Real estate valuation
The mortgage lending value
The concept of the mortgage lending value dates back to 1900, and has been continuously developed ever since. When the Pfandbrief Act entered into force on July 19, 2005, the codification of the mortgage lending value was updated and set forth in more precise terms. The mortgage lending value, then, is the value of the property which based on experience may throughout the life of the loan be expected to be generated in the event of sale, irrespective of temporary, e.g. economically induced, fluctuations in value on the relevant property market and excluding speculative elements. In determining the mortgage lending value, the future saleability of the property is to be taken as a basis within the scope of a “prudent valuation”, taking into consideration the long-term, permanent features of the property, the normal regional market situation as well as the present and possible alternative uses. This reference to the long term clearly sets the mortgage lending value apart from the market value as of an effective valuation date. Over the decades in which it has been applied, the mortgage lending value has helped mortgage lending in Germany to have a stabilizing effect on the German real estate market, in particular by evening out current, possibly exaggerated market expectations.
The Regulation on the Determination of the Mortgage Lending Value(BelWertV)
The Regulation on the Determination of the Mortgage Lending Value (BelWertV) was promulgated in the Federal Law Gazette (BGBl I No. 24) on May 22, 2006. It entered into force on August 1, 2006.
The BelWertV regulates for the first time, uniformly and transparently for all Pfandbrief issuers,
The small loan limit permits a simplified procedure when determining the mortgage lending value of residential properties. This makes the Pfandbrief more attractive as a refinancing instrument for standardized residential properties.
The methodology for determining the mortgage lending value (MLV) has been further developed and refined since 1995 by the Committee for Valuation Matters of the Association of German Pfandbrief Banks (vdp, formerly VDH). In fundamental, methodological working papers (e.g. on important aspects of MLV determination), on which the German Federal Supervisory Authority (BaFin) was consulted, standards were set some of which were included in the BelWertV unchanged. Since the BelWertV has been in existence, the vdp has worked on clarifying interpretation issues. The vdp is engaged in measures to ensure that the MLV and the requirements set forth in the BelWertV meet the security standards to be fulfilled by the cover pool. After all, the security of the Pfandbrief is directly dependent on the sustainable and long-term values in the cover pools. What is more, the organizational and methodological demands made of the MLV must be designed in such a way that the Pfandbrief banks – as they compete with other financial institutions – can supply the desired funding in a fast and flexible manner.The BelWertV Regulation – the wording
The mortgage lending value
The mortgage lending value is a period-related collateral value that is independent of the economic cycle. It reflects only the sustainable, long-term features of a property.
Thanks to the stringent supervision by BaFin, this security-oriented valuation has played a major part in the stable development of the real estate market in Germany.
Significance of the mortgage lending value
In real estate credit operations, it is important to correctly appraise the property lent against for two reasons:
In §16 par. 2 Pfandbrief Act, the mortgage lending value is defined and its main features described.
According to §16 par. 4 Pfandbrief Act, the Federal Ministry of Finance is authorized to determine statutory order details of the method for assessing the mortgage lending value and the form of same as well as the minimum requirements as regards the valuer’s qualifications. This means that the stringent requirements with regard to the determination of the MLV apply uniformly to all Pfandbrief issuers. The Regulation on the Determination of the Mortgage Lending Value (BelWertV) entered into force on August 1, 2006.
Amount of the mortgage lending value
Real estate loans are usually long-term loans with a life of up to 30 years. The value of the property must offer the bank sufficient collateral for the loan at all times. For this reason, the mortgage lending value cannot be related to a specific point in time – like, for instance, the market value – but must take into consideration only the sustainable and therefore long-term features of a property. This is why, with the exception of very poor market phases, the mortgage lending value is always lower than the market value.
Mortgage lending limit 60%
In order to guarantee the high standard of safety of the Mortgage Pfandbrief at all times, in addition to the prudent calculation of the mortgage lending value, only parts of loans up to 60% of the MLV are included in cover. Pfandbrief banks may also provide finance above the 60% limit. However, these loan parts cannot be refinanced through Mortgage Pfandbriefe.
