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A Demand - and Supply- Side Constrained Model for Liquidation Value and Related Exposure Periods

Vladimir B. Michaletz, Andrey Artemenkov
Real Estate Management and Valuation , Volume 26, pp 48-59; doi:10.2478/remav-2018-0015

Abstract: Two problems appear to be most topical in conjunction with mortgage valuation practices during an economic crisis: the assessment of sustainable long-term mortgage values and the assessment of liquidation discounts to prevailing market values which would provide for the most advantageous liquidation/quick sale strategy. This paper addresses the latter issue, which has traditionally proven intractable to analytical modeling. Apart from reviewing some research devoted to the subject of liquidation value modeling, predominantly from the Eastern European perspective, where this issue has, for years, commanded a particular economic interest, this paper synthesizes the best features of this research and builds on it to propose its own model, which lays equal emphasis on both the sellerside and demand-side perspectives. The first perspective accounts for the financial interests of a lender in forced sale disposals, while the latter perspective engages economic analysis on the side of market feasibility of identified efficient lender disposal strategies. By negotiating both perspectives, an optimal analytic solution to the issue of liquidation value discounts can be obtained. This is achieved by what we call a SI-MI framework which is developed throughout the paper. We also adapt this framework specifically to the mortgage banking context where we use it to bring to light some rarely discussed linkages between the LTV policies of a bank and its mortgage liquidation strategies. This also allows us to propose a model and an LTV formula which can help organize thinking about optimal LTV policies in credit issuing processes. We hope that, with the re-appearance of liquidation value basis/premise of valuation as a recognized international basis of valuation in the new edition of the International Valuation Standards (IVS 2017), the findings of this paper will become topical.
Keywords: Modeling / market / mortgage / optimal / discounts / adapt / Liquidation Value / Ltv / Builds

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