The legal framework for mortgages and mortgage securities mortgage and mortgages for framework legal in transition economies – The Mortgages Mortgages in transition economies The legal framework for mortgages and mortgage securities

European Bank for Reconstruction and Development One Exchange Square London EC2A 2JN United Kingdom

Tel: +44 20 7338 6000 Fax: +44 20 7338 6100 Web site: www.ebrd.com

Requests for publications Tel: +44 20 7338 7553 Fax: +44 20 7338 6102 Email: [email protected] About this publication

The European Bank for Reconstruction and of the Swiss State Secretariat for Economic Development (EBRD) seeks to foster the transition Affairs (SECO). Although great care has been from centrally planned to market economies taken to provide accurate information, it does not in its 29 countries of operations. This includes constitute legal advice, and parties to mortgage encouraging countries to improve their legal transactions should seek their own advice. environments by modernising their legal rules In preparation for this publication, the EBRD and institutions. conducted a survey of mortgage laws in 17 This publication aims to identify what legal reform transition countries that have an active mortgage is needed to achieve an efficient legal framework finance market or that are actively developing for mortgage. It was prepared by the EBRD’s Office such a market. The survey can be extended of the General Counsel with the generous support to other countries.

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EBRD countries of operations © European Bank for Reconstruction and Development, 2007 One Exchange Square 01 Albania 09 Estonia 17 Moldova 25 Slovenia London EC2A 2JN United Kingdom 02 Armenia 10 FYR Macedonia 18 Mongolia 26 Tajikistan Web site: www.ebrd.com

03 Azerbaijan 11 Georgia 19 Montenegro 27 Turkmenistan Although great care has been taken to provide accurate information, nothing in this document constitutes legal advice and parties to mortgage transactions should seek their own legal advice. 04 Belarus 12 Hungary 20 Poland 28 Ukraine All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, 05 Bosnia and Herzegovina 13 Kazakhstan 21 Romania 29 Uzbekistan without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored 06 Bulgaria 14 Kyrgyz Republic 22 Russia in a retrieval system of any nature. Designed and produced by Gargoyle – ref: 7093 Mortgages in transition economies (E) – December 2007. 07 Croatia 15 Latvia 23 Serbia Cover printed on Core Gloss; text pages printed on Core Silk. The paper used in this report is manufactured to the strictest environmental standards from Elemental Chlorine Free pulps in a mill which holds ISO 14001 certification and EMAS (Verified Environmental Management) accreditation. 08 Czech Republic 16 Lithuania 24 Slovak Republic Printed in England by Bishops Printers using their environmental print technology. The printing inks are made using vegetable-based oils. No film or processing chemicals were used.

Countries covered by the EBRD Mortgage Regional Survey are shown in dark green. Cover photography: BSR Europe Mortgages in transition economies The legal framework for mortgages and mortgage securities

Contents

Acknowledgements and sources 2

Part I: Introduction 4

Part II: Legal efficiency 7 1 The economic and historic context 7 2 Legal efficiency criteria 9

Part III: Mortgage law 11 1 Legal basics – core principles 11 2 Creation of mortgage – overview 12 3 Creation of mortgage – specific legal issues 14 4 Enforcement of mortgage – overview 24 5 Enforcement of mortgage – specific legal issues 26

Part IV: Mortgage Regional Survey and comparative overview 32 1 Survey description 32 2 Basic legal function of a mortgage law 33 3 Maximising economic benefit 35 4 Legal efficiency indicators – composite table 40

Part V: Mortgage securities 41 1 Mortgage securities in transition economies 41 2 Legal basics – covered bonds 44 3 Legal basics – mortgage-backed securities 47 4 Specific legal issues 50

Part VI: Conclusions 54

Annexes 1 EBRD Core Principles for a Mortgage Law 56 2 Mortgage Regional Survey – composite table 58 3 Mortgage Regional Survey – explanatory notes 63 4 Terminology 67 5 Selected bibliography 68

Full list of contents 70  Mortgages in transition economies

Acknowledgements and sources

The EBRD wishes to thank all those who have generously Estonia provided their time, views and experiences on mortgage SEB Eesti Ühispank, Kristiina Kruus lending. The EBRD has been privileged to receive the Tark & Co, Hannes Vallikivi outstanding support of many people in its research, France which has greatly enriched the quality of the data and Notaires Paris Ile-de-France understanding of mortgage markets in established and emerging markets. However, this publication and any Georgia other materials deriving from the work should in no Bank Republic, Giorgi Kerkadze way be seen as reflecting their views or experiences. Bankakademie, Frankfurt, SELP Programme Georgia, Michael Kortenbusch All errors and omissions are the authors’ only. Special thanks go to Katarína Kraková for dedicated Germany Association of German Pfandbrief Banks, Otmar Stoecker, assistance during all the preparatory work. Andreas Luckow, Kerstin Stünkel Eurohypo AG, Jochen Menzen Federal Chamber of Notaries, Wolfgang Rösing Bulgaria Freshfields Bruckhaus Deringer, Martin Wiemann, Gordon Geiser, Djingov, Gouginski, Kyutchukov & Velichkov Law Office, Dana Kaufmann, Henning Sieber Stephan Kyutchukov, Jasmina H. Uzova White & Case LLP, Tom Oliver Schorling Penkov, Markov & Partners Law Office, Vladimir Penkov, Ivan Markov, Gavrail Hrusanov Hungary ProCredit Bank, Dessislava Jeliaskova Law office of Gárdos, Füredi, Mosonyi, Tomori, István Gárdos Spasov & Bratanov Lawyers’ Partnership, Vassil Hadjov OTP Mortgage Bank Ltd., Zsuzsanna Koszta United Bulgarian Bank, Vania Piskova, Vladimir Pavlov Kazakhstan Croatia BTA Ipoteka, Mortgage Organisaton AO, Gulzhanar Yenkebaeva Auctor, Michael Glazer GRATA Law Firm, Amir Tussupkhanov Croatian Notaries Chamber, Ivan Malekovic´, Lucija Popov, JSC Alliance Bank, Kamilya Ibraeva Slavko Remenaric´ Croatian Financial Services Supervisory Agency, Ivo Šulenta Kyrgyz Republic Croatian National Bank, Evan Kraft, Olga Pajnic´, Pavka Slamic´ Bai-Tushum Non-Banking Microfinance Institution Erste & Steiermärkische Bank d.d., Ilijana Jelecˇ Demir Kyrgyz International Bank Hrvatska poštanska banka, d.d., Mladen Mirko Tepuš Kyrgyz Investment and Credit Bank International Finance Corporation, Magdalena Šoljakova Kunstek Halle & Šimac Law Office, Ivan Šimac Latvia Ministry of Justice, Boris Koketi Rietumu Banka, Eduards Elksnis Ministry of Justice and State Geodetic Administration, Real Property Registration and Cadastre Project, Sanja Vurin, Lithuania Igor Kreitmeyer Jurevicius, Balciunas & Bartkus, Professional Law Partnership, Šavoric´ & Partners Law Firm, Boris Šavoric´ Iraida Zogaite, Nijole Vaiciunaite Société Générale – Splitska Banka, d.d., Emanuel Kovacˇic´, Lideika, Petrauskas, Valiunas & Partners LAWIN Law Office, Biserka Bingula Dovile˙ Burgiene˙, Giedrius Stasevicˇius World Bank, Karin J. Shepardson, Vera Dugandžic´ Šiauliu˛ bankas AB, Giedrius Sarapinas Zagrebacˇka banka d.d., Ivan Bušurelo The Netherlands Czech Republic ABN AMRO Hypotheken Groep, Meindert Willems Bakeš & Partners Law Office, Milan Bakeš, Radim Bohácˇ NautaDutilh N.V. Law Office, Teun H.D. Struycken Cˇeská sporˇitelna, John James Stack, Petr Liska, Živa Böhmová Rabobank Nederland, Jan Willem Aarts European Property Development, Stephan Gietl, Samuel Havlik Stek, Laetitia den Teuling, Maarten van der Graaf Acknowledgements and sources 

Poland Ukraine BPH Mortgage Bank S.A., Artur Je˛drych Access to Credit Initiative, USAID Ukraine and Moldova, BRE Bank Hipoteczny, Izabela Makowska The Pragma Corporation, David C. M. Lucterhand Clifford Chance, Janicka, Namiotkiewicz, De˛bowski i wspólnicy sp.k., Baker & McKenzie – CIS, Limited, Serhiy V. Chorny, Glib V. Bondar Marta Bieniada, Irena Floras Establishment of Mortgage Market Rules and Legislation in Ukraine, EU funded Tecnitas project, Pierre-Yves Divisia, Romania Leif Andersen Nicoleta Luminita Mihalache Information Centre, State Enterprise of the Ministry of Justice Alpha Bank Romania, Radu G. Ghetea, Sergiu Oprescu, of Ukraine, Larisa V. Afinogenova, Liliya Oleksiuk Beatrice Popescu, Catalina Baltag International Mortgage Bank, Gennadiy Semenov Banca Comerciala HVB Tiriac, Eliza Radu Erhan, Daniela Raducau VTB Bank, Anatolyi Zhukov Chamber of Notaries, Dumitru Viorel Manescu, Doina Rotaru, OTP Bank Ukraine, Oleg Zamorsky, Oleksander Shkrebtienko Remus Ion-Zamfirescu Raiffeisen Bank Aval, Angela Prigozhina Deloitte Romania, Dragos Neacsu State Commission for Regulation of Financial Markets Services Domenia Credit, Carmen Retegan of Ukraine, Andriy Y. Olenchyk, Iryna V. Sokolova, Nadiya Zhyla, Linklaters Miculiti, Mihai & Asociatii Law Office, Adrian C. Bulboaca, Oksana Stupak Bogdan G. Bibicu, Cosmin Stavaru State Mortgage Institution, Sergiy Moskalenko, Iryna Kravets Ministry of Finance, Stefan Nanu Ukrainian National Mortgage Association, Anton Sergeev, Mortgage Elite Servicii Financiare, Ioan Bejan Arsen Nizelsky National Agency for Cadastre and Land Registration, Robert Tatu, UkrSibbank (BNP Paribas Group), Irina Sinyakevich, Igor Grygorov, Mihai Busuioc, Mircea Viorel Popa, Marcel Grigore, Adriana Padureanu Mykhaylo Kurochka National Bank of Romania, Angela Dimonu, Dana Cristina Ilie, Ukrsotsbank, Roman Tischenko, Yuliya Kyrpa Angela Monica Margarit Nestor Nestor Diculescu Kingston Petersen Attorneys & Counselors, United States Manuela M. Nestor, Costin Teodorovici University of Pennsylvania, Wharton School, Law School, Reff & Associates SCA, correspondent law firm of Deloitte Romania, Marja C. Hoek-Smit, Georgette Chapman Phillips Andrei Burz-Pinzaru Romanian National Securities Commission, Victor Eros, Raluca Tariuc, International and regional organisations Catalina Iordan, Oana Marinoiu European Mortgage Federation European Federation of Building Societies, Christian König Russia World Bank Group Chadbourne & Parke LLP, Laura M. Brank Gorodskoy Ipotechny Bank, Rouslan Iseev International Finance Corporation, Russia Primary Mortgage Market Development Project, Andrey Milyutin Pepeliaev, Goltsblat & Partners, Vitaly Mozharowski, Maxim Popov

Serbia ProCredit Bank, a.d., Mirjana Zakanji Raiffeisen banka, a.d., Ljiljana Turopoljac Wolf Theiss, Belgrade, Bojana Bregovic

Slovak Republic Linklaters Bratislava, Zora Mistríková, Emília ˇCaprndová Tatrabanka, a.s., Tatjana Slízová Všeobecná úverová banka, a.s., Milica Harvanová

Slovenia Law firm Colja, Rojs & partnerji, Grega Peljhan Jadek & Pensa Law Office, Boštjan Špec, Polona Fink  Mortgages in transition economies