Before the Pfandbrief Act entered into effect in 2005, §§ 11 and 12 Mortgage Bank Act (HBG) set the legal framework for the determination of the mortgage lending value, although without mentioning the method for doing so. To close this gap, the banks which made up the (at that time) Association of German Mortgage Banks set themselves the task, in 1994, of establishing a uniform standard of quality for the methodology by which the MLV should be determined to obtain transparent, comparable results. Thus, the Association of German Mortgage Banks, in consultation with the Federal Banking Supervisory Authority, compiled two fundamental documents on determining the mortgage lending value:
The “Statement of Principles on the Mortgage Value of Realty” – Grundsatzpapier zum Beleihungswert – briefly and concisely explained the autonomous nature of the mortgage lending value as a definition of value distinct from others. The purpose of the paper “Essentials of Mortgage Value Estimation” – “Wesentliche Aspekte der Beleihungswertermittlung” – was to enhance the comprehensibility and transparency of the mortgage lending value methodology and to explain the criteria governing the relevant value-determining factors.
With this systematic examination of and reflection on the methodology for determining the mortgage lending value, substantial headway was made in safeguarding the quality of valuations for banking purposes. Much of the content that was drawn up at that time has been integrated into the Regulation on the Determination of the Mortgage Lending Value.
Quality campaign at valuer level
The quality campaign launched with the standardization and systematization of the methodology for determining the mortgage lending value was continued when an independent certification body, Hyp Zert GmbH, was set up and training programs were offered in all bank academies.
Hyp Zert GmbH was established by the former Association of German Mortgage Banks in 1996. Today, all banking associations are shareholders of Hyp Zert GmbH.
Valuers are certified as MLV valuers in accordance with European standard DIN EN 45013. Certification by Hyp Zert GmbH is person-related, which is to say that the knowledge and expertise of individual valuers are examined. Certified valuers are required to further their knowledge on an ongoing basis and attend advanced training courses, as annual advanced training measures are mandatory, as is a recertification examination after a five-year period.
Explanatory remarks on the BelWertV
The BelWertV is comprised of four parts:
Part 1 contains general provisions concerning the scope of application and subject of the determination of value as well as the principle of and the procedure for the determination of the MLV. As a basic principle, use of the investment method and the cost method is stipulated. The comparison method may be applied by way of addition in the case of residential and part-ownership.
Part 2 governs the requirements with regard to the valuation reports and valuers, and stipulates that valuation reports presented by borrowers may not serve as a basis for MLV determination (§ 5 BelWertV). Each credit institution must convince itself that the valuer has the necessary expertise and experience (§ 6 BelWertV). Furthermore, provisions govern the valuers’ independence (§ 7 BelWertV). Besides being independence of the borrower on a personal level, the valuer must have no organizational involvement in the departments of the bank entrusted with the loan decision.
Part 3 concerns the procedures for determining the mortgage lending value. Besides the methods for the valuation procedure, the Regulation also specifies minimum operating expenses and minimum capitalization rates as well as, in special cases, the determination of the income producing value, e.g. where the net income of a building is negative or the remaining useful life of a building is less than 30 years (§ 13 BelWertV). Particularities are also dealt with, e.g. the handling of building leases (§ 21 BelWertV) and easing measures for properties which primarily serve residential purposes (§ 24 BelWertV). A simplified valuation procedure is made possible for such properties if the loan amount to be secured does not exceed € 400,000.-- (valuations within the so-called small loan limit).
Requirements for foreign valuations are contained in § 25 BelWertV. It must be emphasized here that information from country-specific valuation reports may be referred to for valuation purposes provided the valuation report is not more than two years old. A further new regulation concerns the duties to review. These are contained in § 26 BelWertV and stipulate that the basis of the determination of the mortgage lending value must be reviewed if the respective regional property market has deteriorated. Moreover, where residential properties are not owner-occupied, a review also has to be conducted if the claim secured by the property shows arrears of more than 90 days.
