Loan Security Valuation

Question 1

• What guidance is there for secured lending valuations?

Answer 1

Red Book VPGA2 – Valuations for Secured Lending

UK National Supplement - VGPA10

Question 2

• What are some risks for lenders to consider before lending?

Answer 2

• Micro and macro-economic conditions
• Quality and condition of property
• Functional and financial obsolescence
• Alternate use value
• Future expenditure requirements

Question 3

• Why would a property not be suitable for secured lending?

Answer 3

• Property is uninhabitable
• Short lease
• Structural problems

Question 4

• How would a lender recover their loan if things go wrong?

Answer 4

• Receivers step in as middleman between creditor and debtor
• They facilitate the payment of the loan through sale, collection etc
• Chose the best method of debt recovery

Question 5

• How does PII work for secured lending valuations?

Answer 5

• Maximum amount of the property to value – SW £20M
• Banks (HSBC) requiring minimum of £5M per claim

Question 6

• What are liability caps?

Answer 6

• Insurance against suing
• Maximum amount you can be sued for
• SW – no cap?
• Banks requiring
• Bank terms example -
   Anticipated value less than £25M, liability will be capped at £25M
   Anticipated value less than £100M, liability will be capped at the loan amount of 40% of the MV
   Anticipated value greater than £100M, liability will be capped at amount agreed by the firm and lender

Question 7

• What is contained within a secured lending instruction?

Answer 7

• Property
• Bank
• Bank’s Customer
• Loan details (LTV – term)
• Red Book basis
• Timescales (generally 10 working days)
• Environmental Report
• Fee
• Terms of Engagement

Question 8

• What is a Service Level Agreement?

Answer 8

• Agreement defining the level of service you are expectant of
• Lays out metrics by which service is measured
• Includes remedies or penalties should it not be achieved

Question 9

What does VPGA2 say about dealing with conflicts?

Answer 9

• Must disclose any previous involvement within the last 2 years, with borrower or property
• Valuer’s decision whether to accept instruction
• Should there be a conflict, arrangements to manage this should be made

Question 10

What does VPGA2 say about reporting procedure?

Answer 10

• Valuer must provide in addition to standard valuation procedure:
  o Comment on the owner-occupied/investment nature of the property
  o Comment on the suitability of the property for mortgage purposes
  o Any circumstances in which the value could be affected
  o Acknowledge any sustainability features that will affect value

Question 11

What is within the UK National Supplement with regards to Loan Security?

Answer 11

• VPGA 10 - Commercial Secured Lending
• Talks about ‘Panel Agreements’ which are a third party between lenders and surveyors to manage the instruction process
• Mentions liability
• Mentions reliance - only by the addressee of the report

Question 12

How could a change in interest rates affect the property market?

Answer 12

• Increases the cost of borrowing
• Slows investment in property as it is a less attractive proposition
• Return on investment affected
• Yields move out to reflect the increased risk
• Seen in recent times

Question 13

What risks would rising interest rates pose to a lender?

Answer 13

Lender =
- Have to charge higher fees on the borrowing
- Less investment in property and less lending happening
- Borrowers more likely to default on payments with higher costs

Question 14

What would you do if you were asked to value a property that you had valued for another lender one year previously?

Answer 14

• Undertake conflicts of interest checks
• Disclose to the bank that this had been undertaken
• If instructed, undertake full inspections and due dilligence again to make sure nothing has changed

Question 15

What helps you determine if a property is suitable for Loan Security?

Answer 15

• Marketability
• Condition and in-habitability
• Economic Life