Role of Property Valuation and Data Analytics in Mortgage Lending
Meeting No: 158 840 3174
Globally governments have formulated policies to promote homeownership in their country as enhancing investments in housing has multiple benefits for the economy that work through several positive multipliers and externalities. However, in the past housing boom-and-bust cycles have quite often been detrimental to both financial stability and the real economy. Therefore regulators have been concerned about and wary of unexplained volatilities in the property prices. In order to mitigate the risks, the regulators across the world adopt Micro and Macro prudential measures such as imposing limits on Loan-to-Value (LTV) ratio for mortgage loans, higher capital provisioning through higher risk weights, including monetary policies aimed at increasing the resilience of the banking and financial system as a whole.
The major macro-prudential tools that have been used to contain housing booms are limits on loan-to-value (LTV) ratios and debt-to-income (DTI) ratios and sectoral capital requirements. Limits on LTV ratios cap the size of a mortgage loan relative to the value of a property, in essence imposing a minimum down payment representing the equity and stake of the borrower (skin in the game). Limits on DTI ratios restrict the size of a mortgage loan to a fixed multiple of household income. The hope is to thereby contain unaffordable increases in household debt.
Judgments about housing valuation require objectivity, transparency, uniformity and standardization and whole host of supplementary information, such as credit growth, household indebtedness, lender characteristics, and the method of financing etc. There are significant gaps in the Valuation methodologies adopted by the industry which has serious implications for Regulations, and result in Regulatory arbitrage, conservativeness, potential credit risk and sub-optimal and inefficient credit decisions.
Reforms in Valuation will improve its efficiency and competitiveness. Standardization of Valuation and uniformity in practice across the industry, aligned with the broader reforms, combined with automation and digitalization will result in sharper and well defined regulatory framework will promote stability in the mortgage industry, banking sector and the economic system.