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.