Collateral Observations · No. 3
Two values, not one
A US appraisal reports one number: market value on a single date. German lenders have reported a second number for over a century, the value a property can be expected to fetch at any point over the life of the loan. Since January 2025, EU bank capital rules ask for a value built on the same idea. Should US lenders see a second number too?
Key points
- Germany reports two values. Market value, plus a mortgage lending value that strips out temporary swings and speculation. Only loans up to 60% of the lower figure can back a covered bond.
- The EU now asks for a prudent value. Since January 2025, banks value real estate collateral without expected price growth, and never above market value.
- The record is good, not clean. No Pfandbrief has defaulted. German lenders still took heavy losses on US office loans in 2023 and 2024.
- A US second number would test the debt. A debt-supported value shows what the income will carry at current loan terms. In ARC's ongoing study of 330 reviewed appraisals, more than half concluded above it.
Germany: the mortgage lending value
The Beleihungswert dates to the Mortgage Banking Act of 1900. Today the Pfandbrief Act and the Mortgage Lending Value Regulation (BelWertV) set the method. It strips out temporary market swings and speculative elements. The rules are mechanical on purpose.
| Rule | What the BelWertV requires |
|---|---|
| Income governs | The income value is decisive and, as a rule, may not be exceeded. |
| Cap rate floor | Commercial: at least 4 points over the 30-year German federal bond yield. Residential: at least 3 points. |
| Expense floor | Deductions of at least 15% of gross income. Commercial vacancy allowance at least 4%. |
| Safety margins | At least 10% off the comparison and cost indications. |
| Lending limit | Only the part of a loan up to 60% of this value can back a mortgage Pfandbrief. |
The EU: a prudent property value
Since January 1, 2025, Article 229 of the EU Capital Requirements Regulation sets the value banks use for real estate collateral.
- No price growth. The value excludes expectations of price increases.
- Sustainable. It is adjusted when market value runs well above what is sustainable over the loan.
- Capped. Never above market value. Upward revisions are held to an eight-year average for commercial property.
Both systems ask what the collateral is worth across the life of the loan, not on one day.
Does it make lending healthier? Mostly.
The record. No Pfandbrief has defaulted under the Pfandbrief Act or the Mortgage Bank Act before it. Germany had no 2008 housing bust. Its biggest property-bank rescue that year, Hypo Real Estate, failed on short-term funding at its public-finance arm, not on mortgages.
The limits. The rules protect bondholders more than banks. Only the slice of a loan up to 60% of the lending value backs the bond; the rest of the loan and the bank's equity take the first loss. German lenders financed US offices before rates rose and office demand fell. At Aareal Bank, about €1 billion of a €4 billion US office book was non-performing at the end of 2023.
The cost. Lower values mean smaller loans and more equity, most of all in a boom. That is the design. Housing supply also explains much of German price stability, so the value is one cause among several.
A value built to hold still guards against a bubble. It does not test a rate shock. That is the gap a second US number would fill.
One US value, and what a second would show
US rules define market value as the most probable price “as of a specified date.” That is the right question for a sale. A lender also asks whether the income will carry the loan when it must refinance. The report does not answer it.
A debt-supported value answers it at stated loan terms and a coverage test. It is not the German figure: it moves with rates, where the Beleihungswert is built to hold still. It asks the same lender question in US loan terms.
$10 million appraisal, 6.6% cap rate
| Value | |
|---|---|
| Market value, as reported | $10,000,000 |
| Net operating income | $660,000 |
| Maximum loan, 1.25x coverage at 6.85%, 25 years | $6,310,603 |
| Debt-supported value, 75% loan to value | $8,414,138 |
| Gap | $1,585,862 (15.9%) |
The gap is typical. In ARC's ongoing study of 330 reviewed appraisals, more than half concluded above their debt-supported value. Those that did ran a median 15% above it. A loan at 75% of market value here covers its debt service 1.05 times.
Debt analysis is not part of U.S. appraisal practice, and it falls outside the scope of ARC's reviews. We track it as an internal study. Figures are machine-read and spot-checked.
A proposal for discussion
- Keep market value. It stays the basis for regulatory loan to value limits.
- Add a second number beside it. A debt-supported value on the face of commercial appraisals, with the rate, amortization and coverage used.
- Define it once. USPAP requires each assignment to identify its type of value. One standard definition keeps figures comparable.
- Let regulators recognize it. The Interagency Guidelines could name it as supplemental information for credit decisions.
Market value answers what the property would sell for. The lender also needs to know what the debt can carry.
Sources and limitations. German Pfandbrief Act; Mortgage Lending Value Regulation (BelWertV) of May 12, 2006, as amended October 4, 2022, English translation published by the Association of German Pfandbrief Banks (vdp); EU Regulation 575/2013, Article 229, as amended, applicable from January 1, 2025; 12 CFR 34.42(h); vdp, security of the Pfandbrief; Aareal Bank 2023 results as reported by REFIRE, March 7, 2024; Business Standard, October 6, 2008, on Hypo Real Estate.
A summary for discussion, not legal advice; check the governing texts before relying on any rule. The illustration is hypothetical. These are observations; they are not appraisals, value opinions, credit analysis or investment advice.