THE ACCURACY OF MORTGAGE
VALUATION AS A LENDING REQUIREMENT FOR SELECTED BANKS IN KADUNA METROPOLIS
DEPARTMENT: ESTATE MANAGEMENT AND VALUATION
CHAPTER ONE
1.0 INTRODUCTION
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 thevoperationsvand
businessvdealingsvofvthe
clients, vwrongvopinion
ofvvaluevcan
bringvaboutvstrainvin
businessvdealings. vForvinstance, vdifferentvbanksvhavevsufferedvloss
byvgrantingvloans
in excessvofvactualvvalue, vandvnumerousvorganizationvproprietorsvhavevbeen
persuaded that theyvwerevmaking
benefitsvin resourcesvwhile
really they were running at loss. Furthermore, vnumerous
werevbeing drivenvintovbusiness
thatvwere seenvto
bevproductive andvprofitablevwhile
invfactvtheyvwere
notvreasonablevor
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 avhuge
numbervof Naira; itvhas
alsovled tovcases
ofvbankruptcy, vinvestment
failuresvand grantvof
loansvin excessvof
collateralvvalue. This problemvhas vbeen
thevcause ofvdisagreement.
Therefore, thevclaimvas
tovthevreliabilityvofvvaluationvfiguresvandvthevdegreevof
accuracy of estimate/worth asvgivenvby
the valuer hasvcome undervexamination.
1.1 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.
1.2 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;
i.
identify the methods adopted in valuation of property for mortgage purpose,
ii.
identify the causes of inaccuracy in mortgage valuation,
iii.
evaluate the accuracy of mortgage valuation, and
iv.
evaluate the reliability of mortgage valuations prepared by estate
surveyors and valuers for mortgage institutions in Kaduna metropolis.
1.3 RESEARCH QUESTIONS
The research questions for
this study are:
i.
What are the methods adopted in valuation of properties for
mortgage purpose?
ii.
What are the causes of inaccuracy in mortgage valuation?
iii.
How accurate is mortgage valuation?
iv.
How reliable is mortgage valuations prepared by estate surveyors
and valuers for mortgage institutions in Kaduna metropolis?
1.4 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.
1.5 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.
1.6 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
1.7 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
1.7.5 Economic Importance
Kaduna is anvindustrial center ofvNorthern
Nigeria, manufacturingvproducts likevtextiles,
machinery, steel, valuminum, Petroleumvproductsvand
bearing. Potteryvis highlyvprized fromv
Kaduna, especiallyvfrom the Nok culture, whichvprecedes Abuja and Minna. Kaduna hasva largevmarket, vrecentlyvrebuiltvafter anvextensivevfire invthe
mid-1990s.
Therevis avlargevresource, approximatelyv1.6
kilometres (1 mi) vround, insidevwhichvthe Yakubu
polovclub andvKadunavcrocodilevclub arevsituated, whilst thevKaduna
and Rugvby Clubsvare
on thevperiphery. Therevare twovairports, onevofvwhich is Kadunavairport. Chancangi Airlinesvhas
its headvoffice invKaduna.
Theveconomicvactivities
invthis state bustvmortgagevtransaction invthe
studyvareavwith
levelvofvpatronage.
Figure 1:
Map of Nigeria showing Kaduna state
Figure 2: Map
of Kaduna showing Kaduna Metropolis