Part I: Introduction

In central and eastern Europe and registration combined with uncertainty Mortgage law reform is not necessarily central Asia, access to private home over restitution rights limited the scope high on the agenda for many transition ownership is a relatively recent for using real property as security for countries.5 Taking security through phenomenon, principally as a result credit. Although mortgage over real mortgage is not a new concept – of the privatisation policies of property was often the most favoured it has been used for a very long time, governments moving from a communist security for credit for all the classic including in transition economies – to a capitalist system. It is widely reasons, the security was generally and in most countries the market for seen as one of the keys to fostering tainted by lack of certainty of title of the mortgage finance is developing anyway, economic prosperity, political stability mortgagor (in other words, the person so debate around mortgage law and wider equality.1 With the rate of granting security) and the threat of concepts, or indeed any call for reform, private home ownership now exceeding competing claims to the mortgaged tends to be dismissed. There has been 80 per cent in many transition property. The development since then a good deal of reform activity concerning countries,2 it is evident that there of land registration systems across land law, title to real property and is a huge capital stock that can be many of the transition countries and registration, and now laws are being mobilised as collateral to secure the resolution of restitution claims has introduced to encourage the use of loans for financing not only property made mortgage a much more viable CBs and MBS (referred to together as acquisition but also improvements, form of security and has opened up “mortgage securities”), but the legal business activities or personal new possibilities for mortgage financing. provisions specifically covering consumption. In the business sector The considerable efforts that have mortgage as security have been largely a significant proportion of the assets been made to stabilise and modernise overlooked. And yet mortgage rules of many companies is in the form of the financial sector in the transition have not always developed in the most real property and can be used as a economies also expand the scope rational and legally efficient way. means of facilitating access to finance. and nature of new products that can At the start of the transition process, be developed. Mortgage financing has always been most of the transition countries a favourite form of financing for banks.3 Currently, mortgage activity is booming. provided for the possibility of taking The primary credit risk is supported by In particular, the use of mortgage security over immovable property, solid security that does not move and financing in residential housing markets usually on the basis of laws that had which normally maintains its value. is growing fast and is seen as having their origins in the pre-communist era. The incentive to avoid default is high, high potential for future growth. The The reform priority at that time was especially with residential property techniques for financing the providers to enable movable property to be used because a borrower will make every of mortgage loans have also changed as collateral. Not only was there an effort to avoid losing his home. But with an increasing interest in using the absence of rules governing security over mortgage markets are not only growing. mortgage loans themselves as collateral, movables, but also many borrowers did They are changing fast with more and whether for secured borrowing (with the not have suitable real property to offer more new mortgage products. On the mortgage lender issuing covered bonds as security. In the 1990s the EBRD legal front the challenge facing transition (CBs)), by divesting the mortgage loan and other sponsors of law reform in countries is not just to ensure a suitable portfolio through securitisation (with central and eastern Europe and central legal environment for established forms the acquirer issuing mortgage-backed Asia concentrated on encouraging of mortgages but also to have in place securities (MBS)). The European Bank the introduction of viable secured the rules and institutions that are for Reconstruction and Development transactions laws for movables.6 sufficiently adapted to the latest (EBRD) published a list of minimum However, although for pragmatic techniques of the market, and further standards for mortgage loans in May reasons the initial emphasis was very will be able to adapt to the new 2004, which are adopted by all financial much on pledges over movables, the techniques of tomorrow. And those institutions receiving mortgage credit EBRD approach has always been to techniques concern both the product lines from the EBRD – and by many treat mortgages as an integral part of that is offered to the customer and the others who see these standards as secured transactions and to apply the way it is financed. a basis for a proper risk management same legal principles (while recognising strategy and for ensuring that their that, in some respects, the mechanics In the early 1990s in the immediate portfolios can be attractive to investors may be different). aftermath of the communist era in in the future.4 However, improvements central and eastern Europe and central in lending procedures and policies and Asia, the legal problems surrounding a sound approach to mortgage lending real property ownership were numerous. cannot compensate for flaws in the The lack of reliable cadastral and title legal and institutional systems. Part I: Introduction 

The purpose of this work is to look before the end of 2007 a White Paper in the context of modern market at mortgage law as it is currently used on Mortgage Credit in the European practice (and predictions of future in transition countries against the Union, following the publication in July trends). Only then should the precedent background of contemporary markets 2005 of a Green Paper.7 The Green of laws of countries with more advanced for mortgage finance as they are Paper looked at ways in which greater mortgage markets be examined. Most developing globally. In particular we integration could result in a more mortgage laws were designed a long seek to: efficient and competitive mortgage time ago. Even where they have been credit market in the European Union. adopted recently they are based on ❚ focus on the economic objectives that From a legal perspective there is now much older laws, but the mortgage the law is to serve – the concept of extensive material available that markets of 2007 bear little relation “legal efficiency”, which is so often describes the structures used for to those of 50 or 100 years ago. lost in the legal reform process. For mortgage finance transactions, mortgages it is especially important Following this introduction this especially mortgage securities (see to distinguish the features of the publication is divided into five parts. the selected bibliography in Annex 5). regime that are serving an essential Part II gives a brief background on the However, for the transition country that economic function from those that economic context and introduces the wants to modernise its legal framework exist for historical reasons or to criteria that are used in assessing for mortgage there is a lack of circumvent restrictive or inefficient mortgage laws. It develops the concept comprehensive and objective guidance elements elsewhere in the legal of “legal efficiency” on which many of on the basic issues involved. It is that system. Any reform should be driven the recommendations and conclusions gap that this work aims to fill. by the needs of the market, not by are based. Part III analyses mortgage legal theory or legal history This work focuses on mortgage, the law, separating the issues between security that is given by contract over creation and enforcement. For both ❚ apply to the field of mortgage the real property, which is a core ingredient parts we give an overview of the legal lessons learnt by the EBRD through in any mortgage finance transaction.8 steps involved and then examine its extensive exposure to pledge Research indicates that the quality specific legal issues that are particularly law reform. The context for pledge of the law in itself influences lenders’ significant in practice to mortgage law reform has been different yet, appetite for mortgage lending. The finance transactions. economically speaking, pledge and Banking Environment and Performance mortgage fulfil the same purpose As part of the research leading up to Survey (BEPS), which was conducted by and it is illogical that the reform of this work the EBRD conducted a survey the EBRD and the World Bank in 2005, the legal framework for each should of mortgage laws in 17 transition has shown that when lenders perceive be conducted in isolation countries (the “Mortgage Regional the legal framework for mortgages as Survey”) and the findings of that survey ❚ provide a dispassionate analysis of being comprehensive, predictable and are presented in Part IV and set out in existing systems in transition countries. efficient, they are more likely to extend Annex 2. The methodology used was The EBRD has always aimed to put mortgage credit.9 similar to that of the EBRD Regional forward ideas that are compatible with It is not possible to comment on Survey of secured transactions, which the civil law concepts that underlie mortgage law without referring to many covers security over movable property many central and eastern European other areas of law, such as land law, and was first published in 2000. legal systems and, at the same time, but we try to do so only to the extent Part IV contains a commentary on the to draw on common law systems necessary to explain the issues that are survey and a comparative overview that have developed many ways of addressed in this work. And although we which helps to show the progress that accommodating modern financing look particularly at residential mortgage has been made in developing efficient techniques. The objective is to markets, we do not underestimate the systems for mortgage and the emphasise the results to be achieved, importance of commercial mortgages, weaknesses that still exist. Although while respecting that there may be which present very similar legal issues. not formally included in the survey we many routes to achieve them, and have also had regard to the legal regime highlight the opportunity that reform The legal framework for mortgage is, that applies in western economies can give transition economies to however, looked at comprehensively. with active mortgage credit markets, “leap frog” older markets. It is not just the law on the books, in particular England, France, Germany, but it also includes the way the law A vast amount of material has been the Netherlands and the United States. is applied, the institutions that apply produced in recent years concerning It is not the role of this exercise to it and, ultimately, the result that is mortgage markets in transition assess the legal efficiency of the delivered. The starting point for our countries and globally. The European mortgage system in those jurisdictions. analysis is to look at what is needed to Commission is expected to publish However, from the viewpoint of a provide an efficient security instrument  Mortgages in transition economies

transition country, it is interesting – approach may have concealed more and sometimes revealing – to look at market-oriented solutions that could Endnotes western systems against basic criteria. bring greater efficiency. There is an 1 See for example International Monetary This can help to determine those emphasis on the constant need for Fund (2006), Global Financial Stability elements that can be used as an transition countries to analyse and Report, Chapter II on Household Credit example or even a template, and those understand the legal framework for Growth in Emerging Market Countries, p. 69: “The healthy development of that are less suitable. mortgage, to correct any obvious household credit is likely to generate deficiencies and to regularly fine-tune important benefits for borrowers, lenders, Part V examines the legal framework the financial system, and the economy. the way the legal system operates for mortgage securities, concentrating It can also alleviate some of the current in order to ensure that it responds global imbalances. The resulting welfare on legal issues relating to mortgage to the needs of the market. The cost gains could be substantial. Therefore, law that affect the efficiency or even there is a need to encourage the sound and effort involved in doing that should development of this still-nascent market viability of mortgage securities. After a be relatively low, whereas the potential in Emerging Markets and developing brief look at the background to mortgage countries.” economic benefit in the medium securities and an overview of the legal 2 See European Mortgage Federation (2006) term to the country that follows that basics for CBs and MBS, there follows Hypostat 2005, A Review of Europe’s approach is doubtless relatively high. Mortgage and Housing Market, which an examination of certain legal issues indicates that this is the case in Bulgaria, that are of particular relevance when It is hoped that the Mortgage Regional Croatia, Estonia, Hungary, Latvia, Lithuania, Romania, Serbia and Slovenia. structuring transactions involving CBs Survey that is published as part of this and/or MBS. Finally, Part VI sets out work will provide a useful basis for 3 Mortgage is an ancillary right in immovable property entitling a creditor to recover some conclusions and recommendations. assessment and comparison and will his claim out of the mortgaged property. become a reference point that provokes In legal terms it is important to make the As in previous publications on secured distinction between the mortgage and the discussion and improvements to transactions of the EBRD, this loan that it secures (see the terminology mortgage laws, especially among those in Annex 4). publication is aimed at a diverse who make or influence legal reform 4 See the EBRD strategy for mortgage audience, and seeks to draw attention policy in the region, enabling them finance at www.ebrd.com/country/sector/ to, and increase the understanding fi/debt/products.htm and the List of to improve their mortgage laws in order of, issues that may have been passed Minimum Standards of Mortgage Loans to achieve “legal efficiency”. and Mortgage Manual, (July 2007) at over until now, or where a “lawyerly” www.ebrd.com/country/sector/fi/debt/ mortstan.pdf.

5 The term “mortgage law” is used to refer to the law governing mortgages as security and does not extend to the laws governing loans that may be secured by mortgages (see the terminology in Annex 4).

6 The EBRD published a Model Law on Secured Transactions and Core Principles for a Secured Transactions Law. Almost all transition countries introduced new legal provisions on pledge during the 1990s. See www.ebrd.com/st for further information.

7 See European Commission (2005) Green Paper Mortgage Credit in the EU.

8 This work does not deal with rights given by law to the providers of funds for the purchase of property.

9 See Transition Report 2006: Finance in transition, EBRD, Executive summary, and p. 63 ff. 

Part II: Legal efficiency

The economic and Naturally, transition countries are Mac and Ginnie Mae). These entities historic context keen to understand the factors that in turn financed their portfolios through 1 determine market growth for mortgage the issue of securities, which were The current volume of residential credit in advanced economies, and given a high credit rating not only mortgage lending in advanced consequently what may be needed to because of the underlying mortgage economies such as in the United encourage and maintain growth in their loan portfolio but also based on either Kingdom or Spain is impressive and own markets. In this respect the way an implicit or an explicit government there is every indication that there mortgage loans are funded is critical guarantee. By contrast, under the remains scope for further growth. and has recently been changing German model of Pfandbriefe, mortgage In the transition countries, current fundamentally. loans were retained on the balance volumes are lower but the rate of sheet of the lending bank but used as In many countries mortgage credit has growth is faster and the potential for security for bonds issued by the bank mostly been funded in ways that create future growth correspondingly greater. to finance its property lending business. no legal links between the mortgage Chart 1 shows the ratio of residential loans and the source of funding. The Behind the many permutations that mortgage debt to GDP in 2005 in 14 lender obtained funding from traditional may be offered to borrowers, the basic transition countries, the average being sources, such as customer deposits, mortgage product tends to remain, 7.5 per cent, against the average in the inter-bank borrowing or bond issues, in legal terms, essentially the same, EU-15 countries of 50 per cent. Chart 2 and the fund provider had no direct right involving a contract for credit secured on page 8 shows the growth of or interest in the mortgage loans for by mortgage over real property. Yet the residential mortgage debt between which the funds were used. However, specific features of domestic mortgage 2002 and 2005. The contrast is two models have been used which markets have influenced the shape of particularly striking for 2004-05, when facilitate funding by creating such a link. the mortgage product. Historically, it the average growth for the 14 transition has tended to be very country-specific. countries was 56 per cent against an In the US model, banks originated However, the global trend towards more average growth for the EU-15 countries mortgage loans but they were not kept open and more competitive markets of 9 per cent. Figures on commercial on the banks’ balance sheets; instead both for customer lending and for bank (non-residential) mortgages are not they were packaged and sold to borrowing has led to huge change. available but indications are that the specialist government sponsored Frontiers have blurred and an increasingly sector is growing too. entities (such as Fannie Mae, Freddie

Chart 1 Volume of residential mortgage debt to GDP in 2005

50 300 Mortgage debt to GDP, in per cent Growth of mortgage debt, in per cent

30 200

150

20

100

10 50

0 0 Russia Ukraine Serbia Romania Average Bulgaria Slovenia Poland Czech Average Slovak Average Hungary Lithuania Croatia Latvia Estonia Average Average Hungary Croatia Slovak Poland Romania Average Czech Estonia Slovenia Lithuania Latvia Average Bulgaria Average Serbia Ukraine transition Republic all Republic transition EU-15 EU-15 Republic transition Republic all transition countries transition countries countries countries countries transition countries not EU countries that are that are countries not EU members EU members EU members members

Source: European Mortgage Foundation Source: European Mortgage Foundation Annual growth in 2004-05 Note: The volume for Russia is 0.01 per cent. Figures on other transition countries are not available. Averages are highlighted for ease of reference. Note: Data for Russia not available. Averages are highlighted for ease of reference. Average annual growth between 2002 and 2005

1 2

Level of ef ciency

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Bulgaria Croatia Czech Estonia Georgia Hungary Kazakhstan Kyrgyz Latvia Lithuania Poland Romania Russia Slovak Slovenia Ukraine Republic Republic Republic

Speed of mortgage enforcement Realisation of mortgaged property at market value Cost of mortgage enforcement

Note: Data are based on the Mortgage Regional Survey (MRS), which asked the following questions: Is realisation of mortgaged property rapid? Is realisation likely to be at market value? Is mortgage enforcement inexpensive? Answers were graded according to ef ciency ranging from 0.1 to 3, where 3 = very ef cient, 2 = ef cient, 1 = some inef ciency, 0.1 = inef cient. For more information see the MRS composite table in Annex 2. There are insuf cient data for Serbia as the law is too recent for enforcement practice to have developed.

