Real Estate Exposure Class

The LTV is the amount of the loan divided by the value of the property. When calculating the LTV, the loan amount will be reduced as the loan amortizes. The value of the property will be maintained at the value measured at origination, with the following exceptions: 1. SAMA may require banks to revise the property value downward. If the value has been adjusted downwards, a subsequent upwards adjustment can be made but not to a higher value than the value at origination. 2. The value must be adjusted if an extraordinary, idiosyncratic event occurs resulting in a permanent reduction of the property value. 3. Modifications made to the property that unequivocally increase its value could also be considered in the LTV. 7.67 The LTV must be prudently calculated in accordance with the following requirements: 1. Amount of the loan : Includes the outstanding loan amount and any undrawn committed amount of the mortgage loan 23 . The loan amount must be calculated gross of any provisions and other risk mitigants, except for pledged deposits accounts with the lending bank that meet all requirements for on-balance sheet netting and have been unconditionally and irrevocably pledged for the sole purposes of redemption of the mortgage loan. 24 2. Value of the property : The valuation must be appraised independently 25 using prudently conservative valuation criteria. To ensure that the value of the property is appraised in a prudently conservative manner, the valuation must exclude expectations on price increases and must be adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan. 26 7.68 A guarantee or financial collateral may be recognized as a credit risk mitigant in relation to exposures secured by real estate if it qualifies as eligible collateral under the credit risk mitigation framework ( chapter 9 ). This may include mortgage insurance 27 if it meets the operational requirements of the credit risk mitigation framework for a guarantee. Banks may recognize these risk mitigants in calculating the exposure amount; however, the LTV bucket and risk weight to be applied to the exposure amount must be determined before the application of the appropriate credit risk mitigation technique. Definition of “regulatory residential real estate” exposures 7.69 A “regulatory residential real estate” exposure is a regulatory real estate exposure that is secured by a property that has the nature of a dwelling and satisfies all applicable laws and regulations enabling the property to be occupied for housing purposes (i.e. residential property). 28 Definition of “regulatory commercial real estate” exposures 7.70 A “regulatory commercial real estate” exposure is regulatory real estate exposure that is not a regulatory residential real estate exposure. Definition of exposures that are “materially dependent on cash flows generated by the property” 7.71 Regulatory real estate exposures (both residential and commercial) are classified as exposures that are “materially dependent on cash flows generated by the property” when the prospects for servicing the loan materially depend on the cash flows generated by the property securing the loan rather than on the underlying capacity of the borrower to service the debt from other sources. The primary source of these cash flows would generally be lease or rental payments, or the sale of the property. The distinguishing characteristic of these exposures compared to other regulatory real estate exposures is that both the servicing of the loan and the prospects for recovery in the event of default depend materially on the cash flows generated by the property securing the exposure.