Mortgage crediting
Mortgage crediting
Mortgage crediting – to great extent new
for our country type of banking services, and there are serious obstacles,
which impede its development
The purposes and problems in my thesis work
involve the stage analysis of mortgage process for estimation legal side of
Russia mortgage, study the factors influence on the reduction credit risks.
This work could not be prepared without of
a number of persons. I would like to say special word of thanks to Anders
Dahlquist-Sjöberg, LLD for his guidance, providing the ideas, which become
the base of the structure of the thesis. I would like to say for the Land
Management administration especially to Anders Graad, who has managed the
practical materials.
I am very thankful for the possibility
given by Sida through the Master of Science in Land Management programme, to
come to Sweden and study at the Royal Institute of Technology.
Introduction
As the mortgage operation creates an
essential contribution to the development of real estate market the impotence
of real estate credit is obvious. It might be used for involvement of
additional investment to the different branches of economy: to agriculture,
commercial activity, housing etc.
In the modern terms of general stagnation,
crisis of non-payments and especially of bankruptcies of enterprises, from one
side, and sharp necessity in renovation and technical re-equipment of
production , from other side, the mortgage becomes the sole decision of
problem.
The system of mortgage crediting for the
Russian enterprises , which possess as a rule enormous fixed assets, from my
point of view, represents not only acceptable, but solely possible in the
present conditions.
The purposes and problems in my thesis work
involve the stage analysis of mortgage process for estimation legal side of
Russia mortgage, study the factors influence on the reduction credit risks. I
will emphasise on the home mortgage, because this kind of mortgage occupies
leading position in this section.
The thesis work consists of three main
chapters, introduction and conclusion.
The introduction deals with the topicality
of the subject matter, purposes and problems posed therein and contents of the
thesis.
The first chapter “The essence of mortgage
crediting” gives a general historical outlook of mortgage lending development
and the reasons of necessity to introduce it in the modern Russia.
The essential second part of thesis deals
with the current legal base on real estate issues and the possibilities to
introduce mortgage lending to the bank activity.
The third part “ The problems and
perspective of development of hypothecate crediting” describes the
international experience in this field. The purpose of this to give overview of
loan contracts in several countries and to describe American models of
hypothecation, which are the most widely used in our mortgage system. Also this
chapter is focuses on the existing problems of the mortgage lending and ways their
optimal solving.
Chapter 1. The essence of mortgage
crediting
1.1. The necessity of mortgage crediting
The establishment of market economy is
impossible without attraction of the population masses to the business and
production activity, and such forms of crediting investment, which will have
not only urgent, paid and returnable character but the mass character, will
have the priority development.
As far as the collateral is necessary
condition for market crediting, and the main part of the population of the
country did not possess at the beginning of the reforms and do not possess at
the present time the large real monetary accumulations and considerable movable
property, so the mortgage becomes the sole variant of getting credit .
The expectation of activity of investment
process is strong as never before for the last years. In this case for
restoration of the economy of the country the long-term credits are necessary,
because it seems that the period of recovery will be long. In the situation
when the wave of unpaid credits overwhelmed the banking system the presentation
by the borrower of the most reliable guarantees of repayment of the loan in the
time of debentures gets the determined meaning in the case of resolving of the
question of granting credit. One of the most reliable means of collateral is
real estate, which becomes the subject of collateral in the case mortgage
crediting. In the case of appropriate care the real estate and the land almost
never lose its value and on the contrary in the future its price will increase.
The actuality of this type of credit
consists of the fact that in the terms of the deep crisis of the production and
of the economy of the country as a whole, it is possible that the sole way for
the national enterprises, which majority is at the edge of bankrupt, to get
long-term credits is the mortgage of real estate belonged to them.
In the case of sharp shortage of financial
sources of housing construction the necessity in dwelling increases for the
account of inflow to Russia of refugees from near abroad and the change of
location of troops.
In these conditions the objective necessity
in long-term credits granted to the population for housing construction occurs
which are not subject considerably to the inflation and which are assured in
maximum form from the point of view of their return. Namely the mortgage credit
is in conformity with these requirements, which is assured by the collateral of
real estate.
