THE ACCURACY OF MORTGAGE VALUATION AS A LENDING REQUIREMENT FOR SELECTED BANKS IN KADUNA METROPOLIS
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CHAPTER ONE
INTRODUCTION
- Background of the study
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 it’s 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 it’s many characteristics is hedge against inflation.
Figures acquired during valuation activities are extremely critical to the operations and business dealings of the clients, wrong opinion of value can bring about strain in business dealings. For instance, different banks have suffered loss by granting loans in excess of actual value and numerous organizations. Proprietors have been persuaded that they were making benefits in resources while really they were running at loss. Furthermore, numerous were being driven into business that were seen to be productive and profitable while infact they were not reasonable or viable (Crosby et al 1999). The issue of over valuation and undervaluation has brought about disagreement regarding extensive measure of cash that occasionally keep running into a few a huge number of Naira; it has also led to cases of bankruptcy, investment failures and grant of loans in excess of collateral value. This problem has been the cause of disagreement. Therefore, the claim as to the reliability of valuation figures and the degree of accuracy of estimate/worth as given by the valuers has come under examination.
- Statement of the 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. One of the major problem is the lack of the evidence of recent transaction. This simply act as a great doubt in the hearts of financial institution that requires valuation report to serve as lending requirement.
- Objectives of the study
The main objective of the study is to determine the accuracy of mortgage valuation as a lending requirement for selected banks in Kaduna metropolis. However for the successful completion of the study, the following sub objectives were put forward by the researcher:
(i)To identify the methods adopted in valuation of properties for mortgage purpose.
(ii)To identify the causes of inaccuracy in mortgage valuation.
(iii)To evaluate the accuracy of mortgage valuation.
(iv)To evaluate the reliability of mortgage valuations prepared by estate surveyors and valuers for mortgage institutions in Kaduna metropolis.
1.4 Research question
For the successful completion of the study, the following research questions were formulated:
(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?
1.5 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 it’s entirety.
- Scope and limitation of the study
The scope of the study is to determine the accuracy of mortgage valuation as a lending requirement for selected banks in Kaduna metropolis. However, the study has some constrained and limitations which are:
(a)Availability of research material: The research material available to the researcher is insufficient, thereby limiting the study.
(b)Time: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
(c)Finance: The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.
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.
- Definition of terms
Accuracy
It is the quality or state of being correct or precise.
Mortgage
It is a legal agreement by which a bank, building society etc. lends money at interest in exchange for taking title of the debtor’s property with the condition that the conveyance of title becomes void upon the payment of the debt.
Valuation
It is an estimation of the worth of something especially one carried out by a professional valuer.
Lending
It is grant to (someone) or the use of (something) on the understanding that it will be returned.
Requirement
It is a thing that is needed or wanted.
Selected
It is to carefully choose as being the best or most suitable.
Banks
It is an establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions and provide other financial services to it’s customers.
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