VALUATION OF COLLATERAL :

REAL PROPERTY

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 Objectives

To determine appraisers processes,

approaches and methodology used for
valuation of collateral specifically real property.
To understand basic laws, terminology, concept
in valuing and accepting collateral.

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 Topics for Discussion

Concepts, Laws & Definition of Terms

Concepts on Collateral
Types of Collateral
Acceptability of Collateral
Provision under PVS

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 BSP Circulars & Guidelines Governing
Valuation of Collateral
BSP Circular 472

Excerpt from BSP Circular No. 472 Series of 2005

Pursuant to Monetary Board Resolution No. 74 dated 20 January 2005, the following regulations governing banks
and all financial institutions under the regulation and supervision of the Bangko Sentral ng Pilipinas (BSP) are
hereby issued, as follows:
Section 1. Subsection X304.1 of the Manual of Regulations For Banks (MORB) is hereby amended to read as
follows:
General Guidelines. Consistent with safe and sound banking practices, a bank shall grant loans or other credit
accommodations only in amounts and for the periods of time essential for the effective completion of the
operation to be financed. Before granting loans or other credit accommodations, a bank must ascertain that
the borrower, co-maker, endorser, surety and/or guarantor, if applicable, is financially capable of fulfilling
his/their commitments to the bank. For this purpose, a bank shall obtain adequate information on his/their
credit standing and financial capacities.
In addition to the usual information sheet about the borrower, a bank shall require from the credit applicant a
statement of his assets and liabilities and of his income and expenses together with the following:
1. A copy of the latest Income Tax Return (ITR) of the borrower and his co-maker, if applicable, duly stamped as
received by the Bureau of Internal Revenue (BIR); and
2. Except as otherwise provided by law and in other regulations, if the borrower is engaged in business, a copy of
the borrower's latest financial statements as submitted for taxation purposes to the BIR.
3. A waiver of confidentiality of client information and/or an authority of the bank to conduct random verification
with the BIR in order to establish authenticity of the ITR and accompanying financial statements submitted by
the client.
5/4/2014 RAFAEL B. BUENAVENTURA 4
 CREDIT INVESTIGATION

5 Cs of CREDIT
Qualitative and Quantitative measures in evaluating loan applicant

Refers to a borrowers reputation for paying his bill, and everything

Character that has bearing on his willing to discharge his obligation.

Measures a borrower's ability to repay a loan by comparing

Capacity income against recurring debts

Borrower puts toward a potential investment, because a large

Capital contribution by the borrower will lessen the chance of default.

Creditor is secured against non-payment by extinguishing

Collateral obligation through foreclosures.

Creditor should analyze business condition in the particular

Condition industry in which the applicant is engaged.

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 Concepts on Collateral
Collateral is a property taken in support of credit granted. It
represents the Banks second way out. It is not a substitute for
repayment, however, it provides incremental protection and
stronger negotiating position, particularly if the borrower needs
the assets to continue operating the business.
General Principle
Collateral provides ample defense in case of default.

Three (3) factors must be considered in collateral evaluation:

Control

Disposability &

Margin

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 Concepts on Collateral

Proper Documentation- ensures the perfection of Banks

interest in, and rights to the collateral.
All types of collateral accepted as security for
accommodation shall be subject to inspection and appraisal.
It provides the basis for evaluating acceptability. Safety
margin has to be set to prevent loss. Likewise, disposability
and probable sale value are important considerations when
obtained to protect its position.
 Types of Collateral
1. Cash
2. Bond
3. Shares of Stock
4. Bank Guarantee
5. Real Estate
6. Machinery and Equipment
7. Transportation Equipment
8. Merchandise Inventory
9. Receivables
 Purposes on Valuation of
Collateral

Two (2) primary purposes of the Bank on collateral valuation:

To establish a fair market value for the collateral
offered in order to help arrive at a sound credit
decision based on the loan value of the collateral
In the event of foreclosure and sale of the acquired
asset, to assure an adequate return to the bank of
past due obligation plus interest, penalties and
charges.
 ACCEPTABILITY OF COLLATERAL

Liquidity
Can be sold for cash in the open market on shorter period of

time; ease or quickness with which the asset can be

converted into cash.
Marketable

No legal impediments
Transaction can be settled easily

Transferable

High Quality
No credit risk in itself

No liens and encumbrances

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 LOAN TO VALUE RATIO
Market Value Per PVS Definition; Value in exchange.
Appraised Value Value of Collateral;
% of Market Value- ( 60% t 100%).

Loan Value Risk appetite of lender ;

% of Appraised Value-(50%-80%).

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 Legal Measures

In Case of Default:
Foreclosure Proceeding Minimum of 6 months.

Consolidation Process Minimum of 6 months.

Redemption Period Real estate

1 year after foreclosure.

