As a time period-related collateral value, the mortgage lending value (MLV) is beyond the development of economic activity. It reflects only the sustainable and long-term features of a property.
Given the stringent supervision by BaFin (Federal Financial Supervisory Authority), this security-oriented valuation has played an important part in the stable development of the property market in Germany.
Property Valuation
Importance of the Mortgage Lending Value In real estate lending, the correct assessment of the property serving as security is crucial for two reasons. First, the safety of the cover assets for the Mortgage Pfandbrief depends on it. Second, borrowers expect a sufficiently high loan-to-value ratio. As a rule, a real estate loan has a term of up to thirty years. The value of the property must offer the bank adequate security for the loan at all times. For this reason the mortgage lending value cannot be a value relating to a set date such as, for example, the current and market values, but must consider only the sustainable and therefore long-term features of a property. This explains why the mortgage lending value will always, except in very weak market phases, be below the market or current value. To guarantee the high standard of safety of Mortgage Pfandbriefe at all times, besides the prudent determination of the mortgage lending value only parts of a loan up to 60% of the mortgage lending value are included in cover. Pfandbrief banks can also provide finance above the 60 % lending limit. However, these parts of the loan must not be funded through Mortgage Pfandbriefe.
History In 1996, the former Association of German Mortgage Banks (today: vdp) proceeded in its “Statement of Principles on the Mortgage Value of Realty” ("Grundsatzpapier zum Beleihungswert von Immobilien") from the statutory framework in place at that time to define the mortgage (lending) value as follows. The mortgage value of a property is the value that can be expected with a high level of surety, derived from the historic perspective of market events at the time of the valuation, on the basis of the durable characteristics, and which will be achieved in normal property transactions over a long period in the future. This definition was authorized by the Supervisory Authority: The law at the time contained no information on the methodology for determining the mortgage lending value. To close this gap and to ensure the quality of the determination of the mortgage lending value, the Association of German Mortgage Banks (today's vdp) had drawn up, in consultation with the Supervisory Authority, two fundamental documents on determining the mortgage lending value. These papers specified the particular demands placed on the mortgage lending value. The “Statement of Principles on the Mortgage Value of Realty” explained the autonomous nature of the mortgage lending value briefly and concisely, setting it apart from other definitions of value. The aim and purpose of the paper “Essentials of Mortgage Value Estimation" was to enhance the comprehensibility and transparency of the mortgage lending value methodology and to explain the criteria governing the relevant value-determining factors. The following were identified as the “essential aspects” of the determination of the mortgage lending value: · the sustainable rental rate, based on net rents exclusive of heating charges;
· the consideration of sufficient operating expenses;
· the use of adequate capitalization rates;
· if given, the consideration of a modernization risk. 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.
Statutory Basis §16 par.1 and 2 Pfandbrief Act defines the mortgage lending value and its main characteristics. §16 par. 4 provides that the Federal Ministry of Finance may implement a regulation stipulating details of the methodology and form of the determination of the mortgage lending value as well as the minimum requirements to be met by valuers. Consequently, the strict demands made on the determination of the mortgage lending value will in future apply uniformly to all Pfandbrief issuers. A draft of the Regulation on the Regulation on the Determination of the Mortgage Lending Value has already been submitted to the associations, giving them an opportunity to submit comments. The final version of the mortgage lending value regulation is expected to be published soon.
Quality campaign in valuation
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 qualified training programmes 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 Cert 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 since annual advanced training measures are mandatory, as is a recertification examination after a five-year period. The campaign to enhance quality in property valuation has been taken beyond Germany’s national borders in the meantime. TEGoVA, the European umbrella organization for real estate valuers, in 2000 introduced a European personal certification system in accordance with DIN EN 45013. Under this model, TEGoVA can award the “Approved by TEGoVA” seal of quality to accredited national certification bodies that meet the stipulated quality standards. Hyp Zert GmbH was the first national certification body to receive an “Approved by TEGoVA” seal.
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