6  Mortgages in transition economies

broad array of different mortgage using mortgage loans for issues of benefits. We recognise the importance products is offered to potential covered bonds and mortgage-backed of providing adequate debtor protection borrowers. There is a move away from securities can give the widest scope and we analyse the effect of different the inflexible standard mortgage – the for product flexibility. debtor protection measures so that, one-product-fits-all approach – towards when deciding the appropriate solution In transition countries every opportunity the adaptable product that can be for its citizens, a country may be aware for enabling and accelerating the tailored to the needs of the market of the probable impact on credit transition process needs to be used and of the transaction. For transition availability. to the full. One of the ways to do this countries, this represents both a is through adapting the legal framework The process of modernising laws challenge and an opportunity. to support the legitimate and justified through reform can be fraught with Rather than attempting to analyse the needs of the market. Laws and the problems; the pragmatic solution often ever-growing range of variations and way they are implemented have to be is to adopt ad hoc laws that are limited enhancements that may be made to a “efficient”. While ensuring that the legal in scope, or for lawyers to devise standard mortgage, this work looks at framework is capable of meeting market structures within the existing legal how the legal framework for the basic needs, each jurisdiction has to strike rules. However, in the transition mortgage product can give the widest a balance between protecting debtors countries there is the option of carrying scope for product flexibility in fast- and encouraging creditors. Debtors out a dispassionate review of the legal changing markets. Similarly, rather than need some degree of protection, but framework against economic and market attempting to analyse all the different over-protection inevitably leads to a prerequisites in order to propose possible types of mortgage securities, reduction in availability of credit. This comprehensive reforms that aim to this work focuses on two broad types: publication does not attempt to address maximise the economic advantage that covered bonds and mortgage-backed where the balance should be struck. can be derived from the use of mortgage securities (see Part V), and looks We start from the position that greater credit and mortgage securities. at how the basic legal framework for availability of credit will lead to economic

Chart 2 Growth of mortgage debt between 2002 and 2005

50 300 Mortgage debt to GDP, in per cent Growth of mortgage debt, in per cent

30 200

150

20

100

10 50

0 0 Russia Ukraine Serbia Romania Average Bulgaria Slovenia Poland Czech Average Slovak Average Hungary Lithuania Croatia Latvia Estonia Average Average Hungary Croatia Slovak Poland Romania Average Czech Estonia Slovenia Lithuania Latvia Average Bulgaria Average Serbia Ukraine transition Republic all Republic transition EU-15 EU-15 Republic transition Republic all transition countries transition countries countries countries countries transition countries not EU countries that are that are countries not EU members EU members EU members members

Source: European Mortgage Foundation Source: European Mortgage Foundation Annual growth in 2004-05 Note: The volume for Russia is 0.01 per cent. Figures on other transition countries are not available. Averages are highlighted for ease of reference. Note: Data for Russia not available. Averages are highlighted for ease of reference. Average annual growth between 2002 and 2005

1 2

Level of ef ciency

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Bulgaria Croatia Czech Estonia Georgia Hungary Kazakhstan Kyrgyz Latvia Lithuania Poland Romania Russia Slovak Slovenia Ukraine Republic Republic Republic

Speed of mortgage enforcement Realisation of mortgaged property at market value Cost of mortgage enforcement

Note: Data are based on the Mortgage Regional Survey (MRS), which asked the following questions: Is realisation of mortgaged property rapid? Is realisation likely to be at market value? Is mortgage enforcement inexpensive? Answers were graded according to ef ciency ranging from 0.1 to 3, where 3 = very ef cient, 2 = ef cient, 1 = some inef ciency, 0.1 = inef cient. For more information see the MRS composite table in Annex 2. There are insuf cient data for Serbia as the law is too recent for enforcement practice to have developed.

6 Part II: Legal efficiency 

Legal efficiency criteria Chart 3 2 Criteria for legal efficiency of mortgage law What is meant by “legal efficiency”? Two important features of a law Maximising Basic legal function regulating mortgages need to be economic benefit emphasised. First, its prime purpose is economic, since the mortgage market Simplicity has essentially an economic function (while recognising that the housing Speed market that mortgages finance has an important social function). Secondly, Cost it is essentially facilitative since a Certainty mortgage market is not a necessity, it being possible for any jurisdiction Fit-to-context to function without it. The premise is that the basic legal framework should be conducive to a flexible market for failing which the potential achievements but they reflect a compromise between mortgage credit and for the issuance of the law in terms of legal efficiency two laws with conflicting purposes. of mortgage securities, although there may be curtailed. Any such compromise inevitably inhibits may be local political considerations the effective operation of the mortgage that determine how far a country wants Legal efficiency is therefore analysed law and introduces uncertainty into to allow its mortgage market to develop by looking at the degree to which the the minds of lenders. and what restraints or conditions legal framework enables mortgages it wants to impose on its operation. to (i) achieve their basic function and If the legal framework for mortgage (ii) operate in a way that maximises is to operate in a way that maximises A relatively simple indicator of the economic benefit. economic benefit, the system for success of a mortgage law reform creating and enforcing the mortgages would be the subsequent increase in As shown in Chart 3, the second should be simple, fast and inexpensive, the volume of mortgage lending, but criterion is split into five categories: there should be certainty as to what that is a crude and narrow indicator, simplicity, cost, speed, certainty and the law is and how it is applied, and inadequate by itself. The intended “fit-to-context”. it should function in a manner that fits function of the mortgage market may The basic legal function of a mortgage the local context. be more than just to boost the amount law is to allow the creation of a of credit granted against security of Simplicity – Simple does not mean proprietary security right over real mortgage. It may also include, for simplistic: it is necessary to strike property in favour of a creditor which, example, opening up credit to new a balance between simplicity and the in the case of non-payment of a debt, sectors of society, or encouraging sophistication required by the market. entitles him to have the property new housing construction. Also, if In many countries complexities have realised and the proceeds applied a mortgage law is reformed without developed and become entrenched over towards satisfying his claim before thought being given as to what is time as laws have been adapted to new those of other creditors. If a mortgage necessary to facilitate the issuance circumstances, not because of the law only gives the creditor a personal of mortgage securities, be they CBs or sophistication of these circumstances right but no right in the property, or if MBS, the growth of mortgage lending but rather from inherent limitations there is no right to enforcement or no may be limited because of legal issues of the legal system. There exists in priority over other creditors, the law affecting the funding. A law’s intended transition countries a huge opportunity fails to achieve its basic legal function. function has to be looked at in the to reduce down to the essential context in which it is to operate. Its An absolute priority for taxes and other elements and to introduce laws that ramifications must be considered, not state claims ahead of the mortgage are directly adapted to modern market just in economic terms but also in social creditor, or the right in insolvency of requirements. Simplicity partly comes and cultural terms. An appropriate unsecured creditors to share a portion from the lack of restrictions and balance needs to be struck between of the proceeds of mortgaged property, barriers. If the law is to encourage fulfilling the law’s economic purpose are more than inefficiencies in the the use of mortgage and mortgage and ensuring that the effects of the law mortgage law – they are defects that securities it needs to provide a base are acceptable in context. The purpose prevent it from fully achieving its basic that offers the necessary flexibility of the reform needs to be carefully function. They may be intentional (a to adapt to the trends of the market. analysed and agreed at the outset, super-priority of the state usually is) 10 Mortgages in transition economies

Speed – For most aspects of the legal Fit-to-context – This criterion is the A basic assessment of whether a process, the less time it takes the more most elusive but nonetheless important law maximises economic benefit may efficient it is. There are exceptions: since it covers a number of facets. appear relatively simple. If the law a notice period or a cooling-off period It is not enough to adopt a law that enables a mortgage to be taken and, if should be of appropriate length, but for establishes clearly and unambiguously necessary, enforced simply, quickly and registration of mortgage, for example, a simple, fast and inexpensive regime cheaply, the cost of security by way of there can only be benefits if it takes for mortgage security. The efficient mortgage is minimised and the benefit only a few minutes rather a month, and functioning of the law will also depend of the security is maximised. a lender who knows that the mortgage on whether it is adapted to the economic, However, there are broader aspects that is likely to take several years to enforce social and legal context within which need to be taken into account. Legal will derive less comfort from his security. it is to operate. It needs, for example: inefficiency may not merely reduce the Cost – Legal costs almost inevitably ❚ to respond to the economic need. economic benefit that might otherwise have an adverse impact on the Markets are constantly changing, result from the law (for example a lower economic benefit of a transaction. and the law has to be able to adapt interest rate for mortgage loans Delay, complexity and uncertainty all to new products, as for example compared with that of unsecured loans), tend to add to costs so there is a close when loans are proposed with flexible it may also have a dissuasive effect. relationship with the other aspects of interest rates This is particularly pertinent where the legal efficiency. Some costs are within economic impact is difficult to measure. ❚ to fit the broader financial context the control of the parties. Before taking If the legal process is complex or takes within which the law operates. legal advice on structuring a transaction a long time, or if there is uncertainty, For example, when the legal nature the parties can assess the value of potential players may never pass the of mortgage loans makes them doing so. The cost of legal advice on decision threshold, and not proceed unsuitable for securing bonds or for a complicated transaction may be with the transaction at all. And if a securitisation, the potential for the outweighed by the benefits. However, few people take that line the impact mortgage lender to extend his funding the cost of legal advice incurred because may be multiplied as their conduct options and use instruments developed of defects in the legal framework always influences others. in other markets becomes limited reduces efficiency, as do fixed costs Measuring legal efficiency is clearly (for example registration, notary or ❚ to correspond with existing market challenging and any attempt to develop court fees). practice. Whereas much can be learnt an accurate scientific basis is unlikely from other markets, a law has to be Certainty – Certainty is a critical element to be convincing. However, a close compatible with existing market and of any sound legal system. A grain of examination of a legal system against legal practice and to give confidence uncertainty in the legal position can the legal efficiency criteria listed above to those who rely on it have a pervasive and disproportionate can provide indicators of how efficient effect. Once a banker hears that there ❚ to achieve an appropriate balance the system is. We have used the is some doubt in the legal robustness between fulfilling the economic purpose information from the Mortgage Regional of a transaction, he will fast become and ensuring that the effects of the Survey to produce some such indicators hesitant. The difficulty is one of reform are acceptable in context. and they give an interesting insight into measurement. If the legal uncertainty The rights of consumers and occupiers the strengths and weaknesses of these relating to a mortgage could be stated, of property to appropriate protection existing legal regimes (see Part IV). for example, as a 5 per cent chance of cannot be eliminated to suit the In commenting the survey and the proceeds on enforcement being reduced, economic needs of the mortgage law. indicators some reference is made to with the amount of the reduction being Rather, they have to be framed in western European legal regimes in order on average 20 per cent, the risk would a way that enables borrowers and to provide a reference point for transition be quantified and it would become easier lenders to derive the benefits afforded economies and to emphasise, on certain to manage as there would be relative by a flourishing mortgage market while aspects, the opportunity for transition certainty. But in reality legal opinions ensuring the necessary protections economies to leap-frog over them. cannot be expressed in that way and to persons in a vulnerable position The analyses in the following parts of the natural reaction to unquantifiable ❚ to achieve particular objectives of this work, the recommendations made uncertainty is extreme caution. the law. For example, the law may and conclusions drawn are influenced Transparency can often strengthen aim to extend mortgage lending to a by the overriding economic rationale certainty: for instance, easy access for wide range of banks as opposed to that should drive any mortgage reform all to information in the land register creating a lending cartel or to reduce and the need to achieve legal efficiency. allows potential mortgage lenders to constraints on the types of mortgage find out about the property and any product that can be offered. other mortgages that may be claimed. 11

