Loan Security Valuation Flashcards
- What are the forms of lending?
a. Private placement – sale of stocks/bonds/securities to a private investor rather than on the open market
b. Mortgages – legal agreement where a lender lends money at interest in exchange for taking title of the debtor’s property
c. Bond issues – Investment securities that represents a loan made by an investor to a borrower (typically issued by governments or corporations; so the government or corporation gets the loan from an investor who buys the bond)
- What are the key points of the RICS Guidance Note Risk, liability and insurance, 1st edition 2021?
o Informs on principles of risk management, identification, assessment and controls
o Covers type and sources of liability professionals may face (negligence, health and safety, environmental)
o Providers an overview of insurance available in the industry
o Offers guidance on dispute resolution methods
g. Effective from April 2021
- What is included in the terms of engagement?
a. Identification and status of valuer
b. Identification of client
c. Identification of asset to be valued
d. Currency and fee
e. Purpose of valuation
f. Bases of value
g. Extent of investigation
h. Assumptions and special assumptions
i. Format of report
j. Complaints handling procedure to be made available
k. Limitation on liability agreed
- Define EUV-SH?
a. Refers to property value if it were to be used for social housing in perpetuity
b. Assumes hypothetical sale to another RP On the valuation date
c. On the assumption that there is a willing seller and a reasonable marketing period prior to valuation date and
d. that it will be used for social housing and any voids will be re-let on the same tenure and not sold as MV-VP
e. Vacant properties should be valued as EUV-SH if there is a letting demand
f. Vendor only disposes to similar organisations (RPs)
g. Subsequent sales must follow same assumptions
- Define MV-T?
a. Refers to property value if property was sold on open market with current tenancy in place
b. Assumes a hypothetical sale that is not bound by restrictions to use and can be sold on the open market
c. The sale would see an increase in rents to market levels
- What section in the RBG refers to secured lending?
a. VPGA 2
- What are the risks to lenders?
a. Cost of living crisis could lead to changes in government policy, rent freezes, rent cuts, or changes in the rent regime
b. Things like Hackitt review have lead to extensive fire safety investigations and works – the required scope of works might change over time
c. Global inflation can lead to higher costs of materials and labour to maintain stock at current levels
- Why do we value on MV-T?
a. If there is no restrictions to future use of the property and should the lender possess the property they can sell them on the market at this value
- What lender specific requirements might there be?
a. % of Internal inspections
b. No future staircasing for SO properties
- What factors affect risk for loan security?
a. Levels of demand
b. Age and condition of properties
c. Cost of living crisis could lead to changes in government policy, rent freezes, rent cuts, or changes in the rent regime
d. Things like Hackitt review have lead to extensive fire safety investigations and works – the required scope of works might change over time
e. Global inflation can lead to higher costs of materials and labour to maintain stock at current levels
- How do you establish a capitalisation rate in your DCF?
a. Income/MV
b. In our cashflow = Discount Rate less 25 basis points
- How do things like location, tenure and rent impact the security of the loan?
a. Affect demand
b. Affect income levels
c. Affect rents that are charged and therefore ability for tenants to pay
d. Essentially they impact the discount rate and therefore have different levels of risk associated with them
- When might a property not be suitable for secured lending?
a. Short leasehold interest
b. High flood risk
c. High contamination risk
- What does RBG VPGA 2 state about conflicts of interest?
a. Valuers must declare any potential conflicts of interest – personal or professional – to all relevant parties
- What 5 broad areas does VPGA 2 cover?
a. Conflict of interest
b. Taking instructions and disclosures
c. Basis of value
d. Special assumptions
e. Reporting and disclosures
- Name an example of previous involvement in Secured Lending?
a. Long-standing professional relationship with the borrower
b. Financial interest in asset or borrower
- What must you include in a secured lending report in accordance with VPGA 2?
a. Disclosure of any previous involvements or any arrangements agreed for avoiding a conflict of interest
b. Comment on suitability as security
c. Whether any deleterious materials have been noted
d. Comment on any flood risks or historic contamination
e. Past, current or future trends and volatility in the local market
- What is a liability cap?
a. Contractual agreement that a client can only claim damages up to the amount agreed
- And can lenders, for example, refuse a mortgage application where EWS1 form can’t be produced?
a. Yes, they can.
b. That’s up to their internal risk controls.