The mortgage lending value: prospects for development within Europe

Abstract

Purpose – The purpose of this paper is to critically review the German mortgage lending value (MLV) and to adapt it in order to find a new concept that could serve as the basis for an internationally accepted standard for valuations for lending purposes.
Design/methodology/approach – The research is based on a critical review of existing practices and literature and applies developments in the area of risk management tools, modern valuation techniques as well as the results of the consultation for Basel II in order to find an improved method.
Findings – It was found that a value-at-risk approach and the implementation of simulation helps to understand the concept of MLV. The results also indicate that the German system of calculating the MLV has to be improved.
Practical implications – Banks are in need of tools, reliable instruments and a strong theoretical basis when evaluating their collateral. The valuation of real estate for long-term loans has always been a problem. This paper indicates a strong basis for the implementation of tools in every day business.
Originality/value – Value-at-risk concepts and the concepts of maximum/maximum potential loss within a (future) time period have until today not been integrated in the valuation of real estate serving as collateral.