Mortgage lending value
The mortgage lending value is a key element of property valuation for lending purposes. It is based on the long-term, sustainable features of the property being mortgaged and excludes speculative elements and fluctuations in value tied to changes the economy.
Although for many years, this valuation concept, dating back to the Mortgage Banking Act (Hypothekenbankengesetz) of 1900, was used nearly exclusively in Germany, it has now entered the European discussion about approaches that banks can take to determine value.
As is well known, Germany was spared the turbulence on the real estate markets. There are number of reasons for this: In addition to the fact that the structure of the German residential and commercial real estate market and the way it functions differ from that in other real estate markets, the special nature of real estate financing system stabilises the market. The fixed-interest loan common here, the widespread use of Mortgage Pfandbriefe to fund real estate, and the associated application of the mortgage lending value have significantly helped to prevent speculation and strong price volatilities.
This was of course also witnessed by observers outside of Germany, prompting closer examination of the topic of mortgage lending value.
In addition to requirements concerning the methodology for determining mortgage lending value, an important pillar of the mortgage lending concept consists of the independence, professional experience, and specialised knowledge of valuers. Therefore, it is of great importance to the Association of German Pfandbrief Banks (vdp) that the banking industry receive up-to-date, comprehensive information about the determination of mortgage lending value.
The mortgage lending value is the value of the property that, based on experience, can be expected to be realised in the event of a sale at any point during the term of the loan, irrespective of temporary, possibly macroeconomic-related fluctuations in value on the relevant property market and excluding speculative elements.
Therefore, the mortgage lending value differs from the market value. Whereas market value is tied to a particular reference date, mortgage lending value is based on a period that is unrelated to changes in the economy.
It is a “prudent valuation”, the consistent focus of which is the consideration of long-term, sustainable features of the property, as well as current and potential alternative uses. Particularly because it levels out current, possibly excessive market expectations, the mortgage lending value has, over the decades it has been in use, contributed to mortgage lending in Germany having a stabilising effect on the German real estate market.
The concept of the mortgage lending value dates back to 1900, and it has been continuously enhanced since that time. With entry into force of the German Pfandbrief Act (Pfandbriefgesetz) on 19 July 2005, the statutory provisions concerning the mortgage lending value were modernised. Following from that, the German Regulation on the Determination of the Mortgage Lending Value (Beleihungswertermittlungsverordnung, BelWertV) laid down requirements concerning the methodology used to determine the mortgage lending value, as well as with regard to valuers and valuation reports.
Real estate loans usually have long terms. The value of the property must provide the bank with sufficient security for the loan at all times during its the term. Therefore, the mortgage lending value cannot be a reference date-related value, like the market value. Instead, it may take into account only the sustainable and thus long-term features of the property.
Pfandbrief banks are obligated to determine the mortgage lending value in accordance with the BelWertV and to use it as the basis for the inclusion in cover (section 16 PfandBG). In order to guarantee that Mortgage Pfandbriefe are highly secure at all times, then in addition to the conservative determination of the mortgage lending value, only loan components of not more than 60% of the mortgage lending value are included in cover. Pfandbrief banks may also finance loan to value ratios above the 60% limit. However, these loan components may not be funded through Mortgage Pfandbriefe.
It is also a welcome sign that in Germany application of the BelWertV is becoming increasingly the norm. Until several years ago, this method was mainly used by Pfandbrief banks. It is evident today that the mortgage lending value in accordance with the BelWertV is increasing being applied also by credit institutions that do not specialise in the issuing of Mortgage Pfandbriefe. The mortgage lending value is being used as an alternative method for determining the preferential treatment for equity capital (applicable to all credit institutions) for mortgage loans. As a result, it is continually gaining in importance, including beyond the circle of Pfandbrief banks.