Six Banks Conflict of Interest - had their own LMI insurance division!
APRA Survey results
Residential valuation practices by ADIs and LMIs
23 May 2005
This paper presents the results and analysis of the surveys of 96 authorised deposit-taking institutions (ADIs) and eight lenders mortgage insurers (LMIs) into residential valuation practices, undertaken in the last quarter of 2004. The surveys were completed by all ADIs with a mortgage book of greater than $50 million or total net assets of greater than $100 million. Only two of the participant LMIs may be viewed as being completely independent; the remaining six are owned by ADIs.
The key aims of the surveys were:
• to understand current industry practices in order to identify whether there is any trend towards the use of less rigorous valuation methodologies that might have a significant impact on the financial viability of ADIs and LMIs if there were to be a major property market downturn;
• to understand the interactions in valuation practices between LMIs and ADIs;
• to consider whether there has been any material relaxation in valuation practices; and
• to identify areas where ADIs and LMIs might improve their risk management practices.
Current industry practices
The main conclusion reached is that there have been changes to valuation methodologies in recent years that could potentially increase the risk profile for ADIs and LMIs. However, the control framework implemented to mitigate these potential risks is critical in bringing them to a controllable level. It is important to note that the surveys did not focus on the rigour of the evaluation of new methodologies before they were introduced nor did it seek to identify whether senior management (or the board as appropriate) has approved the methodologies. APRA will be following up on these issues in the course of its regular visit program.
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whilst brokers and mortgage managers can often recommend particular valuers there is little evidence of their involvement in the appointment process;
• in all instances, valuations are addressed to the ADI, its LMI or the securitisation vehicle, if the relevant mortgage is to be securitised;
LMIs do not actively involve themselves in ADI valuer selection and ongoing management processes. It appears that LMIs take the view that these issues are not their responsibility since they are insurers and not bankers. Furthermore, such involvement would limit their freedom of action when it comes to assessing claims: it would be harder to refuse a claim for valuation reasons if the LMI had been actively involved in the valuer management process.
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APRA’s expectations for a prudent risk management environment for valuations are detailed in the relevant chapters of this document and summarised in Chapter 6. In revisions to the capital adequacy framework for residential mortgage lending, announced in September 2004, APRA outlined requirements that ADIs must meet where they do not require a formal (full external) valuation of a residential property.
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In August 2004, surveys were sent to 96 ADIs and eight LMIs, including six entities owned by ADIs. The ADI survey contained 38 questions and the LMI survey 23 questions..............The total value of ADI residential lending for the period of the survey (July 2003 to June 2004) was $233 billion, for which banks accounted for over 90 per cent. The results of the ADI survey are summarised in Tables 1 to 5 and Charts 1 to 3 and the LMI survey in Tables 6 to 9, which are attached to the end of this report.
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ADIs’ risks are to individual properties, not whole suburbs, and this approach provides no mechanism to take into account property-specific factors, which may have a significant effect on the property valuation. In APRA’s view, the use of dated contracts of sale is not an effective method of valuation and needs to be viewed with caution..........All ADIs indicated that valuations are addressed to the ADI, its securitisation vehicle or LMI. There was no evidence to suggest that valuations were ‘addressed’ to homeowners or their agents, such as mortgage managers and brokers. This said, APRA’s on-site reviews have identified occasions where brokers have arranged the valuation and sent it directly to the relevant ADI. Generally, however, there is no evidence of significant broker involvement in the area
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Not surprisingly, those LMIs owned by ADIs rely on the ADI valuer policies and procedures.
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In 86 per cent of ADIs, the credit risk management function is responsible for following up any anomalies identified in the valuation report. Sales personnel are involved in the balance of situations.
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Only 25 per cent of ADIs have a formal valuer dispute resolution process........LMIs do not currently make a claim adjustment for inadequate valuer performance, unless there has been fraud in which the ADI has been culpable in some way.
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In September 2004, APRA announced revisions to the capital adequacy framework for residential mortgage lending. AGN 112.1, Attachment C, Eligible Residential Mortgages, states that where an ADI accepts the purchase price (contract of sale), or other means of valuation, as being an indication of the value of the residential property offered as security for a loan (in lieu of a formal or full external valuation),