Guidelines used in assessing mortgage lending values of properties, as required under Germany’s Pfandbrief Act, lead to market value cushions that are an additional source of protection for investors in Pfandbriefe on top of LTV limits, said Fitch yesterday (Monday).

The rating agency analysed the relative difference between the mortgage lending values (MLVs) and the respective market values (MVs) for German properties securing commercial mortgage loans in Fitch-rated mortgage Pfandbriefe (Hypothekenpfandbriefe). It found that the MLVs are on average 12% lower than the respective MVs, as of March 2013, although the figure differs by property type, size, issuer and the state of the economy.

Fitch, Canary Wharf

This cushion represents protection against potential property price declines on top of that provided by a maximum 60% loan-to-mortgage lending value threshold (Beleihungsgrenze) for mortgages refinanced via Pfandbriefe, said the rating agency.

For example, a 12% MV cushion transforms the maximum 60% loan-to-mortgage lending value eligibility threshold into an equivalent loan-to-value limit of 53%, according to Fitch.

“This contributes to high recoveries given default of 70%-90% on mortgage cover pools in AAA stress scenarios,” it said.

A covered bond analyst said that Fitch’s analysis and report contain data that is helpful for investors, as it is typically not published by issuers.

“While the cushion is somewhat lower than usually assumed, a maximum LTV of 53% (based on market values) confirms strong protection provided by the Pfandbrief legislation,” he said.

Mortgage lending values are the result of valuations intended to capture a property’s long term sustainable value, disregarding speculative aspects such as economic fluctuations, and are required by Germany’s Pfandbrief legislation.

Fitch said that there is no regulatory requirement that the MLV should remain below the point-in-time market value of a property, but that “the guidelines used in assessing MLVs lead to a positive difference between a property’s current MV and its assessed MLV over time”.

MLVs are generally assessed around the origination date of a mortgage loan. According to Fitch the valuation regulations of the Pfandbrief Act impose guidelines with regards to minimum operating expenses and capitalisation rates, which explain why the MLV generally remains below the MV of a given property across the property valuation cycle. Property type and size are the main drivers of MV cushions, it said.