The main purpose of creditor is receipt
from borrower of the most reliable guarantees of loan return in the time of
fulfillment of debentures. It is naturally that the creditor must in the first
place have the strict information of financial position of the borrower, check
his paying capacity, the condition of his property, the availability of debts
and so on. But all that is not sufficient, especially, if the long-term
crediting is considered. The mortgage is more reliable form of guarantee (in
contradistinction to individual form – warranty) of payment of loan under real estate
which owner is not deprived of the right to manage it; the mortgage gives the
creditor the right to collect and to sell the property of the borrower in the
case of non-payment of indebtedness in the time of fulfillment of the
obligation.
In the terms of general stagnation, crisis
of non-payments and especially of bankruptcies of enterprises, from one side,
and sharp necessity in renovation and technical re-equipment of production,
from other side, the mortgage becomes the sole decision of problem for enterprise.
Now the banks are ready to give credits for production only in the case of
availability of reliable guarantees of loan return.
The system of mortgage crediting for the
Russian enterprises, which possess as a rule enormous fixed assets, from my point
of view, represents not only acceptable, but solely possible in the present
conditions. The enterprises need for restoration of production in the first
place the renovation of means of production in accordance with modern
technologies. And for realisation of such modernisation the considerable
long-term and relatively cheap credit resources are necessary. The mortgage
credit is in conformity with such conditions.
The history of establishment and the
experience of mortgage crediting in Russia.
The combination of experience of mortgage
crediting of expenses for purchase of land before revolution with the practice
of individual crediting of dwelling construction in the soviet time is the
reliable theoretical foundation for development of recommendations on mortgage
crediting at the present time.
In Russia the first mortgage organizations
appeared in the second part of XVIII century. In contradistinction to the other
countries where the land was the subject of mortgage, in Russia the subject of
mortgage were serfs. In 1860 the state mortgage credit organizations which
existed before reforms were liquidated. After cancellation of serf right by the
decree of the tsar Alexandre II the commission for development of the mortgage
law was organized on which basis the mortgage banks of different form of
property began to arise. However the private banks had the problem of resources
attraction for a long period of time, and in connection with that the necessity
in the state guarantees on attraction of such means appeared. The state took
measures operatively for increase of liquidity of mortgage bonds: the persons
who had them got the possibility either to use them as collateral in the
purpose to get credit or to sell them.
It is important that the section appeared
in the banking legislation, which regulated the activity of mortgage credit
organizations, and then this legislation was divided into two parts: one – for
commercial banks, which were considered as the banks of short-term crediting,
the other – for mortgage banks, which acted on other principles.
The establishment of mortgage credit after
1861 was stipulated by the needs of landowners holding, which faced the
difficulties of the “reconstruction” in the period of reforms. The noblemen
preserved their rights on real estate, but they did not have large capitals.
The need of landowners in means was satisfied for account of land long-term
crediting.
The considerable demand on mortgage loans
was also in the cities among the house-owners from petty bourgeoises and
merchants. The development of trade and business activity, the increase of the
offers of stock values in connection with the wave of joint stock foundation,
required the large cash means.
In the middle of 60 years of XIX century
the mortgage organizations began to appear in Russia, which were founded on the
capitalist principles of functioning. At the end of 80 years the system of
mortgage credit was built, which consisted of corporation, mutual and joint
stock, private and state credit organizations. This system enveloped the
territory of the whole European Russia.
The mortgage banks granted long-term loans
(till some decades) under the collateral of real estate: private lands in the
country and houses (constructions) in the cities. The banks accumulated the
means for granting credits for account of issue of mortgage bonds – mortgage
sheets. These bonds were supported by the property pledged as security in the
bank.
The amount of interest, which was paid by
the borrowers to the bank for granted loan, exceeded the amount of the
interest, which was paid by the bank to the holders of mortgage sheets. This
difference was the main source of the bank profit. The amount of issued into
circulation mortgage sheets should not exceed the joint stock and the stock capital
more than in 10 times.
The joint stock land banks tried to develop
the mortgage crediting also in the cities. However the government limited in
the interests of landowners its operations in the cities in the frames of one
third of the total of unpaid loans.
The joint stock land banks realized its
activity with support and under control of the government. The body, which
effected the immediate control over the bank activity, was special office on
credit affairs of the Ministry of finances. The government realized the control
over issuing of shares and mortgage sheets, provided coordination of private
banks with state - Noble and Peasant – banks.