Part III: Mortgage Law

Legal basics – core principles Box 1 1 EBRD Core Principles for a Mortgage Law For a transition country that is seeking to modernise its legal and institutional 1 A mortgage should reduce the risk of giving credit, leading to an system for mortgage in order to increased availability of credit on improved terms. encourage growth in mortgage finance, the obvious starting point is to look at 2 The law should enable the quick, cheap and simple creation of a how the law works in advanced western proprietary security right without depriving the person giving the mortgage economies. That exercise reveals a of the use of his property. variety of different systems, mostly 3 If the secured debt is not paid the mortgage creditor should be able to shaped in a different era, which have have the mortgaged property realised and to have the proceeds applied been more or less adapted over the towards satisfaction of his claim prior to other creditors. years to accommodate market changes. Some aspects are highly efficient 4 Enforcement procedures should enable prompt realisation at market and show how long-standing laws and value of the mortgaged property. practices can be moulded to follow 5 The mortgage should continue to be effective and enforceable after the the needs of subsequent generations. bankruptcy or insolvency of the person who has given it. Others are restrictive and preclude techniques commonly used in modern 6 The costs of taking, maintaining and enforcing a mortgage should be low. financing. 7 Mortgage should be available (a) over all types of immovable assets However, this approach ignores the (b) to secure all types of debts and (c) between all types of person. fact that a transition country’s stance 8 There should be an effective means of publicising the existence of is often different to an advanced one. a mortgage. It starts with a deficient legal framework and limited market practice, and wants 9 The law should establish rules governing competing rights of persons to move in a short space of time to holding mortgages and other persons claiming rights in the mortgaged being able to compete with developed property. economies. One of the opportunities 10 As far as possible the parties should be able to adapt a mortgage to that the transition country may have the needs of their particular transaction. is precisely the ability to avoid the kind of obsolete elements in the law that often hinder development in advanced The language has been adapted to refer The trio of simplicity, speed and economies. specifically to mortgage (for example, cheapness as emphasised in the the person granting the security is second, fourth and sixth principles, For a number of years the EBRD Core referred to as the “mortgagor” and is also fundamental and ties in directly Principles for Secured Transactions Law the person receiving the benefit of with the concept of legal efficiency have been widely used in transition the security as the “mortgage creditor”) (see Part II). Every cost, irrespective countries as a starting point for but the substance remains unchanged. of who bears it, that is involved in the reforming security laws. They are very creation of mortgage or its enforcement basic and simple but they contain the The first principle is overriding: if the detracts from the benefits that mortgage essential requirements that the legal legal framework for mortgage does provides. Any delays or complexities framework has to meet, leaving it to not lead to a reduction in the risk translate into additional cost. each country to decide how best to of providing credit and an increased achieve them in the context of its own availability of credit on improved terms, The following parts look in more detail jurisdiction. They apply to mortgage then there is no point in the law at how these principles apply and what as much as to any other proprietary providing for mortgage at all. Every they involve, first when mortgage is security. The principles are set out in element of the legal framework should created (including registration) and then Box 1 and in more detail in Annex 1. be analysed against this basic principle. during enforcement. 12 Mortgages in transition economies

Creation of mortgage – Table 1 2 overview Steps for creating a mortgage Table 1 summarises what is typically involved in the creation of a mortgage in 1. Proof by the mortgagor that he owns (or will own) the property to be mortgaged an efficient legal system. There are Property is defined in The register defines the location and exact boundaries and three basic steps: register characteristics of the property, normally by reference to a cadastral map ❚ proof by the mortgagor that he owns (or will own) the property to be Mortgagor’s title is The proprietary right of the mortgagor (or his vendor) is shown shown in register in the register against the property mortgaged Register shows all It shows any other existing mortgages ❚ agreement for the mortgage between rights and claims mortgagor and mortgage creditor It shows any other limitations to the mortgagor’s proprietary right ❚ publicity of the mortgage through Registered information All relevant information in the register is accessible to any registration. is readily accessible to member of the public the public Searching the register is cheap and fast (preferably via the The creation of a mortgage is sometimes internet) mystified as a result of a complex and Mortgage creditor can It gives an accurate description of land formal process. It should actually be rely on the information It establishes the proprietary right of the mortgagor very simple as long as there is a clear in the register understanding on these three basic It indicates any opposable rights claimed by other persons steps, and in particular (i) what 2. Agreement between mortgagor and mortgage creditor preliminary checks need to be made, (ii) what matters the agreement should Defines the parties Identifies the mortgagor and mortgage creditor address and (iii) the process and purpose Defines the property By reference to the description in the register of registration. The essential elements of each step are summarised below. Defines the debt Defines claim or claims that are secured by mortgage Defines the Commercial terms relating to the mortgage may be in the commercial terms mortgage agreement or other document Proof of ownership May include security over related rights (insurance, rents and Proof of ownership covers the following so on) areas of certainty. Mortgage and credit may be covered in the same document

❚ Certainty that the mortgagor has a Formalities Special requirements may apply regarding the form of the mortgageable right in the property. agreement and/or the manner of signature (i) to create the mortgage and/or (ii) to facilitate the enforcement of mortgage A mortgage is an ancillary proprietary right that can only be given by the 3. Publicity through registration person with a principal proprietary Application is made for Application made by mortgagor or authorised person right over the immovable asset which registration is most often established through title Defined information to be provided registration. Documentation kept to a minimum ❚ Certainty as to the scope of the Checks carried out by Mortgaged property exists in register registrar mortgagor’s property. Any dispute over Mortgagor shown in register as holding proprietary right the scope of the mortgaged property Applicant duly authorised will adversely affect the role of the Publication in register Mortgage is registered against the mortgaged property mortgage as a credit risk mitigant. Title registration is usually based Registration is immediate on a cadastral definition which needs Costs are low to be both accurate and reliable so Third parties are put on Mortgage opposable to all parties with priority ranking based that the risk of a subsequent dispute notice of mortgage on time of registration creditor’s claim is minimised. Any person searching the register can see the mortgage entry Searching the register is cheap and fast (preferably via the internet)

Note: The first column lists the basic elements of each step, the second column summarises what each element involves in practice. Part III: Mortgage Law 13

❚ Certainty as to any qualifications ❚ the mortgaged property. This will Publicity of the mortgage on the mortgagor’s proprietary right. usually be defined by reference to the ❚ This is achieved through registration Immovable property can be subject title register. The agreement may need against the property, but without to a variety of rights of third parties: to further define what is, and what is needing the onerous requirements mortgages or encumbrances, not, included in the mortgaged property involved in title registration, since servitudes (such as a right of – would, for example, the mortgage the purpose is different (see Part III passage, occupation rights or rights creditor be entitled to receive payment 3.5 c.). of expropriation). In many cases these of rents? Does the mortgage creditor’s will be recorded in the title (or other) right extend to all constructions on ❚ It enables third parties, and especially register. Where they are not, the law the land and equipment in the those subsequently seeking to needs to define the extent and the manufacturing plant? establish a claim, to discover that the nature of those rights (see Part III mortgage creditor may have a prior ❚ the secured debt. This will include the 3.2 c.). opposable right in the mortgaged principal debt and any interest. It may property. also include accessories such as costs. Agreement for mortgage ❚ It also establishes the priority between ❚ other conditions relating to mortgage. competing mortgages (most often The agreement defines the following: It is usual to include rights and based on the chronological order obligations of both the mortgagor ❚ the parties. (i) The mortgagor, that is, of registration). and the mortgage creditor concerning the person with a principal proprietary the mortgaged property. right over the property that is The next part examines certain specific mortgaged. (ii) The mortgage creditor legal issues that can arise and make In many jurisdictions certain matters to whom the mortgage is granted. what could be a simple process unduly concerning the mortgage will be set (iii) The debtor of the secured complex or inefficient. out in the law and will not need to be claim: in most cases this will be expressly provided in the agreement. the mortgagor but sometimes one person will give a mortgage to secure someone else’s debt. In this work it is generally assumed that the debtor is the mortgagor. 14 Mortgages in transition economies

Creation of mortgage – plot for purposes of ownership and purchaser is assured that he will obtain specific legal issues registration, and it is then necessary the residence he has chosen, which is 3 to ensure that the description of the particularly needed in markets where mortgaged property identifies not only there is a shortage of new housing. 3.1 Mortgaged property the land plot but also any relevant Without mortgage credit the newly construction on it. Problems can arise developed housing market is effectively a. Identification of property with later construction. If buildings are limited to cash buyers or those who treated as separate, a mortgage lender Mortgages should be available over all can persuade the developer to accept could find it has a mortgage over the types of immovable assets.1 There is payment after construction has been borrower’s land plot and house, but not little justification to allow mortgage over completed. In this case, banks would over a garage that has been built on the some properties and not over others, have their right of mortgage recognised land subsequently. It is desirable that and in practice few restrictions of that only from the moment the borrower later constructions and improvements nature exist in transition countries (see registers his property rights – in other are automatically included in the Part IV 3.5). words, when the construction is mortgaged property unless otherwise completed. If this option is not viable, One of the basic requirements for agreed (see Part IV 3.5). This is of and in many cases it is not, banks can a mortgage is that the mortgaged particular significance for builders try to resolve this problem by taking as property is identified with certainty and and developers where a bank financing collateral during the construction period in a way which avoids any confusion their projects will expect a mortgage the rights of the borrower under his with other property. Normally this will not only over the land but also over agreement with the developer. In some be done by reference to the cadastral new construction on the land as and jurisdictions a system of “housing description available from the land when they come into existence. certificates” is provided (a security register. The absence of a reliable Where a building is in multi-ownership offering the right to purchase a share source from which to establish a unique (for example, apartments or in a building in construction, which can identification for a property can present condominiums) the proprietary rights be traded and also pledged). However, a significant problem when creating in each unit will normally include lending remains risky since these rights a mortgage. In practice this arises co-ownership of, or other rights in, may have little value if the construction where some land or buildings remain the underlying land and common parts is delayed or if the developer fails to unregistered, as is still the case, for of the building. If these rights are not deliver. In Russia, for example, the example, in Croatia, Poland, Romania, properly established (often with a formal interest rate charged by banks on such Russia and Serbia. Much progress has co-owners’ association) or are unclear, loans can be between 2 and 3.75 per been made in recent years and, with the right to enjoy the property will be cent higher until the mortgage can be time and continuing efforts to centralise impaired with consequent adverse properly registered.2 information, convert records into digital effects on the value of the mortgage format, and make the database available The availability of mortgage finance for taken on the property. to all via the internet, it is realistic to future or unfinished constructions can expect that in most transition countries open up the market to a much wider records will become more complete and c. Financing future or unfinished range of buyers, but this also raises accurate, and information more readily constructions a number of special legal issues. accessible and reliable. Practical problems frequently arise with ❚ The construction will occur in the new construction. Property development future: if the building does not yet b. Constructions on land is fuelling mortgage markets across exist the purchaser is relying on transition countries and mortgage credit the contractual commitment of the It is also essential for the parties to has a major role to play in encouraging developer to complete the building. be certain as to what is included in the construction of new housing. Even if the purchaser is able to give the mortgaged property. Most often Therefore, ways are needed for the land a mortgage over the future property, constructions are included as part of and future construction to be used as security under it will only extend to the same property as the plot of land security for financing developments. the new construction to the extent on which they are built and therefore that it ever comes into existence. It is would automatically be included in a In practice the parties may want therefore important that the borrower mortgage over the land. However, in to commit to the sale and purchase and lender assess and manage the some jurisdictions (the Czech Republic, of property before construction is construction completion risk. Kazakhstan, the Kyrgyz Republic and complete, or even before it has started. the Slovak Republic), buildings are This way the vendor (developer) reduces treated as separate from the land his risk and need for finance and the Part III: Mortgage Law 15

3.2 Title to mortgaged property Table 2 Land registers – availability on the internet a. Who can grant a mortgage?

System under Any person with proprietary rights over All basic Limited Information construction, information information available to a property should be able to grant a not all Not available 3 publicly publicly restricted mortgage over it. In many jurisdictions information available available persons available this ability is qualified when the person is the state or the property serves a Czech Republic Ukraine* Croatia Bulgaria public function (for example, a school Estonia Serbia Georgia or hospital). For example, in Estonia and Hungary Slovak Republic Kazakhstan Russia mortgages over real property Latvia Slovenia Kyrgyz Republic belonging to municipalities are prohibited. Lithuania Poland In the Slovak Republic, the prohibition Romania only applies to assets belonging to Russia municipalities that are used for public services. In each country a balance England Germany** France must be struck between the need to The Netherlands give protection to certain properties for Notes: * Mortgage information is available but not title information. reasons of public policy and the need ** Only available to notary offices. for the state or local authorities to be able to raise finance by offering their ❚ The property does not yet have an the construction is taking place and property as security. identification (that is, a cadastral will also normally extend to any number): most acquisitions of newly construction on it. Payments made built property will be of an apartment by purchasers may be used to further b. How to establish title in a block of flats (also referred to finance the development and the Before taking a mortgage the creditor as condominium). In that case, not mortgage given by the developer is will want to ensure that the person giving only may the entire building not exist, unlikely to be released until a later such security has good title to the but there may be no legally defined date. It may be possible to take out property being mortgaged. In practical property for each individual apartment a second mortgage in favour of the terms this usually means that he owns in the land or cadastral register purchaser’s bank, in which case it is the property with all usual rights to that can be acquired. It is therefore necessary to define which part of the use and transfer it, and that no other necessary to examine (i) how the new property the second mortgage covers. person has rights that might limit property can be contractually defined, or prejudice his rights as owner. (ii) whether is it possible to register d. What is included in the mortgage? in the land register a property under The simplest way for the mortgage construction on a provisional basis or A mortgage creditor may expect his creditor to establish title is to consult subject to subsequent confirmation, security to include items such as the land register where the property (iii) what the purchaser is acquiring property insurance rights, fixtures and and legal rights attached to it are at the time of purchase (a mere rents. It is important that there is shown in a way that can be relied on contractual right, title to a future certainty on the right of the mortgage by third parties. Where the mortgagor property, some kind of real right in creditor over the insurance proceeds is using the mortgage loan to purchase developer’s title, for example), and in case of damage to the property. the property the creditor will want to (iv) how a mortgage over the future How this is achieved will vary from one ensure that the vendor has good title to property can be registered, either jurisdiction to the next: typically it will the property and that it will be acquired against the land plot on which the be by agreement or by a provision of the by the purchaser at the time the construction will be built in order law. In nine of the 17 countries covered mortgage is granted. to provide notice that, when the by the Mortgage Regional Survey, the In transition countries, the task of construction is completed, it will be mortgage extends automatically to establishing title is sometimes left to already mortgaged, or against the insurance claims. In Poland, it also the mortgagor, who has to produce to construction’s provisional title. includes a pledge of rents collected the prospective lender a certificate of under commercial and residential ❚ The developer will often raise finance title over the property to be mortgaged. leases. The parties need to be able to secured on the property being This may be a pragmatic way of cover such items simply, with certainty developed. That lender’s commercial reducing the burden on the lender when and in a way that suits their transaction. mortgage will cover the land on which establishing title is time-consuming, 16 Mortgages in transition economies

