# Mortgage lending value

In banking, the lending value represents the value of a loan security that can be expected with a high degree of probability that it can be realized at any point in time in the long term. He may be the absolute limit, up to which a bank of internal policy loans or other loans may be granted.

## General

Since mortgage lending values play a role in real estate financing in particular , the Pfandbrief Act (PfandBG) , which has been in force since May 2005, deals in detail with the matter. In its legal definition of Section 16 (2) of the PfandBG, it requires that the mortgage lending value must not exceed the value “which is based on a careful assessment of the future saleability of a property and taking into account the long-term, sustainable characteristics of the property, the normal regional market conditions as well as the current and possible other uses. Speculative elements must not be taken into account. The mortgage lending value must not exceed a market value determined in a transparent manner and according to a recognized valuation method ”. The market value is "for which an after PfandBG the estimated amount that collateral object could be on the date of valuation between a willing seller and an in-market buyer, after proper marketing, in a transaction in the ordinary course of business sold, where parties had each acted knowledgeably, prudently and without compulsion acts ".

The Ordinance on the Determination of the Mortgage Lending Value (BelWertV), enacted as an implementation provision of Section 16 (2) of the PfandBG, defines it in Section 3 (1) BelWertV as the value of a property, "which, based on experience, is independent of temporary fluctuations in value on the relevant property market, for example, and with the elimination of speculative elements can be expected to be achieved in the event of a sale for the entire duration of the loan ”.

The Capital Adequacy Ordinance (CRR), which has been in force since January 2014 - and overrides these provisions - describes it in Art. 4 Para. 1 No. 74 as the value of a property “that is based on a careful assessment of its future marketability, taking into account its long-term, durable properties , normal and local market conditions, current use and reasonable alternative uses ”. These legal definitions aim to describe a constant value adjusted for short-term price fluctuations, which forms a safe lower limit of the market or market value during the term of the loan.

## Legal regulations

The Capital Adequacy Ordinance (CRR) has a decisive impact on the lending practice of banks . It places specific requirements on the quality of loan collateral, as well as its monitoring and review, in order to achieve credit risk mitigation effects to reduce capital adequacy. Credit protection is subsumed under the term “credit risk mitigation techniques”. Pursuant to Section 10 No. 8 KWG , the provisions of the CRR have been in force since January 2014 for the requirements for measuring the mortgage lending value. These allow the use of a mortgage lending value of real estate when determining the risk weights and risk exposure values of real estate loans only in those Member States which have stipulated strict requirements for its assessment in their legal or administrative provisions. The new Solvency Regulation (SolvV) therefore clarifies the requirements that a mortgage lending value that can be taken into account for the purposes of the CRR must meet. These requirements are finally listed in Section 22 SolvV. After that, the mortgage lending value

• according to § 16 para. 2 sentences 1 to 3 PfandBG in connection with the mortgage lending value determination ordinance or
• have been determined in accordance with Section 7 ( 7 ) of the Building Societies Act, taking into account a provision approved by BaFin in accordance with Section 5 (2) No. 3 of the Building Societies Act or
• relate to a property in another country of the European Economic Area and have been determined on the basis of strict legal or administrative provisions applicable in this country, which BaFin has recognized as being equivalent to the Mortgage Lending Value Determination Ordinance or
• be a sustainably achievable value determined differently, which meets the requirements of Section 16 (2) sentences 1 to 3 PfandBG.

The valuation used to determine the mortgage lending value must be carried out by an appraiser who is independent of the credit decision (Section 16 (1) PfandBG).

The previous minimum requirements of Section 20a Paragraphs 4 to 8 KWG a. F. are now also regulated in the Capital Adequacy Ordinance. The minimum requirements according to Art. 208 Para. 2 CRR concern the legal enforceability in all relevant legal systems (Art. 208 Para. 2a CRR), the real estate lien must meet all legal requirements (Art. 208 Para. 2b CRR), must be realizable in a timely manner ( Art. 208 (2c) CRR), have adequate damage insurance (Art. 208 (5) CRR), are valued by an independent expert (Art. 229 (1) CRR) and is annually (commercial real estate) or every three years (residential real estate ) to be monitored (Art. 208 CRR). A secured credit splitting is still possible. If these conditions are met in individual cases, residential properties that are used or rented by the owner themselves are given a risk weight of 35% of the risk-weighted loan (Art. 125 No. 1a CRR) for the risk position in the standardized approach , whereby the value of the residential property is not material may correlate positively with the creditworthiness of the borrower (Art. 125 No. 2a CRR). This includes owner-occupied industrial lands whose values depend very much on the income that a guarantor by the particular use of the commercial property (eg. As for factory buildings) achieved. According to Art. 126 No. 1a CRR, commercial real estate is assigned a risk weight of 50%.

## Mortgage lending value for other loan collateral

Outside of mortgaged property will also be a collateral value for other at banks in credit granting physical collateral set. According to Art. 4 Para. 1 No. 58 CRR, property collateral or real collateral is part of the "collateralisation with security deposit", in which the credit risk associated with bank loans is reduced by the fact that the institution has the right to counter default of the borrower or in the event of certain other credit events "To realize certain assets or amounts, to obtain their transfer or their provision or to withhold them, or to reduce the exposure amount to the difference between this and the amount of a claim against the institution or to replace this with this difference".