Loss Provision Real Estate
5 years after foreclosure.
 UNACCEPTABLE COLLATERAL FOR
MOST BANKS
LANDLOCKED PROPERTY
FLOOD PRONE AREAS
WITH PRESENCE OF SQUATERS
LAND LOCATED IN AN ABANDONED SUBDIVISION
LAND LOCATED WITHIN DANGER ZONE
LAND LOCATED IN AREAS W/ UNSTABLE PEACE & ORDER SITUATION
WITH DEFECTS ON TECHNICAL DESCRIPTION (e.g. EXTREM OPEN POLYGON)
EXTREME IRREGULAR SHAPE LOT
LOTS WITH TITLES CONSIDERED DOUBTFUL / BAD TITLE
LOTS WITH NO TITLE (ONLY TD)
AGRICULTURAL WITH NO POTENTIAL FOR DEVELOPMENT
Note ; a property has market value but may not have value as collateral.

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 PROVISONS UNDER THE PVS
In performing valuation for lending purposes, appraiser
normally provides MV in accordance with PVS.
Location pinpointing is very important in the valuation of
collateral
Approches to value depend on applicability the typical
manner that property is being traded.
Each relevant method will , if appropriately and correctly
applied, lead to a similar result.
 PROVISONS UNDER THE
PHILIPPINE VALUATION SYSTEM
It is common for a seller especially developers include incentives to
buyers of FFEs.
Market value ignores any price inflated by special consideration.

Appraiser should alert the lender as to the effect of the incentive

being offered.
A valuation may be required of a specialized property where the
property is part of on-going concern business. (lender should be alerted
if continuing profitability is affected)
Property rental that exceeds the current market or economic rent may
constitute a wasting asset because any value attributable to this factor
diminishes as the term of a lease decreases (since the tendency is to
terminate its agreement).

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 BSP Circulars & Guidelines Governing
Valuation of Acquired Assets
(c) Real and Other Properties Acquired (ROPA)
1. Real and other properties acquired (ROPA) in settlement of loans through foreclosure
or dation in payment shall be booked initially at the carrying amount of the loan
(i.e., outstanding loan balance adjusted for any unamortized premium or discount
less allowance for probable losses computed based on PAS 39 provisioning
requirements) plus booked accrued interest less allowance for probable losses plus
transaction costs incurred upon acquisition (such as non-refundable capital gains tax
and documentary stamp tax paid in connection with the foreclosure/purchase of the
acquired real estate property): Provided, That where the booked amount of ROPA
exceeds the appraised value of the acquired property, an allowance for probable
losses equivalent to the excess of the amount booked over the appraised value shall
be set up: Provided, further, That if the carrying amount of ROPA exceeds P5
million, the appraisal of the foreclosed/purchased asset shall be conducted by an
independent appraiser acceptable to the BSP.
2. The carrying amount of ROPA shall be allocated to land, building, other non-financial
assets and financial assets (e.g., receivables from third party or equity interest in
an entity) based on their fair values, which allocated carrying amounts shall become
their initial costs.

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 Liquidation of Foreclosed Property

Market Value 100.00

Appraised Value 100.00

Loan Value 70.00

Foreclosure Expense (6 Months) 7.00
Consolidation Expense (6 Months) 7.00
Cost of Money (2 years) 8.60
Total Cost 92.60

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 FORCED SALE AND LIMITED MARKETING
OR DISPOSAL PERIOD
Lending institutions request valuation on a forced
liquidation for sale basis and impose a time limit for
disposal of security.
Appraiser must have the knowledge of the reasons of

the constraint to come up with reasonable valuation.

An alternative valuation may be provided based on

defined assumption, but appraiser should be

transparent on the validity as of valuation date. It
should not be relied upon in the event of future default.

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 APPRAISERS RESPONSIBILITY
Eyes and ears of the bank
The nature and scope of the appraisers engagement
should be clear to both appraiser and lender.
Appraiser should be aware of the risk associated with the
valuation for lending purposes where miscommunication
and misunderstanding or error may lead to financial losses.
In the undertaking in the valuation for lending purposes, it
is important that appraiser (internal or external) be
independent.
Appraiser must pinpoint the property serve to be as
collateral.
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 CHARACTERISTICS OF A GOOD
BANK APPRAISER
Personal and Professional Integrity
Diligence and Common Sense
Persistence and Resourcefulness
With Strong and Relevant Network
Flexibility and Reasonableness
Promptness and Punctuality
Observance and adherence to Appraisers Code of Ethics of
Independence, Objectivity, Impartiality and Confidentiality

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 SKILLS

Strong communication skills

Be able to communicate his findings in an orderly, logical and
grammatically correct manner
Investigative
Be like detectives inquisitive, enjoy knowing where and how to
obtain information even from reluctant sources, sensitive to new
trends and developments, open-minded
Analytical
Must know how to analyze the data gathered and draw logical
conclusions
Should understand the reasoning behind how he arrives at his final
value
 EXPERIENCE

Knowledge of techniques and skills is important

in honing an appraisers ability, and this could
be further developed on the job.
An appraiser will benefit from experience only
if they constantly work at self-improvement
through continuing education.
Licensing, Certification and Designation
Soon to be a mandatory directive from BSP
 Judgment

Is the operation of the mind, involving comparison,

recognizing differences and discrimination, by which
knowledge and values and relationships are mentally
formulated
Is the ability to develop a clear understanding of the complex
relationships among factors, concepts and events related to
appraisal
Is the ability of appraiser to process a mass of data and
develop a reliable opinion from these data; it is the ability to
draw good conclusions
Is developed by education, experience and reviewing ones
mistakes and by considering the comments of others