advancing international harmonization4 one might ask which valuation method could be used as a ""best practise"",5 or in other words: Is the German MLV a potential ìexport hitî and, if so, in which way must the idea of a global standard for mortgage lending valuations be adapted to secure a broader acceptance of this practise? It must be stressed that the excellent rating of the German Pfandbrief ñ one of the biggest issuers of long term bonds within the European Union ñ is partly due to the lending proceduresin Germany, where one major aspect is the obligation to calculate an MLV instead of just using the MV for lending purposes. Because of the high security standards and the funding only on the basis of the MLV, some other European countries have already partially adopted the German systems, coming up with comparable laws for mortgage lending and issuing bonds.6 In addition, the approaches for Mortgage Lending Valuations have already been integrated into the European Valuation Standards (EVS) and are mentioned in the International Valuation Standards (IVS). Nevertheless the MLV is not used at all or fully understood in valuator circles, which are mainly under American or British influence. In this paper the authors first of all explain the MLV in consideration of the latest changes in the German legislation. From there the authors move on to compare the German MLV to the system and experiences made in the UK ñ a country which is known to have a long and very professional valuation history ñ and analyse the various sections in the EVS as well as the IVS in terms of valuations for lending purposes. Taking into account the findings, the authors point out that an MLV, which must be independent of an MV, is essential for banks that finance real estate investments by granting loans and thereby using the property for secured lending. On the other hand, findings indicate that instead of the current practise and methods used in Germany to do the calculations and report on the MLV, other approaches could be taken to come up with an information package which will be valuable for the different stakeholders in the mortgage lending business. In this paper the researchers indicate a number of aspects regarding the current German system for MLV which, from their point of view, should be looked at critically. Then the authors develop some first steps towards an MLV which could serve as the basis for an internationally accepted standard for valuations for lending purposes. Therefore they take into account helpful developments in the area of risk management tools, modern valuation techniques as well as the results of the consultation for Basel II.7 On this foundation the most innovative aspect of the paper is the development of a Valueat-Risk approach for the MLV application. Starting with a very theoretical method this approach is also transformed into a method which should be easier used in every-day business. The tremendous significance of this topic can be stressed by looking at the latest initiative of the European Commission (Commission) about the further integration of the European mortgage markets within the Union. In this regard the Commission has until now not been sure whether there should be one new pan-European standard for real estate valuations for mortgage lending.8 Looking at the current situation in the UK and Spain (both residential lending business of the banks),9 where lenders once again do fund just about 100% of the whole investment sum in anticipation of ""eternally rising prices"",10 the concerns of the Commission are certainly not completely unfounded. In addition, in their latest strategic plan for the next couple of years, the International Valuation Standards Committee (IVSC) has also diagnosed a need for action in the field of valuations for lending purposes.11"