ED CAREY reviews the discussion and the documents underpinning the current requirements for property valuations.
Times have changed for valuers and the landscape is about to change yet again with a wider range than ever of new and existing rules and regulations affecting the way valuations are undertaken, and which have different implications for banks, valuers, selling agents, buyers and sellers. The good thing is that there is now increasing recognition of the importance of high standards, for which we have been calling.
Role of the valuer
Essentially, there is no real change for the professional valuer: their job remains to carry out a professional and impartial valuation for the client, without outside influence. The valuer must report his or her findings in a clear and unambiguous way, with the file being able to withstand future scrutiny if there is cause to query the valuation figure.
Valuation standards were first introduced in the UK following the property crash of the early 1970s when there were no common standards governing valuations, and subsequently the Red Book was adopted in Ireland.
It is somewhat alarming that, following a number of boom and bust cycles, it was not until Ireland’s recent spectacular crash that the Irish Central Bank identified weaknesses in the valuations process as a contributory factor.
The 2012 Central Bank ‘Lessons Learned’ document stated that there were many weaknesses in the entire secured lending valuations processes. It states (among several findings) that: “…[there was a] lack of appreciation of the significance of the valuation document as independent evidence of risk mitigation effectiveness. Many bankers did not fully regard the valuation report as a key document underpinning the basis on which they were acquiring the risk”.
As there seems to be some confusion around the terminology associated with some of the changes in the sector, I will attempt to simplify it here.
As members of the SCSI and RICS, our valuations must be carried out in accordance with the Red Book. This provides an assurance to our clients that correct and robust procedures are adhered to, and that there can be a consistency across the reporting of property valuations.
Valuer Registration is an RICS scheme launched in 2011, which provides for a new regulatory monitoring initiative to ensure the consistent application of the Red Book standards. It is compulsory for RICS members in the UK, but remains voluntary for the moment in Ireland.
EU Mortgage Credit Directive
The EU Mortgage Credit Directive requires member states to develop national valuation standards for residential mortgage lending purposes, and the Directive is to be transposed by March 2016. The European legislation recognises both the Red Book and Tegova Blue Book. The Society is confident that the Red Book standard will conform to the Directive, is maintaining regular contact with the Department of Finance and will update members as the deadline approaches.
‘Lessons Learned – Guiding the Future’
The Central Bank ‘Lessons Learned – Guiding the Future’ report published in December 2012 provides guidance to lenders in the provision and use of valuations. While it is not binding on banks, it is not expected that there will be deviations from the recommendations. Again the Red Book is fully compliant and consistent with the requirements.
The Macroprudential Policy, recently introduced by statutory instrument, provides loan-to-value and loan-to-income limits, and also contains a provision that banks now require a valuation to be carried out within two months prior to cheque issue. In many cases, this will require a second valuation to be carried out. An unintended consequence will of course present itself at contract stage; it is difficult to see how a purchaser’s solicitor will allow him or her to sign an unconditional contract if that purchaser is relying on mortgage finance to secure the property. It is primarily an issue for the banks as to the detail of how they choose to have the second valuation reported to them, but the detail of re-inspections is dealt with clearly in IRL VS 3.1 (The Irish chapter of the Red Book).
The Society has recently completed a national Red Book training series of seminars, which were well attended by members throughout the country.
Valuations are widely used and relied upon for a host of reasons, but most commonly to support secured lending and for transactional activity. I think the users of valuations frequently underestimate the importance of the valuation, and this can sometimes lead to insufficient care, attention and resources being devoted to the job, and sometimes reluctance to sufficiently charge for the professional input. We need to value ourselves more.
I think the standards are ultimately an assistance to practitioners. Admittedly, in today’s working environment, there seems to be a never-ending amount of administration, with paperwork almost seeming more important than fee earning, but members should take comfort from the knowledge that if the processes and procedures are adhered to, risk is minimised and a defence of any potential claim is significantly enhanced.
Ed is a Fellow of the Society of Chartered Surveyors Ireland and a past Chairman of the Residential Agency Committee within the Society. The views expressed in this article are Ed’s personal opinions.