Art. 192 ff. CRR contain further provisions on the requirements for credit collateral that can be recognized and their risk-reducing effect. According to Art. 194 (1) CRR, the collateral must be legally effective and enforceable in all relevant jurisdictions; According to Art. 194 (2) CRR, banks must take all necessary measures to ensure the effectiveness of the collateral and to address the associated risks. According to Art. 194 Para. 3 lit. b CRR must be sufficiently liquid and its value must remain sufficiently stable over time; Timely recovery or retention must be guaranteed (Art. 194 (4) CRR). The positive correlation between the collateral and the borrower's creditworthiness must not be very high (Art. 194 (4) CRR). This applies, for example, to the granting of a loan to a stock corporation , which is to be secured by pledging its shares . In this context, positive correlation means that the deterioration in the company's creditworthiness is generally accompanied by a decline in the price of the pledged shares.

The standardized approach according to Art. 197 Para. 1 lit. a Cash deposits at the lending institution, government bonds or bonds from central banks with a minimum credit rating of 4 (Art. 197 Paragraph 1 lit. b CRR), other bonds with a minimum credit rating of 3 (Art. 197 Paragraph 1 lit. ce CRR), shares or convertible bonds in the main index (Art. 197 para. 1 lit. f CRR), gold (Art. 197 para. 1 lit. g CRR) and securitisations with a minimum credit rating of 3 (Art. 197 para. 11 CRR). According to Art. 193 (4) CRR, “ cash , securities or goods that are acquired, borrowed or delivered in the context of a repurchase agreement , securities or commodity lending transaction” also count as collateral. The collateral provider's assets can be pledged§ 1204 ff. BGB) of bank balances with third institutions or securities, the assignment of security§ 398 ff. BGB) of claims and other rights , the transfer of ownership of movable property in general and the assignment by way of security of motor vehicles§ 929 , § 930 BGB) are taken into account. According to Art. 229 (1) CRR, the market value for this loan collateral is then the lending value, in the case of receivables its nominal value .

## Mortgage lending value requirements

While the market value or the market value represents the current price of an object to be lent that can be achieved on the market under normal circumstances, the lending value determined as part of a collateral assessment reflects the value of the object from the point of view of a credit institution that is to finance this object over a longer period of time. During this period, the market value - depending on the reporting date - must not fall below the previously determined mortgage lending value. In contrast to the market value, the mortgage lending value should take into account the possible fluctuations in the value of the loan security during the term of the loan. A safety discount is then applied from the lending value to the lending limit . This discount is also intended to cover all credit security risks that are not associated with fluctuations in value.

When determining the mortgage lending value, the security needs of the lenders predominate , but also the requirements of the case law of the BGH . He emphasized that valuation risks and uncertainties can be adequately taken into account. The following requirements for the mortgage lending value are derived from this:

• the determined value should be valid for the longest possible future period;
• only permanent value components derived from the past and present should be used as yardsticks for the valuation, which can also be viewed as stable over the forecast period;
• all reference values ​​and value components used must meet these requirements;
• Unsecured future components for increases in value and earnings may not be taken into account;
• only those properties and yields that can be proven to have been secured at the time of the valuation and which, if used properly, would be permanently available to every owner;
• All approaches used and factors influencing value must be clearly documented;
• the sustainable saleability or rentability must be carefully assessed;
• the usability and usability must be carefully checked;
• all risks associated with the property must be presented;
• The selected loan collateral must not have a particularly positive correlation to the credit risk: assignments can only be recognized as collateral if the third-party debtors are not employees of the borrower or form a group of affiliated customers (Art. 4 Para. 1 No. 39 CRR).

## Effects

The determined mortgage lending value is used as a basis for bank-internal credit decisions because it influences the level of the default loss rate (LGD). Loans in the standardized approach , in which the ratio of the lending value of the collateral to the nominal amount of the loan falls below the threshold of 30% (= reciprocal loan-to-value ratio ), is assigned to the LGD for unsecured loans or 50% for collateral that cannot be recognized because the realization costs could exceed the realization proceeds of the collateral. Loans in which the ratio of the loan value of the collateral to the nominal amount of the loan is between 30% and 140% are also assigned an LGD of 50%. Loans where the ratio of the value of the collateral to the nominal amount of the loan exceeds 140% receive an LGD of 40%. It applies ${\ displaystyle C}$${\ displaystyle E}$ ${\ displaystyle B}$

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The higher the lending value of a loan security, the lower the reciprocal loan-to-value ratio and thus the default loss rate.

For commercial and residential properties different regulations. Retail real estate is assessed with an LGD of 10% and commercial real estate of 15% (Art. 164 (4) CRR). The mortgage lending value is therefore also the basis for the classification of a claim as a real estate loan and enables certain reductions in crediting the capital adequacy .

As a result, if the LGD is low, the risk premium for credit institutions drops so that they can offer lower interest rates or credit margins. This affects especially in real estate financing and integrity collateral as pledge of bank deposits or safe government bonds ( federal bonds ) from.

Pfandbriefbanken may after § 14 PfandBG of the loan value of a maximum of 60% by the emission of mortgage bonds refinance . It also has an impact on the crediting of hidden reserves in the bank's own real estate for the banks' equity .

## Swiss and Austria

In Switzerland and Austria, too, the same terminology is used as the basis for the mortgage lending value (Switzerland: mortgage lending value; Austria: mortgage lending value) as in Germany.