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THE ACCURACY OF MORTGAGE VALUATION AS A LENDING REQUIREMENT FOR SELECTED BANKS IN KADUNA METROPOLIS

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. For instance, vdifferentvbanksvhavevsufferedvloss by granting loans 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.