The article is published in the Sept 2008 issue of Indian Valuer
MORTGAGE VALUATION AFTER THE ADVENT OF
SARFAESI ACT, 2002
B.P.Singh
MIE, FIV
INTRODUCTION
There is a strong relationship between Non Performing Asset (NPA) of a financial institution and the quality of valuation of the mortgaged asset underlying the debt. Poorer the quality of valuation higher the chances of NPA. This has been proved by the increasing stock of properties under the possession of the financial institution U/S 13(4a) of the Securitization and Reconstruction of Financial Assets & Enforcement of security Act, 2002 (SARFAESI Act, 2002) for sale. This is because in large number of cases the price offered to the financial institution in open market for these assets is much lower than the value determined by the valuer at the time of credit appraisal and due to this reason they defer the sale of the mortgage asset to avoid controversies and litigation from the borrowers. In many cases the officers of the financial institutions have been alleged of selling the asset on lower value than the value accepted at the time of loan and litigations on this account are piling up. Although, the financial institutions are required to get a fresh valuation of the asset as per the prevailing market condition before affecting the sale to fix the reserve price under the provision of sub- rule(5) of rule 8 of The Security Interest (Enforcement) Rules,2002 and to decide the sale of asset in light of fresh value. But sometimes the price offered is still found lower than the fresh value determined by the valuer.
This difference in value offered by the market to the financial institutions and value determined by the valuer is due to the prevalence of underground economy and black money in the economic system of the country. Some valuers don’t appreciate this fact and determine black market value, comprising black and white components of the value of the asset, which is always higher than the mortgage value.
CONCEPT OF MORTGAGE VALUE
Mortgage value of any asset is the value which the mortgagee can fetch from the open market on putting the asset for sale after proper publicity/marketing. The mortgagee ie the financial institutions transact only in white money, which reduces their market size thereby reducing the value which is offered to them.
CONCEPT OF BLACK MARKET VALUE
Black market value of any asset is the value which has components of white and black money both. A part of transaction is done in white money and balance in black money. This black money is generated in the system due to the avoidance of applicable taxes and/or regulations of trade and being used mostly in the transactions of immovable assets.
CONCEPT OF DISTRESS SALE VALUE
Distress sale value of any asset is the value which it fetches from the market, when there is an element of compulsion on seller to sell the same with in a short period without exposing it to market condition for a reasonable period of time. Therefore, the distress sale value is different than the mortgage value because in case of sale of asset under the provisions of SARFAESI Act, 2002 the assets are exposed to the market conditions for a reasonable period and there is no compulsion on the financial institution to sale the asset in a hurry.
FACTS TO BE KEPT IN MIND WHILE CONDUCTING MORTGAGE VALUATION
While conducting mortgage valuation, the valuer has to keep in mind the purpose of valuation that means he has to ascertain that value, which the financial institution can fetch from the market in white money on putting the property for sale to recover their dues. The condition of only white money transaction reduces the market size considerably as this restricts those buyers who have meager white money, though they have sufficient black money to offer. Further arranging white money has a cost of its own. In addition to that higher amount of money is required for stamp duty and registration of the asset due to discloser of actual transaction to the registering authorities. Besides this under the provisions of SARFAESI Act, 2002 generally the purchasers has to make the full payment within fifteen days of confirmation of sale failing which the Earnest Money Deposit of the intending purchaser is forfeited. The stigma of failure of borrower has also some negative impact on the asset.
However, factors like ownership whether single or joint, tenanted or owner occupied have no negative impact on mortgage value of an asset and need no adjustment in the value on this account. In case the occupant of the mortgage asset, owners or tenants, resist in giving the possession of the property to the financial institution then under the provision of Section 14 of SARFAESI Act, 2002 the District Magistrate or Chief Metropolitan Magistrate within whose jurisdiction such secured asset is situated are duty bound to take over the possession of the mortgaged property by force and the sale deed is executed by the financial institution in favour of the purchaser.
PRECAUTIONS TO BE TAKEN DURING INSPECTION FOR MORTGAGE VALUATION
- Mortgaged valuation must be done only on the request of the lender/financial institution and title document/ document required for proper identification of the property must be taken from them only not from the borrower to avoid any fraudulent attempt by the borrower to mislead the valuer.
- Though the responsibility of title examination lies with the lender but a common prudence must be applied in this regard by the valuer as well. However, in the valuation report it must be clearly mentioned that the valuation has been done by assuming clear and marketable title of the property.
- Physical inspection of the property must be conducted by the valuer himself.
- Responsibility of identification of the property lies with the valuer. Therefore due care must be taken in identifying the mortgaged property. If possible the inspection must be conducted in the presence of the borrower/property owner/credit manager of the lending institution and there photograph may also be taken with the property.
- To ascertain the boundaries of the property, magnetic needle/compass must be used to know the direction.
- It must be ensured that the valuation of only that structure is done which is standing on the mortgaged premises.
- Valuer must observe the surrounding carefully to know about any major event or factor which may affect the value of asset/interest of the lender.
CONCLUSION
From the above analysis it is evident that the mortgage value of any asset is the value which a mortgagee can fetch from the market on putting the asset on sale in case of default of the repayment of financial assistance and always lower than the fair market value (generally the black market value) of the asset. Therefore a judicious adjustment shall be made to modify the value considering only white money transaction.
