The Accuracy Of Mortgage Valuation As A Lending Requirement For Selected Banks In Kaduna Metropolis

Project and Seminar Material for Estate Management

The Accuracy Of Mortgage Valuation As A Lending Requirement For Selected Banks In Kaduna Metropolis


Chapter One


1.0 Introduction

1.1 Background of the Study

Landed property constitutes often major portions of company assets acceptable as collateral securities for corporate lending. According to Babawale et al (2013), real estate valuations are vital for financial institution, particularly banks, for no less than two reasons. First, valuations are frequently required during the underwriting or renegotiating of mortgage loan advances, where valuations ought to give a reasonable evaluation (future) market estimation of the property that will serve as collateral for loan. Second, valuations are required if the organization or bank needs an updated assessment of collateral values for outstanding loans it holds on its asset report. Moneylenders constantly require an exact appraisal of worth for every situation. This is on account of they have to realize that they can recover their credit by offering the property if the borrower defaults and they need to take ownership. The financial services authority likewise obliges lenders to guarantee that there is sufficient security for their credit by guaranteeing that the property is worth at any rate what is being loaned on it. Incidentally, the valuation additionally serves to ensure the borrower against unexpectedly borrowing more than their property is worth.

Credit transaction between financial institution and investors grew to such an extent that securities such as shares and bonds, debenture, unit trust, Treasury bill, property are required as prerequisite for advancement of capital for whatever purpose the investor may require it for, since Investment have become a driving force of future income generation to individual, corporate organization and government as well, people are so eager to invest most especially In real estate but most of the investors are either having half of what they need to invest or not having at all which will lead to borrowing from financial institution, at this junction valuation is the only determinant of fair market value of the mortgage property which will serve as security for loan.

Practically, finance sourcing is a major component of every investment programs. And the need to have tangible and sustainable collateral before capital advancement seems to be a big task to investors. Bonds, Treasury bill, shares and stocks were alternatives collateral securities required by mortgage debt provider before loan were advanced. But due to the insecurity of the collateral during default in loan payment, property is now regarded as better alternative since one of its many characteristics is hedge against inflation.

Figures acquired during valuation activities are extremely critical to the operations and business dealings of the clients, wrong opinion of value can bring about strain in business dealings. For instance, different banks have suffered loss by granting loans in excess of actual value, and numerous organization proprietors have been persuaded that they were making benefits in resources while really they were running at loss. Furthermore, numerous were being driven into business that were seen to be productive and profitable while in fact they were not reasonable or viable v (Crosby et al 1999).

The issue of overvaluation and undervaluation has brought about disagreement regarding extensive measure of cash that occasionally keep running into a few a huge number of Naira; it has also led to cases of bankruptcy, investment failures and grant of loans in excess of collateral value. This problem has been the cause of disagreement. Therefore, the claim as to the reliability of valuation figures and the degree of accuracy of estimate /worth as given by the valuer has come under examination.


1.2 Statement of Problem

Because of the lack of generally accepted method which valuers apply in valuing properties for mortgage purpose in Kaduna metropolis, according to Kuye (2000), valuers sometimes increase or over value the worth of property pledged as collateral for loan, which mostly resulted in dispute between the lender and the borrower in the case of default, bankruptcy, investment failure, which make financial institution to grant loans in excess of collateral value.

This mostly occurs when valuers use the cost method of valuation without making reference to the income approach”. Other errors contributing to this problem are; lack of rental evidence, lack evidence of recent transaction and wrong use of capitalization rate. To make it worse, some valuers don’t use the correct procedures of arriving at opinion of values and focus on satisfying their clients (mortgagor) demand in terms of value by demanding and accepting bribe from the mortgagor. This simply act rise a great doubt in the hearts of financial institution that requires valuation report to serve as lending requirement.


1.3 Aim And Objectives

The aim of this study is to assess the accuracy of mortgage valuation as a lending requirement for selected banks in Kaduna Metropolis.

