Revaluation of Immovable Property Collateral

Definition

Revaluation of Immovable Property Collateral refers to the practice of monitoring and revaluing Collateral that has been pledged to secure a loan as a means of having an up-to-date perception of the residual Credit Risk

EBA Requirements

When monitoring property values as laid down in Article 208(3) of Regulation (EU) No 575/2013, institutions should, for the purposes of these guidelines, also set up policies and procedures specifying the approach and the frequency of monitoring of immovable property collateral. These policies and procedures should account, when relevant, for the following elements:

• the type of property;
• the credit quality of the loan secured by property;
• the development status of the property;
• the value of the property;
• assumptions made in the appraisal;
• changes in market conditions.

Institutions should set out appropriate frequencies for monitoring the value of the collateral, considering the type and value of the collateral at origination, and, in relation to the credit agreement, consider the following:

• the frequency of monitoring of properties and parts in development, e.g. unfinished buildings, is higher than that of similar finished properties and parts;
• the frequency of monitoring of properties and parts with a high carrying amount or with a high LTV ratio is higher than that of similar properties and parts with a low carrying amount or with a low LTV ratio;
• the frequency of monitoring of loans secured by immovable property or parts of the property with lower credit quality is higher than that of similar loans secured by immovable property or parts of the property with higher credit quality.

Institutions should ensure that any indices and statistical models used to monitor the value of the collateral are sufficiently granular and that the methodology is appropriate for the type of asset and lending product and based on a sufficient time series of observed empirical evidence of previous transactions and appraisals of the collateral or similar collateral.

Institutions should have policies and procedures for the revaluation of immovable property collateral, specifying the approaches to revaluation (e.g. desktop valuation, drive-by valuation, full visit with internal and external assessment of the property, statistical models) for different types of immovable property collateral, ensuring that the approach or combination of approaches is prudent and proportionate to the type and potential values of the collateral and in relation to the credit agreements. Furthermore, institutions should set out specific triggers (e.g. a change in the assumptions made in the appraisals), indicating when monitoring leads to revaluation or collateral needs revaluation.

When the conditions for a review in accordance with Article 208(3)(b) of Regulation (EU) No 575/2013 are met, institutions should update the value of the immovable property collateral by means of a revaluation carried out by a valuer who is potentially supported by appropriate advanced statistical models that meet the conditions set out in Section 7.4 and account for individual characteristics of the property and geographical area. Institutions should not use these models as the sole means of the revaluation.

When the conditions for a review in accordance with Article 208(3)(b) of Regulation (EU) No 575/2013 are not met, institutions may update the value of the immovable property collateral by means of either a revaluation carried out by a valuer or appropriate statistical models that meet the conditions set out in Section 7.4 and account for the individual characteristics of the property and geographical area.

See Also

• EBA Guidelines on Loan Origination and Monitoring