OCTOBER 17, 2024 – Fifteen years ago, I was hopeful that American bank regulators would research the concept of Mortgage Lending Value (MLV) and make lenders adopt it for real estate loans. Of course, there was little chance as us Americans love booms and busts (ok, some don’t like this part of the cycle). Lenders live off of the fees they generate. Lots of money to be made when asset prices skyrocket. And, as the movie The Big Short showed, lots of money to be made when asset prices crash.
First the Germans (around the 1890’s), and now all of Europe, decided the crazy cycle of boom and bust was not ideal for its citizens. The following excerpts are from the 2025 European Valuation Standards (EVS). Maybe one day America will also decide to rid itself of the concept of Market Price (we do not have Market Value in USA real estate appraisals).
Shalom,
The Mann
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At least as far as the valuation of bank collateral is concerned, the European authorities are no longer satisfied with a stand-alone ‘Market Value’ that they correctly view as a ‘spot value’ at the date of valuation. They want to ‘secure the future’ by excluding expected price increases and internalising the potential for future lower market prices/values.
———–
The CRR lays down that in valuation according to ‘prudently conservative valuation criteria’, “the value excludes
expectations on price increases”. EVS 2025’s EVGN 2 addresses the issues arising from this in the contexts of:
• Valuation under the income approach.
• Using the direct capitalisation model.
• Valuations carried out by means of a DCF model.
• Treatment of rental increases.
• And the developer’s profit in the residual method of valuation.
————
The second CRR requirement for appraisal according to ‘prudently conservative valuation criteria’ is that
“the value is adjusted to take into account the potential for the current Market Value to be significantly above
the value that would be sustainable over the life of the loan”.
▶ HERE EVGN 2 HIGHLIGHTS ISSUES OF:
• Assessing the sustainability of the value over the life of the loan.
• The impact of oversupply of a particular type of property on prices and value.
• The impact on future value of declining population of a given locality and
other negative factors changing the surroundings of the real estate.
Tag Archives: Capital Requirements Regulation
THE EUROPEAN UNION BASICALLY ADOPTS MLV
JUNE 7, 2024 – The following comes from The European Valuer Journal:
The ‘Banking Package’ included a revision of the Capital
Requirements Regulation (CRR) which introduced a new
concept of ‘property value’ founded on ‘prudently conserv
ative valuation criteria’ that valuers will have to accommo
date alongside market value. Soon to be on the EU statute
books, it will come into effect on 01.01.2025 the same day
as EVS 2025. The Blue Book will contain a Guidance Note
with an interpretation of the new CRR concepts that the
European Valuation Standards Board issued – and that this
Journal liberally commented and publicised – shortly after
it became clear that the relevant provision had achieved
political consensus and wouldn’t change.
The other CRR game changer was Parliament and
Council’s ECB-inspired rejection of the Commission’s
attempt to extend banks’ freedom to use stand-alone,
valuer-free AVMs to revaluation and even to valuation
at origination. This extraordinary event will have conse
quences. Reiteration by the highest European authorities
of the central role of the qualified independent valuer
in ensuring the safety and stability of financial and real
estate markets will command a revision of the European
Banking Authority Guidelines on loan origination and moni
toring that confined mortgage valuers to a ‘desktop’ role so
poorly defined that banks could interpret it as little more
than an exercise in rubberstamping AVM ‘value proposals’
==================================
Mortgage Lending Value (a 120+ year old German valuation concept) was introduced in the USA about 15 years ago. It has not gained traction as Americans like Market Price and the bubbles it produces. MLV basically eliminates the ups and downs of property value and provides a stable number to loan against. The EU has now adopted the ‘prudently conservative valuation criteria.’ This is essentially MLV. But, other countries didn’t want to simply adopt a German concept. Maybe a decade or two from now this will become part of Basel and American lenders (and appraisers) will be forced to use this value instead of Market Value (Price).
It is also interesting that the EU basically killed the idea of AVMs.
Shalom,
The Mann
The ‘Banking Package’ included a revision of the Capital
Requirements Regulation (CRR) which introduced a new
concept of ‘property value’ founded on ‘prudently conserv
ative valuation criteria’ that valuers will have to accommo
date alongside market value. Soon to be on the EU statute
books, it will come into effect on 01.01.2025 the same day
as EVS 2025. The Blue Book will contain a Guidance Note
with an interpretation of the new CRR concepts that the
European Valuation Standards Board issued – and that this
Journal liberally commented and publicised – shortly after
it became clear that the relevant provision had achieved
political consensus and wouldn’t change.
The other CRR game changer was Parliament and
Council’s ECB-inspired rejection of the Commission’s
attempt to extend banks’ freedom to use stand-alone,
valuer-free AVMs to revaluation and even to valuation
at origination. This extraordinary event will have conse
quences. Reiteration by the highest European authorities
of the central role of the qualified independent valuer
in ensuring the safety and stability of financial and real
estate markets will command a revision of the European
Banking Authority Guidelines on loan origination and moni
toring that confined mortgage valuers to a ‘desktop’ role so
poorly defined that banks could interpret it as little more
than an exercise in rubberstamping AVM ‘value proposals’
==================================
Mortgage Lending Value (a 120+ year old German valuation concept) was introduced in the USA about 15 years ago. It has not gained traction as Americans like Market Price and the bubbles it produces. MLV basically eliminates the ups and downs of property value and provides a stable number to loan against. The EU has now adopted the ‘prudently conservative valuation criteria.’ This is essentially MLV. But, other countries didn’t want to simply adopt a German concept. Maybe a decade or two from now this will become part of Basel and American lenders (and appraisers) will be forced to use this value instead of Market Value (Price).
It is also interesting that the EU basically killed the idea of AVMs.
Shalom,
The Mann