Committee was responsible for land Box 2 records. Matters are further The case of Ukraine complicated by additional registers that existed for state-owned property only. The Ukrainian 2004 Law on the State Registration of Property Rights to Real Some countries, such as Moldova, have Estate and Their Limitations envisaged the registration of all ownership rights, successfully merged these registers including leases and mortgages in a consolidated register (referred to as the whereas others, such as Azerbaijan and united register). It will supersede the Bureau of Technical Inventory where Ukraine, have not. Also, records in the titles over finished buildings and constructions are currently registered, and cadastre (where property is described) the State Committee for Land Resources where titles over land are registered. and in the land register (where legal rights are recorded) do not necessarily The united register has not yet started operating but despite this defective match (for example in Kazakhstan), and institutional environment, mortgage transactions are conducted relatively this means that before any mortgage smoothly. This is thanks to the Information Centre run by the Ministry of can be taken, lenders may require Justice, which operates a number of fully electronic registries: clarification of discrepancies. ❚ the mortgage register, where mortgages are registered In the United States the risk of title ❚ the Register of Prohibition of Alienation of the Immovable Property, where defect or invalidity is habitually covered a mortgage creditor registers any prohibition in the mortgage agreement by title insurance – that is, an insurance on sale of the mortgaged property policy covering a property purchaser (and his mortgage creditor) against the ❚ the Register of Transactions with Real Estate, where leases of over risk of defects in title. However, such 11 months are recorded a solution for transition countries is ❚ the Register of Encumbrances, which records tax liens over immovable not necessarily appropriate. Unless property. the nature and extent of the potential defects can be clearly defined, the These registers in effect provide the means by which mortgage creditors can insured risk remains uncertain and simply, quickly and cheaply check, establish and protect their rights over the the cost of insurance is likely to be mortgaged property. Title risks, however, remain. prohibitively high. It is preferable for the reform of land registration systems (which is taking place in almost all but checks are still needed to ensure internet. This is already the case in transition countries) to ensure that that the certificate is correct and the the Czech Republic, Estonia, Hungary, reliable title information is shown in mortgagor has to bear the costs of Latvia and Lithuania. Lithuania is also the register. Some countries have producing the certificate. a participant in the European Land found pragmatic solutions to facilitate Information Service (EULIS), which In much of the region of central and mortgage transactions pending aims to provide electronic worldwide eastern Europe and central Asia, improvements in land registers, for access to European land and property land registers are still not complete, instance in Ukraine (see Box 2), and in information by creating a platform centralised or easily accessible, Croatia where a mortgage can be connecting existing national land and lenders have not been able to created over a property not yet registers.4 Croatia and Serbia are standardise their title investigations. registered in the land register.5 working on an online land register Much progress has been made but but for the time being it cannot be work is still needed in many countries relied on and creditors still need to go c. Third-party rights in the property to complete the development of to the land register to check title. It is comprehensive, reliable and easily The land register will usually show not encouraging to see that the countries available information on land title, which only the ownership right but also the that provide online access generally is now found in some (but not yet all) entitlement of other persons to rights make it available to any member of developed economies. The ability in in the property. The lender needs to the public. transition countries and in some know, for example, of all mortgages and western European countries to access In former Soviet countries, establishing other encumbrances, servitudes and land register information online is title is made more difficult because in easements, long-term leases and rights shown in Table 2 on page 15. the past, land and buildings have not of occupation to be able to assess and been registered in the same register. value his security, and it greatly eases The aim should be to make it possible Buildings were often listed in a his task if he is able to rely on entries for title searches to be made directly so-called Bureau of Technical Inventory, in the land register. by potential mortgage creditors on the whereas a Land Management Part III: Mortgage Law 17

Registration needs to embrace all liens page 20), reflecting different policy In practice, questions of restitution or encumbrances that have the effect standpoints. What is important is that were largely resolved during the first of mortgage, including, for example, the potential mortgage creditor is able decade after the fall of communism tax liens and judgment liens. It is not to establish the position from the outset. but the problem, although less acute, unusual that claims for taxes related to is still relevant. It is desirable that: It is generally considered unduly onerous the property rank ahead of mortgage to require that rights of occupation be ❚ any outstanding restitution claims are creditors when the property is sold but registered. The occupation of a property registered. In Croatia and the Czech such claims are likely to be of limited is often apparent from inspection and Republic, for instance, restitution amount. However, where a tax authority short-term leases are unlikely to be claims that have been lodged are noted has obtained (by law or by court detrimental to the rights of the owner in the land register against the property judgment) a right to pursue against or mortgage creditor. Therefore the in question. In Poland, there is a the property for other tax claims benefits of registration would be special register of restitution claims (such as income or corporate tax, outweighed by the administrative held by the Ministry of Infrastructure VAT and so on), this right needs to be burden that registration would entail. In visible in the same way as a mortgage ❚ the rules governing restitution are the Netherlands, for instance, lessors for all to see because such a claim clearly defined so that third parties have a right to stay in the property represents a significant risk to the can assess the consequences of their on enforcement, unless the mortgage value of the security. applying to the property in question agreement includes a clause limiting The law may give spouses rights in the right of the mortgagor to lease the ❚ the mortgage creditor has a prior right each other’s property. Where these mortgaged property, in which case the in any compensation paid to the arise from a general legal provision lease is deemed null and the property mortgagor. (such as in marital law) a mortgage must be vacated. Where the rights creditor can be made aware of the granted to occupants are unusually More generally, on any claim affecting potential existence of these rights from extensive, they can become a the mortgagor’s title (whether enquiries at the time of the mortgage disincentive to mortgage lending (see restitution or otherwise), the mortgage application, and registration should not Part III 5.4 f.). The need from a mortgage creditor should be notified and should be necessary. It may be necessary to creditor’s perspective to have long-term have the right to be involved. register these rights where they are not lease rights registered depends on evident, for example from the marital the nature of the right. In Lithuania, 3.3 The secured claim regime (legal rules on marriage that for example, only registered leases can relate to persons and their property) be opposed to the enforcing creditor. a. Who can receive a mortgage and of the mortgagor. In Bulgaria, a right of Rights registered after the mortgage what types of claim can be secured? use over the property may be granted has been created should not affect by court order to a divorced spouse and In principle, a mortgage can be taken by the prior right of the mortgage creditor. this right would be enforceable against any creditor.6 Attempts to limit mortgages The principle of priority between third parties, despite the fact that it is to a particular category of creditors (for mortgages being regulated by the not registered in the land register. Such example, specialised mortgage lenders) time of creation is almost universally a “secret” right over the property can are unusual. Rules may be applied accepted. In some countries, such be problematic for mortgage lenders. to the activity of mortgage lending but as Hungary, the Netherlands and there is no justification for reserving Although in transition countries the the Slovak Republic, the law expressly the use of mortgage as security mortgagor has the right to grant several provides that this priority order can be to a restricted group of persons. mortgages on their property, many varied by agreement. mortgage lenders want to ensure that not Mortgage should be available to secure only do they have first-ranking priority all types of debt.7 In practical terms d. Restitution rights over the property acting as security but the debt has to be capable of being also that no lower-ranking mortgages In transition countries a particular expressed in monetary terms. It may can be created that might restrict their case arises whereby former owners, not be possible to directly secure an rights on enforcement. To achieve this, whose property was nationalised or obligation to provide a service (for the lender may seek an undertaking expropriated during the communist example, build a house). Enforcement of from the mortgagor not to create further regime, have the right to have their the mortgage would not make good any mortgages on the property (often property returned to them. What default in the mortgagor’s obligation. referred to as a negative pledge). The happens to the mortgage creditor However, it is possible to secure the rules applying to such undertakings and who finds that title to the mortgaged monetary damage that is suffered their effectiveness vary greatly from property is removed from the mortgagor because of default (such as the failure one country to the next (see Box 3 on and passed to the former owner? to build the house). 18 Mortgages in transition economies

b. Nature of the debt Here it is sufficient to summarise the c. Accessority – should the mortgage basic elements needed to achieve be accessory to the secured debt? The nature of the debt that is secured a simple and flexible definition of the and the way it is defined can be the Accessority is often cited as a curb on secured debt. source of many legal problems. The flexibility for mortgage creation and as pragmatic requirements of the market ❚ The secured debt may include debts an obstacle to the transfer of mortgage. are simple enough: arising in the future, for example These problems, in fact, do not come further advances that a bank may from the concept of accessority, which ❚ there should be certainty between the make under a loan agreement, or is self-evident: a mortgage always parties as to what they have agreed additional loans that may be agreed depends on the existence of a debt ❚ the requirements for defining the debt subsequently. It should suffice for the secured by a property, and in the should be simple description of the debt to make clear absence of a secured debt a mortgage what is covered. creditor can exercise no rights under it. ❚ there should be sufficient flexibility to In that sense there is no such thing allow the debt to be defined in a way ❚ The debt may also fluctuate, for as a “non-accessory mortgage”. While that corresponds to the transaction example in an overdraft or revolving there is general agreement that the that the parties want to carry out. facility where repayments can be made secured debt has to exist and be defined and amounts redrawn subsequently. with adequate certainty for a mortgage Certainty between the parties is ❚ A general description should be to be enforced, requirements for the debt normally required as a general principle possible. Formalistic requirements for also to be in existence and/or specified of contract. However, requirements to specifying and quantifying each debt, at the time of mortgage creation vary specify and quantify the debt immediately for example listing each advance considerably from one country to the at the time of mortgage creation are made by a bank under a loan next. Difficulties often arise from the unnecessary and can greatly reduce the agreement, are not needed to achieve way in which in some jurisdictions the simplicity and flexibility of mortgage as certainty. In most cases the specific so-called “doctrine of accessority” is a means of security. Certainty can be principal amount of the debt will be applied. The requirements that result achieved notwithstanding a general stated (typically in the case of a from such a doctrine can limit the kind description of the debt. The core residential mortgage loan) but this of transactions that can be secured requirement is that the description should not be a legal requirement. In by mortgage and the way they can enables the debt to be determined with the case of a loan facility it is only the be structured. certainty at the moment of enforcement maximum principal amount of the debt of the mortgage. Perhaps the easiest way to present the that can be specified. In commercial issues surrounding accessority is to There can be much legal discussion on and financial market transactions the illustrate the progression in terms of the how to define a debt, where one debt principal amount may, for example, debt that can be secured from what is ends and another begins, and what be calculated under a formula which sometimes called “strong accessority” additional requirements are to be made gives sufficient certainty, but means through “weak accessority” to what when defining a debt for the purposes that it is impossible to quantify the is normally meant by “non-accessory of security. Is each instalment under a debt at the time the mortgage is mortgage” (see Chart 4 on page 19). loan a separate debt? Is interest part of given. Some countries allow a wide the same debt as the principal? Should description of “all monies due from The non-accessory mortgage is often put it be expressed as a money amount the debtor to the creditor”; others forward as a solution to the problems too? Likewise, theories abound as to require that the legal nature of the that can arise from strong accessority. whether a secured debt can fluctuate debt is also specified. Frequently the One of the best-known examples in (as in the case of a bank overdraft or maximum amount of debt has to be practice is the Grundschuld (or “land a credit line) and as to whether the specified when a general description charge”), which is successfully used for secured debt can include future debts is used (see Part III 3.5. b.). mortgage lending in Germany. It seems that arise after the mortgage is created. that one of the reasons why the land ❚ The debt may include not only interest charge was developed by the banking These issues have already been well but also items as agreed by the parties sector was to circumvent problems rehearsed, and often satisfactorily (costs, commissions, and so on) and under mortgages (Hypotek) when the resolved, in the context of pledge laws the costs of enforcement. interest rate was variable (as opposed (the securing of debt by movable ❚ The debt may be expressed in local or to fixed). The land charge was then property),8 yet they continue to present foreign currency. used instead of a mortgage: since it is problems for mortgage (see Part IV 3.5). created as an abstract security right, it could be used to secure debts that the mortgagor and the lender would define separately (and freely) by contract.9 Part III: Mortgage Law 19

