Monday, 22 October 2012

Bank Valuations – What’s with them right now?

We have had some amazing valuations lately…

With variations of over 20% on the same property, with the same valuer, but with different Banks, so what is going on?

On one property alone recently we have seen valuations of; 2 lenders at $300,000, 1 of $330,000, 2 of $340,000, 1 of $350,000 and 2 at the Contract Price which was $365,000, with a valuation of $300,000, $340,000 and $365,000 from the same individual valuer. It was actually different properties but they were all identical and all within a block of each other and on the same size land.

Explain that to me?

Bank Valuation 101.

The valuers job is to assess risk for the bank.

It is important to note there is a distinction between the way lenders value a property and the true market value.

True market value can only be assessed by a “willing buyer and a willing vendor” however in the past the lender valuation has always been close, because it has previously been based on previous sales of a similar property in a similar area, without caveat.

More than ever our lenders are placing caveats on valuations by way of “instructions” all possibly driven by profit at any expense.

Lenders have outsourced the overhead of valuations to commercial valuers but still control the valuation process with “instructions” to the valuer.

If a loan goes bad and the banks are not able to recover their principal and costs, then valuers are at risk of getting sued. Yet they are paid peanuts to do the valuation so the commerciality comes into it too, for the valuation firm.

So when undertaking a valuation, the valuer must take into consideration a number of factors not the least of which is, how much they are getting paid for the time spent on it. Hence they might give the task to a new or less experienced valuer and therefore they must consider the terms of their Professional Indemnity Insurance.

Nowadays Bank valuations are not generally based on true market value of a property, but are rather based on the level of risk to the valuer and to the bank.

Valuers take their “instructions” from the bank.

Right now banks are cooling the market, with tight lending criteria and they do that by limiting valuations. When you go to borrow money, the instructions will more often than not (these days) come through from a lender that may force the Valuer to use certain “indicators”.  For example the value of a brand new property may be valued significantly lower than expected as it may be based on using only second hand properties as sales data. Or perhaps previous sales of old homes in an area that is going through re-gentrification where the old homes are really land value only.

Over exposure in certain areas:

Banks have exposure limits in areas and even complexes. In other words, if a particular lender has lent too much in a postcode, they will restrict further involvement or at least offer less favourable terms.

Lenders Mortgage Insurers (LMI’s) have exposure limits in areas and even complexes. In other words, if they have lent too much in a postcode, they will restrict further involvement.

So funders don’t chase business away, they use guidelines and instruction to control the outcome.

No Bank wants to chase away business so they will rarely say “No” but what they will do is make the loan more attractive to their business guidelines by lowering the LVR.

LVR an acronym for “Loan to Value Ratio”

LVR is basically the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan. Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower the risk is to the bank and hence the lower their cost on that loan and on their Book in general.

Question: Would it be plausible that a lender would advertise that they will do 95% LVR loans yet rarely lends that amounts over 80% LVR?

Absolutely, and they can achieve that by giving “instructions” that result in a lower valuation.

LMI (Lenders Mortgage Insurance)

When a loan has a LVR of less than 80% then the borrower doesn’t pay mortgage insurance. Lenders still insure all loans so in the case of a LVR less than 80% the Lender pays the premium.

If the loan is greater than 80% then the borrower pays the LVR.

* Would it also be plausible that a particular lending might instruct the valuers in such a way that it elicits lower valuations so that the lender does not have to pay as many insurance premiums? Absolutely! That way you pay for their risk.

NOTE: Nowadays you just can’t tell whether a valuation is realistic or not until you see the valuation and try to understand what the Lender is trying to achieve.

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