The specific objectives are to;

  1. Identify the methods adopted in valuation of property for mortgage purpose,
  2. Identify the causes of inaccuracy in mortgage valuation,
  3. Evaluate the accuracy of mortgage valuation, and
  4. Evaluate the reliability of mortgage valuations prepared by estate surveyors and valuers for mortgage institutions in Kaduna metropolis.

1.4 Research Questions

The research questions for this study are:

  1. What are the methods adopted in valuation of properties for mortgage purpose?
  2. What are the causes of inaccuracy in mortgage valuation?
  3. How accurate is mortgage valuation?
  4. How reliable is mortgage valuations prepared by estate surveyors and valuers for mortgage institutions in Kaduna metropolis?

1.5 Scope of the Study

This study is limited to the accuracy of mortgage valuation, and the effect of undervaluation and overvaluation of mortgage properties to banks and investors. Banks and other financial institution sometimes lost capital and interest in case of default by the investor whose property was undervalued and cannot pay the debt in case of foreclosure. This research focuses on two set of people which are the estate surveyors and valuers and bankers in Kaduna metropolis and their involvement in mortgage transactions for the period, 2004 -2014.


1.6 Significance of the Study

The importance of this study to the financial institutions, investors, individual, estate surveyors and valuers, cannot be overemphasized. The security of interest and capital is the chief goal of mortgagees. The amount a borrower is qualified to access will depend, among others, on the earning capacity of an income-producing property; the earning capacity is determined by valuation.

It is the usual practice to advance by way of mortgage two-thirds of the estimated market value of the property, thereby leaving the mortgagee with a one-third margin of safety. However a study like this will serve as an eye-opener to investors whose properties are valued, banks who use valuation as their basis for collateral, valuers who determine or estimate the worth of such security and academic world with respect to lending requirement in its entirety.


1.7 Limitation of the Study

  1. Time constraints to adequately collect data from the field
  2. Banks and Estate Surveyors and Valuers were too busy to respond appropriately

1.8 The Study Area

Kaduna metropolis is chosen as the study area because it is one of the most important commercial city in northern part of Nigeria and providing a sufficiently vibrant economic and valuation activities. Kaduna state has grown from a small farming and trading settlement to become an important Centre of learning, commerce and finance in Nigeria, housing a large number of Financial Institution, Industries, Estate Firms and Commercial Enterprise.

1.7.1 Geographical Description

The study area Kaduna is one of the oldest state in the present day North Central geographical region, got its name from the Hausa word “Crocodile” which were said to be the most popular marine reptiles that abound on the bank of the River Kaduna, a branch to the river Niger a major geographical feature in the state.

Kaduna is geographically located and lies between Latitude 10°30’N and Longitude 7°30’E with a customary regular variety of wet and dry seasons. Its normal temperature falls somewhere around 25°C and 38°C in the separate seasons and the state occupies a landmark of 69,993 square kilometers.

1.7.2 Historical Development

Kaduna metropolis is constituted of two local governments which are Kaduna North and Kaduna South. Kaduna state has a populace of 6, 0662,562 individuals of a proportion of 4.33% of the national population. Statistics have the male: female Ratio as 51.29% (3,112,029 persons): 49.90% (2,954,534 persons) [National Population Commission, 2007]. The two cities in the state which are; Kaduna North and Kaduna South, Kaduna North have a populace of 367,694 persons around 5.9%; while Kaduna South has a populace of 402,390 representing 6.63%.; It share common borders with the following states Kano, Katsina, Zamfara, Kebbi, Niger, Nassarawa, Plateau state, and the state majorly imparts her limit to the FCT, Abuja which is the state capital.

The Gbagyi’s are the local pilgrims in Kaduna, which is co-possessed with different tribes and ethnic gatherings, especially the Hausas, the Kataf’s and the southern Zaria minor Tribes.

1.7.3 Soil and Vegetation

Generally, the soil is typically reddish-brown to reddish-yellow tropical ferruginous soils; and vegetation Savannah Grassland with scattered trees and wooden shrubs. The soils in upland areas are rich in red clay and sandy soil, but poor in organic content. However, ‘Fadamas’ have soil rich in clay and organic content, though heavily and poorly drained.

