Bank bullying of independent property valuers is weakening scrutiny of the $1.8 trillion residential and commercial sectors and increasing credit risk for property buyers and investors, according to a scathing analysis of lenders by the Australian Property Institute for the banking royal commission.
The association, which represents 8000 professional members and 650 businesses, claims it will not risk having members appear before the commission because “any public appearance would place their livelihood in jeopardy”.
It also warns new-technology “shortcuts” used to value property for credit and securitisations are indiscriminately bundling assets, such as mortgages, in ways that could understate the risk, creating the potential for manipulation of values that precipitated the US housing crisis.
“Structural arrangements under which valuers deliver services have a profound impact on the operation of the financial services industry,” API chief executive Amelia Hodge said. “Financial institutions have embarked on a shift on price and speed rather than quality.”
The API is involved in real estate, commercial property and related businesses that rely on accurate valuations and covers disciplines ranging from funds management to accounting. Its analysis underwrites $1.5 trillion of domestic housing loans and about $315 billion of commercial property exposure.
Lenders are expected to vigorously deny any allegations by claiming their commercial relationship with valuers is responding to technological developments, funding pressures and evolving business practices.
The report calls on the commission to defend the profession’s independence against increasing encroachments from aggressive, powerful lenders wanting to bring a lot of the services in-house through desktop valuations, ownership of intellectual property and devolution of decision making to third-parties, such as mortgage brokers.
“These shifts in valuation practises and policies by the financial institutions in the past five to seven years are increasing the likelihood of failure of risk management” flowing onto financial services, valuers and consumers,” it warns.
It also reveals an increasingly toxic relationship between valuers and lenders degraded by attempts to pressure valuers to surrender rights to intellectual property, cut fees, lower standards and erode their independence.
For example, the increasing use of desktop valuation by lenders, which reduce the need for a full on-the-site evaluation, is diminishing evidence used to make an assessment and could distort the market.
“The use by banks of a single vendor’s system that is not transparent or open to scrutiny creates opportunity for a property market that is open to manipulation,” Ms Hodge said.
Tendering processes, or beauty parades used to choose valuers, are “heavy handed”, lack appropriate governance and are “overlaid with a significant power imbalance” between small, suburban valuers and billion-dollar banks, the report warns.
In addition, financial institutions and banks are shifting risk from themselves onto valuers, mitigating risk to their balance sheets by leveraging valuers’ professional indemnity insurance, which creates the additional transactional cost of driving up premiums.
“The use of bullying tactics to leverage PI insurance while threatening panel appointments/agreements and contracts creates significant problems for the viability of the industry,” Ms Hodge said.
“This has resulted in valuation firms being leveraged to settle losses through professional indemnity insurance without proper process or risk their work being removed,” she said.