The remaining useful life of a property is of crucial importance for its mortgage lending value. A reduced remaining useful life specified by the EU directive - see my post yesterday here – therefore raises the question of whether this has an impact on a) the ability to finance purchases and b) the implementation of existing loan agreements.
The background to this consideration is that the lending value is ultimately the value of the security on which the loan is based. In order to ensure this, it is not only the time of the credit decision that is important, but the entire term of the loan agreement. A sale of security must cover the loan at each stage. The loan value therefore represents the absolute upper limit up to which a bank may grant a loan.
This is regulated in a law (PfandbriefG) and a regulation (BelWertV):
Section 16 (3) PfandBriefG provides:
The mortgage lending value must not exceed the value that as part of a cautious assessment of the future saleability of a property and taking into account the long-term, sustainable characteristics of the property, normal regional market conditions and current and possible other uses results. Speculative elements must not be taken into account. The lending value must not exceed a market value determined in a transparent manner and using a recognized valuation method. Market Value is the estimated amount for which a Mortgage Property could be sold at the Valuation Date in an arm's length transaction between a willing seller and a willing buyer, after a reasonable marketing period, each party acting knowledgeably, prudently and without coercion.
More detailed provisions on how to determine this can be found in the “Ordinance on Determining the Mortgage Lending Value of Properties”, BelWertV for short here. The topic is in a pleasingly good condition Wikipedia article elaborated in an understandable way, to which I would like to refer at this point.
The remaining useful life as part of the loan value.
According to Section 13 (2) BelWertV, the remaining useful life is a key factor in calculating the lending value. The regulation formulates it somewhat mathematically as follows:
If the structure has a remaining useful life of less than 30 years, the share of the land value in the net income over the remaining useful life of the structure must also be capitalized or the determined demolition costs of the structure must be deducted from the earnings value. With regard to the discounting of the demolition costs, paragraph 1 sentence 4 applies accordingly.
This means that the shorter the remaining useful life of the property, the lower the mortgage lending value of the property.
Is collateralization necessary?
If the value of the property falls below the value of the loan, this can mean that the bank sees the risk of lending increased and demands additional collateral. Subsequent security can, for example, take the form of additional security such as a guarantee or a mortgage on another property.
This right is usually provided for in the general terms and conditions or credit conditions of the banks. There is currently no general legal obligation for banks to demand supplementary collateral if the value of the property falls below the value of the loan in Germany. The decision is up to the bank and depends on various factors such as the creditworthiness of the borrower, the amount of the loan and the risk of lending.
In practice, however, this individual legal consideration for individual cases can be overtaken by the regulatory framework, namely when a bank's loan portfolio as a whole gets into trouble due to the loss of collateral. Then the banking supervisory authorities have to take action. You will get the necessary funds § 44 Banking Act (KWG) handed over.
According to the KWG, banking supervision has the task of ensuring the stability of the financial system and monitoring compliance with laws and regulations. If a bank has made a large number of loans where the collateral is no longer available or is no longer sufficient to cover the loan, this can lead to increased risk for the bank and the financial system as a whole. In this case, the banking supervisory authority can take measures to stabilize the bank and minimize the risk to the financial system.
To do this, they can ask the bank, for example, to review their loan portfolio and reduce risks by writing off bad loans, requesting additional collateral or restricting lending business. In severe cases, the banking supervisor can also require the bank to be recapitalized or ordered to be wound up in order to minimize the risk to the financial system.
In my opinion, the EU directive on the reduced remaining useful life of buildings has the potential to bring about this, as it not only reduces individual but entire categories of buildings – and thus loan collateral – suddenly and significantly in value. Banks that have loaned many properties with poor energy ratings may therefore now have a problem.
Loss of tradability of such properties?
If you think about it further, the next question is whether a bank should still finance the purchase of a property with poor energy parameters at all? This is because it brings a security risk into its portfolio, which intensifies the above problems in its overall portfolio. This should lead to greater restraint from now on. This in turn should lead to such real estate being more difficult to sell, with the result that their market value falls, with the result that the mortgage lending value of the real estate that is currently held as collateral in the banks' loan portfolios continues to fall. These effects reinforce each other.
New loans for buildings with poor energy ratings are likely to be more difficult to obtain than before. It remains to be seen whether there is a motivation to take a closer look at the portfolio of loans that have already been granted, because as long as nobody takes note of the reduced security, the resulting pressure to act can perhaps be ignored.