(Bloomberg) -- Spain’s bank regulator warned that the country’s lenders could be underestimating the riskiness of the mortgages they issue, because the external firms on which they rely for property valuations aren’t always sufficiently independent.
The Bank of Spain in a June letter criticized the practice of requiring drafts before the final appraisals are issued, or providing previous estimates in a re-appraisal process. The regulator also highlighted commercial agreements between banks and appraisers as problematic, according to the letter, which was seen by Bloomberg News.
The central bank subsequently urged banks to fix any resulting issues, according to people with knowledge of the matter, who asked not to be identified because the conversations were private. A spokesperson for the Bank of Spain declined to comment.
The use of external firms to determine how much buildings are worth has long been a focus for regulators including the European Central Bank, the top watchdog in Europe. A drought in transactions, particularly in commercial real estate, has exacerbated the situation, with some lenders relying on outdated appraisals, Bloomberg has reported.
Some Spanish banks have privately criticized the letter as excessive, arguing that there aren’t any signs of a real estate bubble and that internal policies have improved significantly since the last crisis.
Spanish banks have been stepping up mortgage lending, handing out about €38 billion ($42.3 billion) in fresh loans in the first seven months of the year. That’s an increase of 14% on the same period in 2023.
Banks frequently use estimates from property valuers to help them decide how much collateral is worth. That’s a key process in steering their business, but the ECB has said that it’s a “blind spot” for many banks and cited weaknesses in the selection of appraisers.
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