Part 4 contains the concluding provisions with the entry into force of the Regulation on August 1, 2006. The BelWertV is not of a generally binding nature, i.e. the Regulation is not applied outside the scope of the Pfandbrief Act (PfandBG) to rules governing equity backing for real estate financing. Under § 20a of the German Banking Act, real estate loans enjoy privileged backing when either a mortgage lending value pursuant to § 16 par. 2 sentences 1-3 PfandBG in conjunction with the BelWertV or another long-term sustainable value that meets the requirements of § 16 par. 2 sentences 1-3 PfandBG was determined. The mortgage lending value pursuant to the BelWertV, however, is one possible way (of two) of measuring capital backing, and is attracting more and more attention among non-Pfandbrief banks as well.
Extensive explanations on the methodology for determining the mortgage lending value are contained in the paper "Der Beleihungswert" by Wolfgang Crimmann and Dr. Konrad Rüchardt, vol. 33 in the vdp’s “Schriftenreihe” (series of papers), which is available from the vdp order center free of charge.
This paper goes far beyond interpreting the Regulation on the Determination of the Mortgage Lending Value. For instance, the first part of the publication contains an extensive account of the scopes of application of the valuation of real estate for financing purposes and the rules for property valuation pursuant to the Pfandbrief Act and the German Banking Act. The MLV may be used not only for its actual purpose, i.e. the generation of a cover pool for the issuance of Mortgage Pfandbriefe, but also to determine the capital backing for real estate loans. Moreover, the paper explains the criteria that set the MLV apart from other expressions of value. Depending on the statutory provisions and the specific calculation model chosen by the bank for capital backing purposes, the paper also clarifies who has to determine and control which value and by which method. And finally, the reader is given a detailed overview of the valuation regulations in different laws and the interplay between them.
The second part of the book contains details on the methodology for determining the MLV in accordance with the Pfandbrief Act as well as on the Regulation on the Determination of the Mortgage Lending Value. The authors cover the rules that were in force prior to August 2006 up to the latest questions on interpreting the Regulation. A description of the path that led to a uniform methodology for determining the MLV is followed by an in-depth look at the content of the Regulation. The reader is provided with recommendations and background information containing, besides the wealth of experience of the authors themselves, the practical experience of the valuers of the vdp member institutions in the application of the Regulation on the Determination of the Mortgage Lending Value since 2006. Results arrived at by the vdp’s Committee for Valuation Matters have found their way into the book, as have the latest decisions by BaFin (Federal Banking Supervisory Authority) on interpreting certain questions relating to the Regulation, and which were reached in joint discussions involving BaFin and the vdp.
When the Regulation on the Determination of the Mortgage Lending Value (BelWertV) entered into force, three papers were published on the content of the Regulation. These works analyze, in particular,
vdp event “Mortgage Lending Value Determination for New Issuers”, November 25, 2008
The extensive experience the vdp has gathered in mortgage lending value determination was passed on to a circle of participants comprising non-vdp member banks at the event “Mortgage Lending Value Determination for New Issuers”. This event was aimed at banks without long years of experience in determining the MLV; the aim was to give these banks, as new issuers or with an interest in refinancing through Pfandbriefe, an overview of the regulations of the BelWertV and how they are put into practice. As well as members of the Committee for Valuation Matters, the vdp was able to win a representative of BaFin as a speaker. The speeches focused on the following topics:
Further speechesSpeech “Bank regulatory requirements with regard to the mortgage lending value” by Achim Reif during the vhw seminar on February 27, 2007
vdp forum “Mortgage Lending Value and Pfandbrief Safety” November 9, 2006
What effect does the Regulation on the Determination of the Mortgage Lending (BelWertV) have on the safety of the Pfandbrief? What bank regulatory measures are taken to check them? On November 9, 2006 – shortly after the BelWertV entered into force – the vdp organized a forum “Mortgage Lending Value and Pfandbrief Safety” to answer these questions.
Dr Louis Hagen (moderator)
Wolfgang Crimmann (member of the vdp Valuation Committee)
Bernd Bollmus (BaFin)
Raymond Trotz (Chairman of the vdp Committee for Valuation Matters, Head valuer HVB)
Christoph Kettel (member of the vdp Valuation Committee, Head Real Estate Appraisal Consulting, Eurohypo)
Annegret Hasler, Covered Bond Analyst at Dresdner Kleinwort Debt Research GmbH