Mortgage Lending Value and EU Regulation Andrzej Reich Director of Banking, Payment Institutions and Credit Unions Regulations Department Polish Financial Supervisory Authority Member of the Management Board European Banking Authority Brussels, 13th of May 2016

Agenda  Definitions  EU Legislation  How to understand the mortgage lending value  Mortgage lending value vs market value  Creditworthiness assessment  Determination of the motgage lending value  Harmonisation? 2

Definitions Market Value: The highest estimated price that a buyer would pay and a seller would accept for an item in an open and competitive market. (BusinessDictionary.com) Mortgage value: The worth of the mortgage on the home. The value of the mortgage may not be equivalent to the current market price of the property over time. (budgeting.thenest.com) 3

Mortgage lending value (CRR, art 4 (74)): 'Mortgage lending value' means the value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property; 4

Assessment of the mortgage lending value (CRR, art 124 (1) first para): The part of an exposure treated as fully secured by immovable property shall not be higher than the pledged amount of the market value or in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions, the mortgage lending value of the property in question. 5

The EBA mandate (CRR, art. 124 (4) (a)): EBA shall develop draft regulatory technical standards to specify the rigorous criteria for the assessment of the mortgage lending value referred to in paragraph 1; 6

Is the mortgage lending value a market value of the real estate? 7

Is the mortgage lending value a market value of the real estate? – No 8

Is it more rigorously assessed market value of the real estate? 9

Is the mortgage lending value a market value of the real estate? – No Is it more rigorously assessed market value of the real estate? – No 10

Is the mortgage lending value a market value of the real estate? – No Is it more rigorously assessed market value of the real estate? – No Is it the minimum of a long-term projection of the present market value of the real estate based on macroeconomic cycle model? 11

Is the mortgage lending value a market value of the real estate? – No Is it more rigorously assessed market value of the real estate? – No Is it the minimum of a long-term projection of the present market value of the real estate based on macroeconomic cycle model? - Yes 12

The difference between the mortgage lending value of a property and the market value of the same property is a macroeconomic corrective factor 13

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Which value: market value or mortgage lending value, is more appropriate for mortgage lending? for covered bonds issuance? 15

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Who should detrmine the mortgage lending value? Valuer? Bank? 17

While discussing the entity determining the mortgage lending value one shall always bear in mind risks which may easily materialise. The most significant are: risk of financial liability, reputational risk, legal risk. 18

Every country has its own approach to mortgage lending, to the issuance of covered bonds, to the valuation of real properties. Each has a different market and different legal arrangements. Some countries have a very conservative approach to the mortgage loans whereas in some others the rules are much more liberal. At present, a single fully harmonised stadard would not satisfy everybody. For some it would be too restrictive while some others would find it too permissive. But… From the Polish perspective, the standard proposed would be acceptable if it were at least as strict as it is in Poland now. 19

Given the broad range of practical solutions and legal frameworks in Member States the provisons of the CRR mentioned above would not bring about the desired objective. One would need to begin with harmonisation of relevant provisions of national laws, definitions leading to the real comparability. Otherwise, the CRR provisions would lead to unequal treatment of national markets, unnecessarily increased cost of operations, finally, growth of operational and reputational risk. 20

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