Banks warned against ‘drive-by’ home valuations

Australia’s banking regulator has warned home lenders that incomplete property valuations could expose them to high levels of debt during a market downturn.

The Australian Prudential Regulation Authority (APRA) has released the results of surveys carried out late last year on property valuation practices used by lending institutions and mortgage insurers.

They found banks are increasingly lending on the basis of valuations that do not involve thorough inspections.

These include “drive-by” valuations with no internal inspection, or a “desk-top” approach which involves price comparisons in the same suburb.

APRA says that with the housing market in Sydney starting to fall, lending institutions need to have tighter controls in place to manage the higher level of risk.

The Australian Prudential Regulation Authority has warned of increasing credit risks posed by a trend among lenders to use limited and less rigorous valuations of homes and land.

The abbreviated valuations have partly replaced the traditional full home and land valuations among deposit-taking institutions, lenders and mortgage insurers.

Over the past three years there has been an increased willingness on the part of banks and deposit-taking institutions to consider alternative valuation methods, a trend APRA says is likely to continue.

Releasing the results of a survey of valuation methods adopted by 96 lenders and eight mortgage insurers, APRA’s chairman, Dr John Laker, said the new methods had not been tested in a major property market downturn and they could expose lenders to increased credit risk if appropriate controls were not in place.

The new methods include limited on-site valuations as well as electronic valuations rather than a valuer physically visiting the property and walking over or through it. Of course, the new methods are cheaper.

Dr Laker said: “Good practice, in APRA’s view, would see these new techniques limited to lower risk lending, where there is benefit to the lender in reducing valuation costs without significantly adding to the risk.”

APRA’s report said that it was one thing to use more streamlined valuation methods for relatively low-risk situations, where the loan to valuation ratio (LVR) might be 60 per cent, it was another to use them for higher risk loans where the LVR is, say, 95 per cent.

For loans with LVRs over 80 per cent – which are typically mortgage insured – risks in valuation are generally shared with mortgage insurers. It is now common practice for mortgage insurers to accept contract of sale and restricted valuations – although often subject to control on loan size, valuation ratios and property location.

Dr Laker said it was important that the new methods have been appropriately researched and approved at senior levels, with a suitable level of back testing.

APRA will be following up on these issues in the course of its regular visit program.

Dr Laker added that the survey also confirmed a number of strengths in current practices, as well as some weaknesses.

It found that 94 per cent of valuations are undertaken by external valuers and 6 per cent by internal valuers.