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We are now starting to see a number of mortgage shortfalls in regional areas of Australia particularly those where employment has ceased virtually overnight and housing demand has plummeted (such as where mines may have been placed into maintenance mode until resource prices recover).
In this article we review what key points have been identified that valuers should cover in their memorandum in preparing their reports.
Below is an extract from the Supreme Court NSW, Genworth Financial Mortgage Insurance Pty ltd v Hodder Rook & Associates Pty Limited  NSWSC 1043 (15 September 2010).
i. The valuer is required to provide an opinion as to the market value of the property at the date of the valuation (usually the date of inspection) that is supported by the evidence of at least 3 comparable sales within the 6 month period prior to the valuation (or 3 months in a rapidly moving market). If there are insufficient suitable comparable sales in the prior 6 months period, an explanation must be given in the Additional Comments section of the form.
ii. The sales evidence should provide a realistic comparison in terms of price range, type of property and price. If the sales evidence varies significantly from the valuation (+ or – 15% is referred to in the memorandum) a suitable comment should be provided in the Additional Comments section of the form.
iii. The sales evidence should be compared with the subject property with a description of the comparable sale which allows an understanding of why it has been judged to comparable, inferior or superior (as the case may be).
iv. A sale of the subject property in the previous 3 years should be noted, particularly if the valuation is a significant variation from the valuation. The memorandum makes the common sense point that a prior sale is a test of the market.
v. The valuer is required to comment on the direction the recent activity and direction of the market.
vi. The Risk Analysis section of the form requires a forward-looking assessment of four risk factors which may affect the value of the subject property, particularly over a 2 to 3 year period. The most pertinent factors are “market volatility” and the “reduced value 2-3 years.” The risk rating system requires a comment on any “4” rating or if there are three or more “3” ratings.
The implications for the Australian market as evidenced in Genworth's share price dropping is that there are now more options available to lenders for lenders mortgage insurance. Westpac was reportedly 12% of Genworth's book.
So what are the possible implications for mortgage default / lenders mortgage insurance claims moving forward?
Many lenders have noted the tightening of what LMI will pay out on, with a trend to very strict enforcement of all sub limits. With limited competition in the LMI industry, there were not many competitive forces in play. If this is the start of a trend to offshore LMI by the big four banks, it may give lenders more room to negotiates with LMI providers in the future and subsequently obtain better deals and less restrictive sub limits. This has the potential to save lenders thousands of dollars in LMI claims.
Many commentators have already identified the risks the the Australian LMI providers. QBE was about to list its LMI.
Watch this space.