In 2006, the appraisal guidelines for mortgage banks were standardised via the German Valuation Ordinance (WertV). The German Supervisory Authority for Financial Services (BaFin) has now floated the idea of overhauling its regulations so as to adapt it to today’s market reality. But BaFin’s proposals have sparked controversy, and been heavily criticised by the Association of German Mortgage Credit Banks (vdp).
Pursuant to the provisions of the currently effective ordinance, the value of a property about to be appraised is marked down by a flat 15 percent to allow for management costs. These costs break down specifically into administration and maintenance, the modernisation risk and non-recoverable operating costs. The reenacted ordinance as planned by BaFin is now considering striking the two latter items from the 15-percent deduction. This means that, in future, non-recoverable operating costs and modernisation risk would have to be deducted from the property value in addition to the flat-rate deduction. Moreover, the reenacted law is supposed to set up an annual review mechanism operated by the banks. It would obligate banks to review their facts underlying their valuations in regular intervals. Yet another measure will raise the limit for small-ticket loans from 400,000 euros to 500,000 euros. Here is why: According to the vdp homeownership survey, the funding volumes for detached and semi-detached homes often exceed the 500,000-euro limit already, in metropolises in nearly 23 percent of all cases.
The critics of the proposed reenactment are primarily worried about an increased documentation and research effort. If the auditing responsibility is delegated to the banks, it will not only exacerbate the issue of excessive red tape but will also prompt a tightening of funding terms. Jens Tolckmitt, the association’s director general, also rejects the idea of taking the non-recoverable costs out of the minimum deduction of 15 percent, arguing: “Especially for operator real estate like hotels and shopping centres, the new regulations would imply significant additional deductions, and ultimately reduce mortgage lending values. This would neither be helpful nor reflect the facts on the ground” (Source: www.pfandbrief.de) According to Tolckmitt, the step would mean a further cut to the mortgage lending value and be unnecessary from his point of view. He argued that it would actually increase the imbalance between market value and mortgage lending value, rather than closing the gap. He also believes that raising the small-loan limit falls short of the mark: “The new small-loan limit remains out of touch with the reality in many regional housing markets”(Source: www.pfandbrief.de). His proposal in this context is to raise the limit to 600,000 euros instead. However, he considers digitisation the decisive aspect of the reenacted law, and principally welcomes it. Yet the new regulations limit the use of statistical valuation methods exclusively to the small-loan segment. Jens Tolckmitt therefore demands that the valuation methods be approved for any type of real estate that can be standardised (Source: www.pfandbrief.de).