The structure of the profit of the joint
stock land banks was typical. The long-term loans gave approximately half of
the profit, the short-term credits and the securities, belonged to the bank,
gave the other part of the bank profit.
The mortgage banks invested their capitals
in the state and assured by the government securities, and because of this fact
the demand on their mortgage sheets and shares was increasing constantly. The
demand on the shares grew also because of constant high dividends.
Creating mortgage organizations, the
government saw their tasks in the fact that the land and the city property,
attracted into the banking circulation, was transferred from “weak” to “strong”
owners, who could organize developed production and thus could serve for
increase of welfare of Russia. /11/
In Russia before the revolution the dynamic
market of houses was organized, which was based on strong crediting-financial
system, which was founded on pledges and promissory notes. None the less the
main object of the mortgage crediting was the land but not the dwelling. The
mortgage credit at that time as a rule was associated with land credit and was
granted by the different types of land banks, that is the mortgage without
dwelling dominated. On the contrary for the period after revolution the
granting of credit under dwelling, but without mortgage, was typical, because there
were not conditions for development of mortgage: the land – the invariable
factor of mortgage – was nationalized.
None the less, in the soviet period the
experience of dwelling crediting was formed in our country, which is in
principle the base of mortgage crediting. The practice of crediting of dwelling
construction in the USSR presents considerable interest. So for a long period
of time the organizations of the State Bank of the USSR granted long-term
credits to the population for cooperative and individual dwelling construction.
The typical feature of organization of individual dwelling construction was the
absence of immediate contact of the borrower with bank. The credits were
granted to the population not directly but through the organizations in which
the individual borrowers worked; the enterprises were guarantors of loans
return. The redemption was realized by deduction of payments for credit
directly from salary of the borrowers of their enterprises. The credits for
dwelling were not assured by real estate or other property, and withdrawal of
the property for realization in the purposes of redemption of loan was not
used.
In the future, with the reorganization of
the credit system, the range of the granted credits developed. The loans began
to be granted not only for individual construction of the house, but also for
purchase of dwelling, and for construction of second house. The question of
crediting of dwelling through construction cooperative societies was resolved.
The State Bank of the USSR had separate
elements in the organization of crediting of individual construction which were
typical for mortgage system. Particularly the connection of construction of
house with land was stipulated.
The practice of bank right protection
before the other creditors existed in the form of immediate redemption of the
loan from the value of the house. In the case of insufficient amount from the
sale of the house for covering the claim the receipt of necessary amount for
account of collection of other property of the borrower was stipulated. There
were features of mortgage accountability: in the case of full redemption by the
borrower of indebtedness before the bank or organization, though which the
crediting was organized, the notary was informed of the fact of cancellation of
prohibition on sale or transmission of the house. /9/
The limited combination of home experience
of mortgage crediting of expenses for purchase of land before revolution with
the practice of individual crediting of dwelling construction in the soviet
time is the reliable theoretical foundation for development of recommendations
on mortgage crediting in the transitional period.
Chapter 2.Construction of safe system of
crediting in modern Russia
Legislation on Mortgage Crediting
The present chapter describes legal
fundamentals of mortgage crediting in Russia, and also depicts the most
important changes in legislation on mortgage for the last years. At the same
time, I am trying to attract attention to main “perils” of considered legal
relations and specifies basic directions of their optimal overcoming.
The term “mortgage” in legal practice
usually covers two concepts:
1. “Mortgage” (as legal relation) is the
gage of a real estate with the purpose of receiving a mortgage credit (as a
rule, in a bank). For mortgage it is characteristic to leave property with the
debtor. Gage in civil right is one of methods to back obligations - in this
case of bank credit. In so doing, in all cases it is mandatory to register with
the State bodies the gage of any real estate. In case of insolvency of the
debtor, claims of the creditor are satisfied from the proceeds from sold
property with priority before other creditors or by transferring the
incorporated real estate in the property of the pledge.
2. “Mortgage” (as a security) means a
“bond” - debt tool certifying the rights of the pledge on a real estate.
Mortgage usually has a free circulation in the market.
Institute of mortgage has not received in
Russia considerable development till nowadays due to different encumbrances,
both economic and legal, therefore it is regulated by a rather small array of
normative acts.