The distinction between strong accessority and weak accessority is Chart 4 centred on the way in which the secured Levels of accessority debt has to be defined and the moment at which it has to be specified. At one Level 5 – Strong accessority extreme, the debt has to exist and The debt must already exist at the time of mortgage be fully specified at the moment the creation and be described specifically. mortgage is created. At the other, it is sufficient at the moment of mortgage creation to describe the secured debt (whether present or future) with sufficient certainty to enable it to be Level 4 identified specifically at the moment of enforcement of the mortgage. The debt must already exist at the time of mortgage creation and can be described generally. As seen above, strong accessority poses practical difficulties in mortgage transactions because it can restrict the ability to secure debts described in general terms (such as variable interest Level 3 rate) and to cover future debts. There are arguments rooted deeply in the legal The debt does not yet have to exist at mortgage traditions of some civil law jurisdictions creation but must be described specifically. of adhering to the strong accessority approach, for example that a right in rem, such as a mortgage, cannot be created without the debt being defined with absolute specificity. However, Level 2 developments in recent years in the The debt does not yet have to exist and can be laws governing pledge in transition defined generally within the scope of an existing countries show that simple and legally obligation or contractual framework. efficient solutions can be found. Decisions have to be made as to how far the law can be adapted to the needs of modern market practice or, on the contrary, how far the market should Level 1 – Weak accessority be restrained by legal principles that The debt does not yet have to exist and can be defined are mainly justified by doctrinal theory, generally outside the scope of any existing obligation rather than economic rationale. or contractual framework. Another argument sometimes put forward in favour of requiring strong accessority is the need to protect the debtor. A precise and specific definition of the secured debt is considered Level 0 – Non-accessory necessary to prevent the debtor being The debt does not yet have to exist and be defined at all. misled into giving security for more The mortgage exists independently from any debt (but would than initially intended. But there is not be enforceable without a debt to relate to) and can be little evidence of this perceived danger used to secure debts (i) which are not in the contemplation becoming a reality in countries that of the mortgagor at the time of its creation and (ii) which allow a general description of debt may become due to third parties who have no connection with (including future debt). A feature that the mortgagor at the time the mortgage is initially created. is increasingly common is to require the maximum principal amount of the secured debt to be defined in the mortgage agreement (see Part IV 3.5). 20 Mortgages in transition economies

This reduces the risk of mortgagor and mortgage creditor having conflicting Box 3 ideas on the extent of the security Negative pledge clause − different views across the region and, when the maximum amount is publicised, it increases transparency ❚ In the Czech Republic, Croatia, Estonia, Poland, Serbia and Slovenia any by providing information to other actual contractual clause prohibiting a further mortgage over the mortgaged and potential creditors. property is deemed void. This applies to third parties as well as between De-connecting the mortgage from the the mortgage creditor and mortgagor. secured debt is also seen as a way of ❚ In Hungary and the Slovak Republic, a negative pledge clause is possible facilitating the transfer of mortgage between the parties but the prohibition of further mortgage over mortgaged loans. Since debt and mortgage are not property is not enforceable against third parties. A subsequent mortgage linked, the formalities of transfer for creditor would have a valid right in rem over the property despite the the mortgage and the debt can then existence of the negative pledge. The prior mortgage creditor to whom be dealt with separately. In countries the negative pledge had been given would have a claim in damages against where the formalities for the transfer the mortgagor. of the mortgage are onerous, such ❚ separation may, it is argued, give scope In Ukraine the law requires the consent of the prior mortgage creditor for for dealing with them more efficiently. the creation of any subsequent mortgage, so in practice a negative pledge Transfer of mortgage loans is examined clause serves no purpose. in the section on mortgage securities ❚ In Kazakhstan, Romania and Russia, negative pledge clauses are registered (see Part V 4.1): it is evident that in the land register along with other mortgage information, and when this for securitisation it is desirable that happens it is not possible in practice to register a subsequent mortgage. mortgage loans can be transferred ❚ simply, quickly and cheaply. As with In other countries the effect on third parties is not clear. mortgage creation, the transition countries may choose to establish Any discussion of accessority is made security over related rights (for example, an inherently efficient system for the complicated by the different approaches insurance rights, fixtures, rents and transfer of mortgage. If they do so, and interpretations that apply from one so on). Parties should be allowed wide any advantage of the non-accessory jurisdiction to the next. And each lawyer contractual flexibility.12 Special rules mortgage on transfer falls away. will naturally tend to view the issues may be considered necessary to cover against the particular backdrop of his matters such as negative pledge It has been suggested that the non- own system, which inevitably leads to (see Part III 3.2 c. and Box 3) and accessory mortgage be used as the crossed wires. But when the issues lex commissaria (see Part III 5.2 a.) basis for the Eurohypothec.10 This surrounding accessority are looked at but detailed regulation of what the derives from the difficulty of reconciling detached from any specific legal system agreement can, and cannot, contain widely diverse systems operating in each and are analysed in the context of the should be discouraged. of the 27 countries of the European practical effect they may have on a Union without harmonising the existing mortgage transaction it becomes clear regimes (which would be beyond the b. Form of agreement that the advantages of non-accessority remit of the project of facilitating cross- may be illusory. In many jurisdictions the mortgage border mortgage finance), and currently agreement is subject to the same remains under discussion. When seeking requirements for form and signature a common form of mortgage to ease 3.4 The mortgage agreement as a transfer of real property. Generally, and encourage cross-border mortgage The mortgage agreement is important formal requirements should be kept financing the non-accessory route may because it defines the mortgage simple and the costs low. The agreement avoid some of the incompatibilities (security) that is being created and the needs to be in a form that gives between existing national regimes. parties’ agreement in relation to it. adequate proof of the creation of However, the legal efficiency of such the mortgage on any subsequent a solution needs to be examined as enforcement. In some jurisdictions a a separate issue, as has been pointed a. Content of agreement notarial deed is used for this purpose out by stakeholders in the public The agreement must identify the parties, (see Table 3 on page 21). Where this is commentary procedure on the European the property being mortgaged and the the case, the role of the notary needs Commission Green Paper on Mortgage debt being secured. Beyond that it may to be well defined, as it should not Credit in the European Union.11 contain other matters as the parties duplicate the role of other parties, decide, including where appropriate such as the registrar. The costs and Part III: Mortgage Law 21

It may also be useful to include: Table 3 Notarial involvement in the creation of mortgage ❚ the identity of the creditor – this is almost invariably shown. It helps Other compulsory determine the mortgage with greater Notarial deed Notarial deed used No notarial notarial required in practice involvement certainty and gives an initial indication involvement* of the person who is entitled to enforce the charge. It also enables Bulgaria Croatia Czech Republic Kazakhstan Estonia Hungary Latvia Russia any interested third party to enquire Georgia Slovenia Ukraine Serbia*** directly to the mortgage creditor about Kyrgyz Republic Slovak Republic the mortgage and the secured claim. Lithuania However, as will be seen below (Part V Poland** 4.1 d.), it is not desirable to make it Romania obligatory to register any subsequent change of creditor (for example on France Germany assignment of the claim) The Netherlands ❚ the amount, or the maximum amount, Notes: * Usually signature certification of the secured claim – this enables ** Not required when the mortgage creditor is a bank *** Signature certification must be done at the court any person – for example, a creditor considering a lower ranking mortgage inconvenience of having a notarial deed a. Where mortgages are registered – to assess the extent of the mortgage. should not be disproportionate and the The amount of the secured claim is In most countries mortgages are benefits should be clear to the parties. registered in all countries covered by registered in the same register as the the Mortgage Regional Survey (apart In some jurisdictions, mortgage title to the property and this helps the from the Slovak Republic and the certificates are also issued and search process. Title to the property Kyrgyz Republic). The amount shown registered in the land register at the is already registered and the simplest should be the principal amount of the same time as the mortgage agreement system is to have mortgages registered claim excluding interest and costs. A (see Box 5 on page 51). against the title so that any person requirement to quantify interest and searching the title can see immediately costs should be avoided since it adds the mortgages that have been 3.5 Publicity of mortgage through complexity with little practical benefit. registered. When the organisation of registration Where the principal amount may vary the title register is deficient a separate (for example, a financing facility) it It is essential that a system is in place mortgage register can result in more should indicate the maximum principal 13 to publicise the mortgage. The value effective publicity and more efficient amount. This is the case in Estonia, of a mortgage to a creditor lies in the searches (see Box 2 on page 16 for Hungary, Latvia, Ukraine and the confidence that the secured claim can the situation in Ukraine). Netherlands. be recovered out of the mortgaged property in priority to other creditors. Showing the duration of the mortgage is b. Information to be registered Publicity of the mortgage ensures that not recommended. The duration depends any person subsequently acquiring a The amount of information that needs on the secured claim; whatever the right in the mortgaged property is alerted to be included in the register is quite contractual term for payment of the to the existence of the mortgage. limited. It is only necessary to note that claim, the mortgage should continue Likewise, when creating the mortgage a mortgage is claimed and the precise until it is paid. Requiring renewal of the creditor can discover any pre-existing time of registration (since this will registration after a given time has little mortgages or other rights providing serve for determining priority between justification (yet this seems to be similar protection to the holder (for competing mortgages or other registered required in Romania after 15 years, example, tax liens for unpaid taxes) that rights). Where registration is in the although there are conflicting views have a prior claim. Without a reliable title register, the description of the as to whether it would be compulsory; system for publicity a creditor is unlikely mortgaged property and the identity of and in Bulgaria after 10 years). The to have sufficient certainty in his rights the mortgagor are already registered, onus and inconvenience of renewing in the mortgaged property. but if registration were to take place registration outweighs any advantage in a separate mortgage register, of clearing redundant mortgages from this information would also need to the register, which should remain the be included. responsibility of the parties. Negative pledge clauses (see Box 3 on page 20) are also sometimes registered. 22 Mortgages in transition economies

c. Effect of registration Chart 5 Traditionally, registration has the Average time taken to obtain mortgage registration Czech Republic effect of authenticating the mortgage, Estonia Serbia Latvia Latvia guaranteeing its validity. In legal terms, Czech Republic Poland Lithuania Slovak Republic Estonia Bulgaria Russia Russia registration often results in the creation Slovak Republic Slovenia Poland Georgia Ukraine of the proprietary right over the Russia Kyrgyz Republic property. The aim of registering a Slovenia Lithuania Bulgaria Romania Croatia mortgage is therefore to confirm to the Ukraine Georgia world the validity of the mortgage in the same way as title registration confirms a transfer of land title. This approach Czech Republic derives from the principle that any Bulgaria Estonia Hungary Hungary Croatia Kazakhstan person should be able to rely on the Kazakhstan Kazakhstan Croatia Georgia Kyrgyz Republic Kyrgyz Republic accuracy of information shown in the Latvia Hungary Slovenia Lithuania Poland land register. However, in the context Serbia Ukraine Romania Slovak Republic Romania Serbia of the contemporary use of mortgage this approach is singularly inefficient: it means that the registrar (or another Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient person, such as a notary, who is not a Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes party to the transaction and on whom in Annex 3 for methodology. in Annex 3 for methodology. the registrar relies) must be satisfied agreement. Requiring the registrar or ❚ check that the person requesting that the mortgage is validly created. any other external party to examine and 5 registration is the mortgagor or a be satisfied with the validity of every person duly authorised by him To be satisfied, he has as a minimum 7 8 to check the mortgage agreement mortgage that is to be registered is ❚ ensure the information relating to the and the powers of the parties. It is this placing a heavy and unnecessary mortgage in the register accurately checking process that delays the burden on him that delays mortgage reflects the information given by the creation of mortgage and means that it creation and is of little or no value to person who requested registration. usually takes a number of days or weeks the parties or the public. to obtain registration (see Chart 5). That process may only take a matter The case for the land register providing d. Registration process of minutes and now that most registers the public with guaranteed information are becoming electronic the possibility To many the expression “registration on ownership of land is unquestionable, of immediate registration is becoming process” still conjures up images of Croatia but the position for mortgage is real – not just the same day but “while Serbia Ukraine Hungary Kazakhstan bureaucratic forms, arcane procedures, Serbia different. The desired effects of you wait”. This is reported to be the Slovenia long queues, delays and costs. It Czech Republic registration of mortgage are: case in Ukraine and in the Netherlands, Bulgaria Ukraine should not. The process for registration Poland where notaries proceed with mortgage Russia Croatia ❚ first, to alert third parties that a should be designed to be simple and Kyrgyz Republic registration directly from their own Slovenia mortgage exists, or is claimed to exist; rapid. The requirements should be Lithuania computer, accessing the mortgage Romania limited to what is necessary to achieve ❚ secondly, to establish the precise register remotely. the intended effect. If, as in most time from which it would have priority. traditional systems, registration is The Czech Republic, Estonia, Hungary Bulgaria Czech Republic Estonia intended to “authenticate” the and Slovenia provide that the order Estonia Georgia Lithuania The validity of the mortgage is a matter Georgia mortgage the process will be more of priority is the order of application Hungary Romania Kyrgyz Republic for the mortgage creditor. He can Kazakhstan Russia onerous because the registrar will have for registration, and the order is Latvia establish the mortgagor’s title to the Latvia Slovak Republic to be satisfied either by his own enquiry preserved by an immediate note being Poland property from the title register and he Slovak Republic or by relying on notarisation that the made on the register of any pending should be able to establish the validity mortgage has been validly created. application to register a mortgage. of the mortgage agreement (in a similar If, as explained above, registration is Useful as these procedures may be, Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient way that he can establish the validity merely intended to publicise the claim they become unnecessary if registration of the loan agreement). If the mortgage Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes of the mortgagor that he has created is quasi-immediate. in Annex 3 for methodology. in Annex 3 for methodology. is enforced, which will only apply to a a mortgage, the registrar has only to: small fraction of all mortgages, any ❚ check that the mortgagor is registered question of its validity can be raised 9 10 at that stage in the same way as any as owner of the mortgaged property question of validity of the loan (see Part III 3.2 b.)