1.7.4 Social Infrastructure

Kaduna enjoys the leading position in educational development in the entire Northern sub region of Nigeria above the Niger, prior to the acceptance and liberation of the formal western education by the government of the northern region. The effort of Voluntary Agencies in establishing schools at both primary and secondary levels gave the present Kaduna state an attractive position and advantage of early establishment of educational infrastructural establishment


1.8 Definition of Terms

Accuracy

It is the quality or state of being correct or precise.

Mortgage

It is a legal agreement by which a bank, building society etc. lends money at interest in exchange for taking title of the debtor’s property with the condition that the conveyance of title becomes void upon the payment of the debt.

Valuation

It is an estimation of the worth of something especially one carried out by a professional valuer.

Lending

It is grant to (someone) or the use of (something) on the understanding that it will be returned.

Requirement

It is a thing that is needed or wanted.

Selected

It is to carefully choose as being the best or most suitable.

Banks

It is an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions and provide other financial services to it’s customers.


Chapter Five


Summary Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the accuracy of mortgage valuation as a lending requirement for selected banks in Kaduna.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of mortgage valuation accuracy as a lending requirement for selected banks.


5.2 Summary

In the course of the study a number of issues of concern raised in the study including the appropriate basis for mortgage valuation, and the best approach to mortgage valuation that guarantees acceptable and sustainable margin of safety to the mortgagee, can be addressed by a joint standard committee of the Nigerian Institute of Bankers, the accounting profession regulatory bodies, and the Nigerian Institution of Estate Surveyor and Valuer with responsibility for promoting codification of good mortgage valuation practice in the country, as is being witnessed in other countries. Coupled with this, these bodies, as the principal stakeholders, must improve on their internal regulatory mechanisms. The lenders must ensure, among others, that mortgage valuation jobs are given to professional valuers, engage their own internal valuer to oversee the jobs given to external consultants, insist on minimum standard of market/industry information, adequate data and risk analysis, among others. The Valuers on the other hand must use the platform of the mandatory continuing professional development to educate their members through workshops, seminars and conferences; and ensure members‟ compliance with the prescribed standards for mortgage valuation.


5.3 Conclusion

Haven successfully completed the study; the researcher therefore concludes that real estate valuers’ liability for negligence in mortgage valuation. In particular, the research sought to define the nature and extent of valuers’ duty of care; and also considered such matters as contributory negligence, penalty for negligence; and the ‘margin-of-error’ concept. The study revealed that the valuation industry recognizes the limitations of the MV as a basis for mortgage valuation. MV focuses on a specific date and is therefore insensitive to changes accentuated by changes in the underlying variable inputs. The market value being the value at the date of valuation, does not allow for sufficient margin of safety in loan-to-value ratio to safeguard the interest of the lending institution. Mortgage value should be a sustainable value rather than relating only to the value of the collateral at the date of valuation as provided by the MV.


5.4 Recommendation

Haven successfully completed the study; the researcher therefore recommend that appropriate basis for mortgage valuation, and the best approach to mortgage valuation that guarantees acceptable and sustainable margin of safety to the mortgagee, can be addressed by a joint standard committee of the Nigerian Institute of Bankers, the accounting profession regulatory bodies, and the Nigerian Institution of Estate Surveyor and Valuer with responsibility for promoting codification of good mortgage valuation practice in the country, as is being witnessed in other countries. Coupled with this, these bodies, as the principal stakeholders, must improve on their internal regulatory mechanisms. The lenders must ensure, among others, that mortgage valuation jobs are given to professional valuers, engage their own internal valuer to oversee the jobs given to external consultants, insist on minimum standard of market/industry information, adequate data and risk analysis, among others. The Valuers on the other hand must use the platform of the mandatory continuing professional development to educate their members through workshops, seminars and conferences; and ensure members‟ compliance with the prescribed standards for mortgage valuation


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