24th October 2007
Valuers and valuations in relation to mortgages - why are they important?
In previous editions of our Investment News, we have referred to the three “Cs” of lending – character, capacity and collateral.
In this Investment News, we talk about "collateral". In subsequent newsletters we will discuss "character" and "capacity".
“Collateral” refers to the security available to the lender if the borrower defaults on his or her loan repayments. The lender, in order to recover the loan from the borrower, we may have to sell the security property, and it is important that the value of the security is sufficient to repay the loan.
In making a loan, we need to be sure that there is sufficient “collateral” to support the loan. To ascertain the “collateral” to be used for a loan, we obtain an independent valuation of the security property.
Loan to valuation ratios
The “loan to valuation ratio” or “LVR” is one of the most important concepts in lending. It is the ratio of the amount of the loan to the valuation of the security property over which the mortgage is to be registered. For example, if the loan amount is $60,000 and the value of the security property is $100,000, the LVR is 60%.
In managing La Trobe’s Mortgage Fund, we aim to keep the LVR for the overall Fund at around 60%. As at 30 June 2007, the overall LVR for the Fund was 59.16%, although this varies between each Investment Option and from loan to loan.
Clearly, what is fundamental in assessing the loan is to obtain a proper and reliable valuation of the security property, so that we can determine the LVR.
Who do we ask to prepare valuations?
As a general rule, we will only advance a loan to a borrower where the security property has been valued by one of
La Trobe’s Panel Valuers.
To become a member of La Trobe’s Panel of Valuers, the valuer must:
- be a professional person currently registered with the Australian Property Institute (“API”);
- have specialised in their chosen field for at least five (5) years;
- have academic qualifications relevant to the nature of the valuation work to be undertaken;
- either be, or have access to, directors and principals of the firm; and
- be included on the panel of other major lenders (the other lenders are contacted when assessing inclusion on La Trobe’s panel to verify performance).
Appropriate registration with the API is verified by obtaining a copy of current practising certificates and professional indemnity certificate at each renewal. Each valuer must also certify with each valuation report that their professional indemnity cover is current and for an amount of at least
$2 million for residential properties and $5 million for non - residential property valuations. The professional indemnity insurance must be valid at the date the valuation is made, but there is a risk that the insurance may have lapsed at the time of a potential claim.
Any perceived conflict of interest would preclude a valuer’s involvement in any particular transaction, so the valuer is required to certify that there are no conflicts of interest in respect of each valuation.
We review our Panel of Valuers regularly to ensure that the valuations being provided are of an appropriate standard to protect the interests of our investors.
All valuation reports must be completed with strict compliance with our Standing Instructions, must be no older than three months, and all valuations must be addressed to La Trobe.
Valuers instructed by us are not our agents, and are therefore acting only as independent contractors. This means that La Trobe is not liable for any errors, omissions or negligence in their conduct, or any resulting loss to investors arising out of improper or negligent valuations.
Once we have reviewed a valuation, we reserve the right to obtain further supporting information such as a kerbside appraisal or a further valuation by another panel valuer if there is any reservation as to the strength of the security property. This is particularly relevant for properties valued in excess of $1 million.
Are there any occasions where we do not use a valuer?
In the significant majority of occasions, we will obtain a formal valuation from one of our Panel Valuers. However, for residential or rural-residential properties with a 40% LVR or less, we will accept the most recent Municipal Rate Notice instead. A Municipal Rate Notice will in most cases record a “Capital Improved Value” or “CIV” that has been assessed by a valuer appointed by the local Council or relevant Rating Authority or assessed by a Government department for the purpose of determining rates. We accept this CIV as the value of property for residential and rural-residential property on the basis that the CIV is likely to be a conservative assessment of the value of the property and at a 40% LVR, there is a sufficient buffer to protect the interests of investors.
La Trobe’s position in summary
We regard the appropriate valuation of a security property as one of the cornerstones of good lending, because only when the security property has been properly valued can we determine the LVR.
We therefore demand the highest standards from those valuers who are appointed to our panel, to ensure that our investors’ interests are best protected.