Ukraine Estonia Czech Republic Estonia Latvia Hungary Slovenia Slovenia

Bulgaria Bulgaria Georgia Kazakhstan Croatia Kazakhstan Croatia Kyrgyz Republic Georgia Kyrgyz Republic Czech Republic Latvia Romania Poland Hungary Lithuania Ukraine Russia Lithuania Poland Serbia Romania Russia Slovak Republic Serbia Slovak Republic

Very ef cient Ef cient Some inef ciency Inef cient Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology.

11 12 Part III: Mortgage Law 23

e. Relying on registration f. Access to registered information and search process The extent to which third parties are able to rely on the entry of the mortgage The most important function of in the register depends on the intended registration is to publicise the mortgage, effect of registration. As explained above, to enable the public to discover that a if registration aims to “authenticate” the mortgage is claimed. This information mortgage, then a third party will expect should be available to any person, the entry to establish the right of the without the need to demonstrate a mortgage creditor under the mortgage, particular interest. The search process just as the register establishes the should be simple, fast and cheap. The ownership right of the mortgagor. It has move towards electronic registries and been seen that in practice this is not the increasing use of the internet greatly necessary. Leaving the onus of proving facilitate the easy and immediate access validity on the creditor who seeks to to mortgage information and a relatively enforce simplifies the process for large group of transition countries creating the mortgage and reduces have been quick at embracing the time and costs. The mortgage creditor technological advances in this respect (and any person to whom the mortgage (see Table 2 on page 15). right is transferred) should be capable of ensuring that the mortgage is valid without having to rely on the registrar, and third parties only need to know whether a mortgage is claimed on the property. A person searching the register does, however, need to rely on the fact that no mortgage can be claimed on the property other than those shown in the register. Reliance on the “negative information” given by the register is an essential element in establishing certainty of title (see Part III 3.2) and first-priority ranking. 24 Mortgages in transition economies

Enforcement of mortgage – Table 4 4 overview Steps for enforcement of a mortgage What gives a mortgage its value, and 1. Establishing right to enforce therefore enables borrower and lender Proof that secured debt is due Formalities are required to establish that secured alike to derive benefit from it, is the and unpaid debt exists confidence that it can be enforced, if Formalities are required to establish that secured debt necessary, to repay the lender’s claim.14 is due and unpaid The greater the doubts of the lender The extent of debt – a breach of credit or the mortgage agreement may lead to the whole loan becoming as to his ability to enforce, the less repayable or trigger the contractual right to accelerate the influence of the mortgage will be Opportunity to remedy Time is given to the mortgagor to pay overdue amounts when he decides whether to lend and and/or remedy the breach on what terms. Right of mortgagor to contest Appeal to court mortgage creditor’s claim Setting up an efficient basis for creating a mortgage is often easier than 2. Commencement of enforcement of mortgage providing an efficient enforcement Steps needed to commence Notice given to mortgagor procedure enabling the mortgage right enforcement Notice given to other parties, such as other mortgage to be executed and the secured debt creditors Publicity (through registration) to be recovered out of the mortgaged Grace period given property. Not surprisingly, many reforms have concentrated on the process of Proof that the mortgage is Creditor declaration enforceable Executory title creation but it is feasible, and necessary, for a reform to address enforcement Right of mortgagor to contest Appeal to court mortgage creditor’s right to as well. In the context of mortgage enforce securities (see Part V), investors will Effect of insolvency/bankruptcy May suspend enforcement pay particular attention to the ability of mortgagor May change procedure for enforcement to enforce, since the value of their 3. Realisation of mortgaged property investment will depend to a large extent on the underlying mortgage loans, and Method of sale (or other means Public auction, private auction, private sale, other to generate proceeds) the security rights attached to them. How and when chosen determined Protection of other legitimate interests in the property Enforcement is dreaded as much by Realisation process Who is responsible the mortgage creditor as it is by the Duties to act diligently mortgagor. When the mortgage loan is Prevention of abuse extended, both parties believe that the Timing loan will be repaid, or the obligations Repossession of property Rights of the occupiers fulfilled, as agreed. When difficulties Eviction procedure arise the parties will usually undertake Priority ranking Other mortgage creditors negotiations to try to resolve the Other privileged creditors situation in a way that is satisfactory for Mortgagor’s right to end both sides. If the enforcement process realisation by repayment is unclear, uncertain or inefficient, there Effect of insolvency/bankruptcy May suspend realisation may be scope for the mortgagor to evade of mortgagor May change process for sale his obligations and the creditor may Title transferred to purchaser How title is transferred be forced to compromise in a manner No risk of subsequent challenge contrary to the original agreement. 4. Distribution of proceeds This puts a heavy onus on the law and institutions underpinning enforcement. Procedure for receipt and Who is to receive proceeds and how disbursement of proceeds Protection of legitimate claims of other parties It also means ironically that the better Timing the system of enforcement, the less Priority of the mortgage How this is established it is likely to be needed. Table 4 creditor Claims of other priority creditors summarises what is typically involved Priority should not be affected by a mortgagor in practice in the enforcement of a insolvency/bankruptcy mortgage in an efficient legal system. Any surplus funds go to the mortgagor Note: The first column lists the basic elements of each step, the second column summarises what each element involves in practice. Part III: Mortgage Law 25

For the enforcement of a mortgage In modern practice there are various Realisation of the mortgaged property there are three basic steps: ways to protect the debtor, such as Realisation aims to generate money rules allowing time to remedy a breach ❚ establishing the right to enforce from the mortgaged property that will or insurance cover that guarantees be used towards repaying the claim ❚ realising the mortgaged property payment in case of ill health or secured by the mortgage. This usually unemployment. But a system that fails ❚ distribution of the proceeds. entails selling the property to a third- to recognise and implement efficiently party acquirer, although in some cases the right of the mortgage creditor to Realisation is the most visible step, the mortgage creditor may accept, at enforce is depriving all parties of the since it determines the ultimate value least initially, to derive only revenue full advantage of mortgage credit. of the security that the mortgage from the property. What is paramount creditor took at the outset, but is that the realisation is conducted in inefficiencies at any one of these steps Establishing the right to enforce a fair manner and that the proceeds of can reduce this value. the realisation are maximised. Fairness Selling a property on enforcement is a implies that the mortgagor has the right When looking at each of these steps, serious measure and should not be to challenge the procedure but not in the overall context of enforcement carried out before a number of a way that is intended to deprive the needs to be understood. It results from preliminary steps have been taken to mortgage creditor of his legitimate rights. an agreement between borrower and establish that the right to enforce exists creditor, and is intended to provide the and that realisation can proceed. The means of assuring the creditor that he precise nature of these steps varies Distribution of the proceeds will be repaid even in case of default. considerably from one jurisdiction Where the mortgage creditor is the only It is not intended to enrich the creditor to the next, but broadly they involve creditor claiming a priority right in the or to penalise the mortgagor. establishing that: proceeds of the realisation, distribution By giving a mortgage, the borrower is ❚ the mortgage creditor has a valid should be straightforward, with any reducing the lender’s risk and therefore claim against the debtor surplus returned to the mortgagor. Where persuading him to lend (or to lend on there are other mortgage creditors or ❚ the claim is secured by a valid better terms). However, as a result creditors with prior rights to the proceeds, mortgage over the property to be the borrower agrees that in the case there must be an orderly process by realised of default, the lender can have the which the ranking order is respected. property sold to repay the debt. If the ❚ an event has occurred that entitles Where the mortgagor is insolvent, the creditor exercises that right it should the mortgage creditor to enforce (and insolvency procedure should allow the lead to realisation of the mortgaged it has not been remedied) proceeds due to the mortgage creditor property at, or very near to, market to be distributed promptly upon receipt. ❚ the mortgagor has been given notice value. Any surplus from the secured The rights of competing privileged of the intention to commence claim should revert to the mortgagor. creditors and their respective rank enforcement and has been given the should have been determined well Just as the mortgagor should allow opportunity to remedy before the proceeds become available realisation to take place and not ❚ the mortgage creditor has fulfilled and therefore, even in a complex case, obstruct the process, so also should all other conditions (often in terms it should be possible for the proceeds the mortgage creditor be obliged to of timing, notice, procedural steps and to be distributed expeditiously. carry out enforcement with diligence so on) for the realisation procedure and with a view to maximising the to start. amount realised. 26 Mortgages in transition economies

Enforcement of mortgage – “executory title”, whereby documents in the loan or mortgage agreement. The specific legal issues the appropriate form (often a notarial trigger event needs to be linked to an 5 deed) enable enforcement to be acceleration of the secured claim so expedited, avoiding the need to apply that the full amount becomes due. If 5.1 Prerequisites to realisation: to the court to issue a decision on the the mortgage creditor enforces because the mortgage creditor’s validity of the mortgage and secured the mortgagor has failed to pay interest obligations claim. This can, however, lead to or one instalment in the payment additional cost and complexity at the schedule, he wants to be able to a. Existence and validity of the secured time of creation, which is hard to justify recover the whole claim, not just claim and the mortgage if it only serves a purpose in the the unpaid interest. relatively rare event of enforcement. For a mortgage to be enforced it is Acceleration may occur by operation necessary for the mortgage creditor to The arguments for avoiding formalities of law but it may also be contractual. establish that there is a valid claim and at creation that can be more efficiently Typically a breach by the mortgagor will that it is secured by a valid mortgage. fulfilled at the time of enforcement give the mortgage creditor the right to In all jurisdictions rules exist as to what (should that ever occur) have been set accelerate, leaving him the possibility, is required to prove that a claim exists out above (see Part III 3.5 c.). The same before exercising that right, to seek a and is valid. In the case of a bank loan arguments apply when considering less extreme resolution of the breach. this should be quite simple and should the formalities of executory title. Legal systems that limit contractual not involve onerous procedures. The parties may choose to accomplish freedom may do so supposedly to Establishing the existence and validity formalities for establishing executory protect borrowers but they send a of a mortgage securing the claim title during the creation process but dangerous signal about the underlying requires confirmation that there is a they should not be obliged to do so. rationale behind enforcement. Again, valid mortgage agreement, that it has the mortgagor should have the right to It is a delicate policy decision as to been publicised through registration challenge the existence of the default how far the creditor claiming the right and that it secures the claim that the through the courts (see Part III 5.4 b.). to enforce should be obliged to produce creditor is seeking to recover. When determining the formalities that supporting evidence for that right and apply to prove default, similar Practices vary considerably but there how far the position of the mortgagor considerations apply as for validity. are two issues which are often critical is adequately protected by his right to the efficiency of the process: first, to appeal to the court. The mortgage how onerous the formalities involved creditor should not have to demonstrate, c. Need to involve the court are and secondly the time in which through a complex or lengthy court When the mortgage creditor enforces they have to be fulfilled. The principle procedure at the time enforcement he is applying the procedure that has of simplicity should apply. Needless is being envisaged, the existence been agreed between the parties from requirements should be avoided and and validity of the secured claim and the outset, and which was the basis on a pragmatic approach is needed when mortgage. But it is equally important which credit was made available. There determining the level to which the that the mortgagor, while being should be no mandatory requirement mortgage creditor has to actively discouraged from obstructive behaviour, to involve the court. The mortgagor establish proof of such existence and always has the right to challenge the has the right to appeal to the court validity. Once the right to enforce has validity of the claim and the mortgage if he disputes the right of the creditor been established with relative certainty via a court and that the courts are to enforce or the way in which he is there comes a point when it is more equipped to handle any such challenge executing that right. Likewise the appropriate to presume that the right to (see Part III 5.1 c. and 5.4 b.). mortgage creditor may seek redress enforce is valid subject to any challenge from the court if the mortgagor tries by the mortgagor. b. Event of default illegitimately to prevent or obstruct In many countries some of the enforcement. Similarly, if the mortgage It is not only necessary for the enforcing formalities are carried out at mortgage creditor has grounds to fear that the creditor to demonstrate that there is a creation, rather than enforcement. mortgagor may try to evade enforcement, valid claim secured by a valid mortgage, For example, in Bulgaria, the Czech he may request the court to order he also has to show that the mortgage Republic, Croatia, Estonia, France, preventing measures. However, in a has become enforceable. Hungary, Germany, Kyrgyz Republic, straightforward case it should be Lithuania, the Netherlands, Poland, For a mortgage to become enforceable possible to commence enforcement Romania, Serbia, the Slovak Republic, a trigger event needs to have occurred. without any court involvement. Slovenia and Ukraine, the mortgage This is normally a failure to pay but it can be created in a way that provides may also be some other breach of 50 300 Mortgage debt to GDP, in per cent Growth of mortgage debt, in per cent

