October 18, 2016 – As I mentioned in my very first post on this blog, one of my goals is to get Mortgage Lending Value (MLV) adopted in the USA. Between new bank regulatory guidelines (specifically CECL) and the proposed Basel IV, things are looking good for Long-Term Sustainable Value (LTSV) being adopted here.
Since 2009, I have made it known that my 10-year goal was to get MLV/LTSV used by American banks and to eliminate the use of Market Value as currently defined. Market Value may not be eradicated, but the use of MLV/LTSV will greatly reduce future loan losses and market volatility.
The following is from the October 17, 2016 edition of the Appraisal Institute’s Washington Report and State News. I have placed in bold the wording that makes it clear that prices that exceed value (like what is occurring currently in almost all markets and property types in America) are to be adjusted downward accordingly. It is great to see the World recognize the difference between price and value. It will be better when the American valuation industry has to recognize this, also.
7 years into this….in 3 more years I might need to move on to another long-term goal.
Planned Basel IV Includes Valuation Provision
The banking sector is on high alert as the Basel Committee on Bank Supervision expects to finalize its new accord (Basel IV) by the end of the year, the Appraisal Institute reported Oct. 17. The Second Consultation Document, which was released for comment in March, pays significant attention to real estate risk requirements, including real estate valuation.
The so-called “Basel Accords” are issued by the Bank for International Settlements and establish regulatory capital requirements that bank regulatory agencies around the world have committed to following.
For exposures secured by real estate, the accord proposes to use the loan-to-valuation ratio as the main driver for risk-weighing purposes, and to use a three-category classification (from less risky to risky) as follows:
- General treatment for exposures secured by real estate where repayment is not materially dependent on rent/sale of the property;
- A more conservative treatment for exposures secured by real estate where repayment is materially dependent on cash flows (i.e. rent/sale) generated by the property. Specialized lending (corporate) exposures assigned to “income-producing real estate” under the IRB approach would be classified under this category; and
- A conservative, flat-risk weight for specialized lending real estate exposures defined as “land acquisition, development and construction” (i.e. loans for unfinished property that meet the definition of specialized lending).
The proposed accord also includes the most extensive commentary relating to real estate valuation of any current accord, and includes a provision directly relating to market value:
Value of the property: the valuation must be appraised independently using prudently conservative valuation criteria. To ensure that the value of the property is appraised in a prudently conservative manner, this value must exclude expectations on price increases and must be adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan. National authorities should provide guidance setting out prudent valuation criteria where such guidance does not already exist under national law. If a market value can be determined, the valuation should not be higher than the market value.
These market value constructs appear consistent with current bank regulatory requirements in the U.S., with one exception. The “life-of-loan” concept is new to U.S. bank regulatory requirements and could be interpreted to include “long-term sustainable value,” which is found in accords used in other parts of the world, including Europe.
As noted, the Basel IV accords are expected to be finalized in the coming months. U.S. banking trade organizations such as the American Bankers Association
have called on banking regulatory agencies to release a notice of proposed rulemaking for any changes to the risk capital requirements to help avoid piecemeal application and increased complexity. Once finalized, expect implementation of Basel IV provisions in the U.S. to take considerable time.