To the most important of such acts refer
Federal Act of 1998 “On mortgage (gage of the real estate)”. General provisions
on gage, not defined in the indicated law, are contained in appropriate
articles of the Civil Code of the Russian Federation. Federal Act from 1997 “On
State Registration of Rights on Real Estate and of Transactions With It”
governs registration of real estate, the most important function of the state,
absence of which would make stable turnover of real estate completely
impossible.
Actual realization of bank’s rights on the
mortgage is possible within limits of the law “On execution”. Separate special
provisions, which nevertheless should be taken into account while making
conclusions on the mortgage agreements, are scattered as well in articles of
appropriate laws, such as, for example, the law “On companies of living
accommodation proprietors”. In the mortgage of housing accommodations it is
necessary to follow requirements of the branch housing legislation, including
Housing code of RSFSR, and as well laws and regulations on registration of
citizens in their places of residence. Members of the borrower’s family also
have rights, established by legislation and described in Family and Civil codes
of the Russian Federation. Special acts defend interests of infants, elderly
persons and disabled persons.
Up to the beginning the ninetieth years
mortgage practically missed. Temporary transfer of property rights on real
estate, being the object of mortgage, to the creditor, was a kind of
pseudo-mortgage. After settlement of accounts between the debtor and creditor
rights on the real estate were transferred back. It was necessary to pay twice
rather high State duties, levied from the borrower, and to be ready to run
risks connected with possible dishonesty of the creditor receiving rights on
real estate for undercharge. Besides, term of rights registration was rather
long. In these conditions the above described scheme badly protecting the
borrower, could not be distributed broadly. But also after legalization of the
mortgage as civilized legal institution, in 1992, contradictions between the out-of-date
branch laws did not give lawyers practical possibility to defend effectively
rights, but this time not of a borrower, but of the bank-creditor. /11/
There was an impassable gap between
“socialist” housing legislation and new Russian right.
Unfortunately, recent laws have only partly
corrected this intolerant situation. For example, before acceptance of the law
“On mortgage” there were no serious basis for ejection of insolvent debtor and
his family from the gaged flat. The bank could hope only on transferring
property rights with exception of the right of use or its limitation (depending
on the size of living space per tenant). Nowadays ejection is quite possible,
but under condition of... granting other living quarters in the same city - in
our it means in Moscow, - and with allowance for all existing sanitary
requirements.* There is no court practice on realization of the rights of
creditor banks in new legal conditions. Earlier collection on gaged flat could
be imposed only judicially. With the purpose of avoiding the indicated rule,
there was widely used practice of conclusion with insolvent borrower an
agreement “on buy off”. But from the moment of replacement of initial agreement
with a new one, the mortgage contract was terminated and there emerged
competition with other creditors. Not all banks took it into account and
bargains on purchase and further disposal of the real estate received by
agreement “on buy off” could be recognized invalid.
According to the new act “On mortgage”
contractual selling of real estate is possible.
The most important novelty of this law was
emerging “mortgage bond”-encumbrance as a kind of securities, freely
circulating in the market.** Though Commissions on Securities under President
still has not issued appropriate instruction, but at first glance, there are no
encumbrances for issue of mortgage bonds already nowadays. There is no need to
prove advantages of the mortgage over “simple” agreement on mortgage crediting.
Mortgage bond is a nominal security certifying right of its holder on
fulfillment of liability, backed by mortgage of property indicated in the
agreement on mortgage, without submission of other proofs of existence of this
obligation and the very
* Decree of the Moscow Government N365 from
the 25th of April 1995 “On
principles of mortgage crediting in
Moscow”.
** Chapter 3 of the Federal law N102-FL of
July 16, 1998 “On Mortgage”.
right of gage on property indicated in the
agreement on mortgage. The mortgage bond is issued to the initial pledge by
body conducting State registration of mortgage, after actual State registration
of the mortgage and is transferred by fulfillment of endorsement (partly
similar to bill, under condition of observance rules of state registration).
The mortgage ensures payment to the pledge
of capital amount of the debt under the credit agreement or other liability,
backed by mortgage, completely or in a part, foreseen by agreement on mortgage.
Table 1
Obligation Secured by Mortgage
Obligation
Secured by Mortgage
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