30 200

150

20

100

10 50

0 0 Russia Ukraine Serbia Romania Average Bulgaria Slovenia Poland Czech Average Slovak Average Hungary Lithuania Croatia Latvia Estonia Average Average Hungary Croatia Slovak Poland Romania Average Czech Estonia Slovenia Lithuania Latvia Average Bulgaria Average Serbia Ukraine transition Republic all Republic transition EU-15 EU-15 Republic transition Republic all transition countries transition countries countries countries countries transition countries not EU countries that are Part III: Mortgage Law that are countries not EU 27 members EU members EU members members

Source: European Mortgage Foundation Source: European Mortgage Foundation Annual growth in 2004-05 Note: The volume for Russia is 0.01 per cent. Figures on other transition countries are not available. Averages are highlighted for ease of reference. Note: Data for Russia not available. Averages are highlighted for ease of reference. Average annual growth between 2002 and 2005

1 2

Chart 6 Efficiency of mortgage enforcement

Level of ef ciency

3.0

2.5

2.0

1.5

1.0

0.5

0.0 Bulgaria Croatia Czech Estonia Georgia Hungary Kazakhstan Kyrgyz Latvia Lithuania Poland Romania Russia Slovak Slovenia Ukraine Republic Republic Republic

Speed of mortgage enforcement Realisation of mortgaged property at market value Cost of mortgage enforcement

Note: Data are based on the Mortgage Regional Survey (MRS), which asked the following questions: Is realisation of mortgaged property rapid? Is realisation likely to be at market value? Is mortgage enforcement inexpensive? Answers were graded according to ef ciency ranging from 0.1 to 3, where 3 = very ef cient, 2 = ef cient, 1 = some inef ciency, 0.1 = inef cient. For more information see the MRS composite table in Annex 2. There are insuf cient data for Serbia as the law is too recent for enforcement practice to have developed.

A full court review of the creditor’s right breach but when enforcement is e. Publicising the commencement to enforce should be reserved only for formally commenced,6 notice is needed of enforcement the case where the mortgagor requests to ensure that the mortgagor is alerted Mortgage enforcement is relatively it. Sanctions (such as damages and immediately to the creditor’s intention unusual; most mortgages are never costs) should apply to a mortgagor and to commence any grace period enforced. So when a mortgage is who makes such a request without which may apply (whether imposed by actually enforced it is highly relevant justification, and equally to a mortgage law or contractually). Notice may also information to third parties and any creditor who commences enforcement be required formally to accelerate the person examining the mortgage register without being entitled to do so. Where secured debt. should be alerted to it. The prospect of there is compulsory court involvement The requirements as to the form and this happening may also be a practical for the commencement of enforcement content of the notice should be clear incentive for the mortgagor not to it should be kept simple and fast. so that there can be no doubt as to prevaricate in performing his obligations. its effect, but the formalities should be On the other hand publicising d. Notice to the mortgagor kept simple. Subsequent notices will be enforcement is a serious step and required as the enforcement procedure The mortgagor needs to be made aware it should not take place until the progresses (for example to advise of the mortgage creditor’s intention to mortgagor has been given time to the mortgagor of any sale and of the enforce. In a normal case the creditor remedy or a fair opportunity to contest outcome) and it may also be necessary will have already contacted the the enforcing creditor’s claim. to give notice to other parties, such as mortgagor in an attempt to obtain A mortgage creditor who publicises other mortgage creditors. payment or remedy of any contractual enforcement when he is not entitled to do so should be accountable to the mortgagor for damages. 28 Mortgages in transition economies

5.2 Realisation procedure: realise as near as possible to market by the mortgage creditor allowing him, incentives and obligations value. The chances of achieving this are for instance, to collect the rents unlikely to be enhanced by restrictive generated by the property may, Realisation of the mortgaged property regulation of the sale method. particularly in the case of commercial can entail many different procedures real estate, be a more effective option. but its objective is always the same: It is preferable for the mortgage creditor generating money from the property to be given the right to choose the most which will be used to repay the suitable method of sale, either by law b. Who is responsible for sale? outstanding secured debt. If it is to be or in the mortgage agreement. The risk The traditional view that realisation efficient, realisation should happen in of the creditor abusing this right can be should be by auction is often linked a simple, fast and inexpensive manner mitigated by ensuring that he is under with the view that the best institution and the proceeds should be close a duty to act diligently and will be to oversee the sale is the court. But the to the market value of the property.15 sanctioned for any failure to do so single most important issue on sale is For a picture of the current situation (see Part III 5.4 d.). It is sometimes to ensure that the price is maximised. in transition countries, see Chart 6 provided that the parties can agree on The motivation of the persons who are on page 27. The EBRD’s approach has the method of sale at the time of responsible for the sale is likely to have always been that that there is no one- enforcement (especially to opt out from a major influence on the outcome. The size-fits-all approach to enforcement a court-led enforcement, for example, in case for the mortgage creditor being and there is a need for the legal Estonia, Russia and Slovenia), but this given responsibility, subject to framework to adapt to the context and gives little comfort as the creditor cannot appropriate safeguards, for conducting to give the mortgage creditor a choice rely on obtaining such agreement. It is the sale, or at least selecting the of solutions.16 always open to the mortgage creditor method of sale, is cogent and is being to reach a separate agreement with the increasingly accepted. The court may mortgagor, and indeed that may avoid a. Method of sale have a role (in the background) to formal enforcement happening at all. ensure that the sale is conducted fairly In many jurisdictions the traditional view However, enforcement rules are there and that the rights of the parties are has been that imposing detailed rules to cover precisely the case where the respected, but maximising the price for the method of sale ensures a fair parties are unable to agree a mutually is not a court’s direct remit. and satisfactory result. In particular, acceptable solution. public auction has been promoted as The sale of property is a market A case that is often regulated is the the optimum solution, and often this operation, essentially commercial in right of the mortgage creditor to is the only method of sale permitted nature, and the best course is often to appropriate the property for himself with the process being closely regulated appoint external specialists to take care in satisfaction of the debt in case of (for example, in the Czech Republic, of the sale. The case for having those default, without any sale procedure Croatia, Georgia, Kazakhstan, Latvia, experts appointed by the court is open (“lex commissaria”). Since Roman times Lithuania, Poland and Romania). to debate. In some countries the the law has discouraged this practice, However, the results of enforcement procedures involved are bureaucratic which can clearly lead to the creditor through public auction do not in practice and legalistic, the costs are high, and profiting at the expense of the debtor. produce consistently good results (see the motivation to achieve a rapid sale Most transition countries expressly Part IV 2). at a good price may be low (this was prohibit it. This is the case in 15 out the case, for example, in Bulgaria where The most suitable method of selling a of the 17 selected countries, namely private bailiffs were recently introduced property will depend on the market and in Bulgaria, Croatia, the Czech Republic, to help overcome the inefficiency of the the circumstances. For an unusual and Estonia, Georgia, Hungary, Kazakhstan, court bailiffs). highly desirable property, sale by auction Latvia, Lithuania, Poland, Romania, may achieve the best price, whereas for Russia, the Slovak Republic, Slovenia Conversely, in the Baltic states and a relatively standard property the auction and Serbia. However, there is no reason Slovenia, enforcement seems to work process may put off potential acquirers. why the mortgage creditor should relatively efficiently despite court For a specialised production plant where not have the right to buy the property involvement (see Part IV 2 and Chart 6 interest is limited to a handful of market upon enforcement, subject to adequate on page 27). Whoever a country players, a closed tender may be the best safeguards to ensure that the price decides, in the context of its own way to sell. The interests of both the is fairly set. institutions, to make responsible for mortgagor and the mortgage creditor the sale, the determining factor always Immediate sale may not always be the are that the property should be sold remains whether they will be able to most effective mode of realisation: rapidly with minimum costs, and should deliver a commercially acceptable result. administration of the mortgaged property Part III: Mortgage Law 29

As well as being given the right to selling under enforcement procedures a. Validity choose the method of sale, the (for example by checking that The validity of the mortgage should mortgage creditor should also be commencement of enforcement has not be affected by insolvency. If the entitled to appoint property been registered in the mortgage mortgage existed and was valid professionals to conduct the sale register), but he should not have to pre-insolvency, this should continue for him, subject to an appropriate verify the seller’s compliance with to be the case post-insolvency.17 obligation to act diligently. A few all relevant procedures. countries in central Europe (the Czech The mortgagor’s rights to challenge the Republic and the Slovak Republic, for b. Setting aside sale should cease at the moment the example) have created a professional sale is completed, unless there are A mortgage may be set aside as body of “private auctioneers”. By exceptional grounds, such as fraud or fraudulent or preferential, or as carried contrast to the “public auctioneer”, who collusion between mortgage creditor out in the suspect period, but the acts on court orders and is subject to and purchaser. Allowing a right to applicable rules should be the same the full civil law procedure provisions, challenge the sale for a limited period as those for other pre-insolvency the private auctioneer is able to after it is completed (for example for transactions. There is no reason to conduct public auctions in a way that three months in the Czech Republic, treat mortgages in a harsher way. is more flexible and generally faster Kazakhstan and Ukraine) may seriously and less bureaucratic. The existence of discourage bona fide purchasers in private auctioneers should not, however, c. Reorganisation enforcement proceedings. Many exclude the right of the mortgage purchasers may not be prepared to On a reorganisation or rehabilitation, creditor to appoint any other person to take on the risk of the sale being later the rights of the secured creditors may advise him on the sale or to conduct a reversed for reasons outside their be temporarily suspended, but: private sale on his behalf. control. Ultimately this issue can have ❚ rules on reorganisation and The responsibilities on sale should a major impact on the value of the rehabilitation should aim to strike a reflect the nature of the mortgage security to the mortgage creditor. fair balance between the interests of agreement. Mortgage is a private secured creditors and other parties agreement and if enforcement becomes 5.3 Insolvency and bankruptcy necessary it is primarily the duty of the ❚ suspension may be lifted if the mortgage creditor to organise the sale. Should the mortgagor become insolvent mortgage creditor can show that He should be given wide scope to or bankrupt, the ability of the mortgage suspension of the rights under the control how the sale is conducted creditor to commence enforcement – or mortgage is not necessary for the and to ensure that the proceeds are pursue if the enforcement procedure reorganisation or rehabilitation maximised, not only in his own interests has already started – is likely to be ❚ the mortgage creditor should be but because he owes that duty to altered. Insolvency proceedings require protected from or compensated for the mortgagor and, indirectly, to the creditor discipline and orderly liquidation adverse consequences of suspension mortgagor’s other creditors (secured of the insolvent debtor’s assets to (for example loss of value or and unsecured). ensure creditors are paid based on deterioration of the property). their respective rights. A temporary stay of proceedings is sometimes allowed c. Transfer of the mortgaged property to explore the possibilities of turning d. Liquidation to the purchaser the business around (reorganisation). A policy decision is needed as to In realisation proceedings the purchaser When individuals are involved, which whether the mortgaged property needs to be assured that he will obtain is primarily the case in residential will be included in the assets to be as good a title in the property as that mortgage lending, personal bankruptcy administered in the liquidation, or dealt previously enjoyed by the mortgagor, rules should apply. These have yet to be with outside the liquidation. If the free from the mortgage. The procedures developed in most transition economies mortgaged property is outside the for transfer and registration, and the but corporate insolvency laws have liquidation, the mortgage creditor will authority of the mortgage creditor generally been modernised. Regardless have a duty to the liquidator and/or or other person selling to sign the of what the insolvency law provides, other creditors to realise the property necessary documents and take other a number of principles should apply diligently and to account for any surplus steps, need to be clearly provided. to avoid the mortgage losing its value (this is the same duty that exists towards The purchaser may be required to as a security at the moment when the the mortgagor prior to insolvency, see check that the mortgage creditor is mortgage creditor needs it most. Part III 5.4 d.). 30 Mortgages in transition economies

If the mortgaged property is inside the who ruthlessly abuses his position net rather than a lead player. If the liquidation then it is necessary to: of strength at the expense of the mortgage creditor leads enforcement defenceless debtor. This overlooks the either directly or through professional ❚ define who can enforce: it may remain fact that the situation was born out of executors appointed by him, the court as before the insolvency (mortgage an agreement between the two parties, should be available to intervene at the creditor enforcement rights continue) not by force or law. And the system that request of either party if enforcement but probably subject to the liquidator’s leans too far towards protecting the has not been implemented as agreed authorisation, or it may be the debtor may deprive the mortgage of and intended. In particular, the liquidator only much of its value, with consequent mortgagor should have the right to ❚ define the method of realisation: here repercussions on the availability of apply to the court to challenge the again, the options are that realisation mortgage credit. right of the creditor to enforce, or if remains as before the insolvency the creditor fails to respect his legal or or the same rules will apply as for contractual obligations on enforcement. a. Opportunity of the mortgagor realisation of other assets by the The mortgage creditor should be able to remedy liquidator. In the latter case there is to apply to the court to challenge, or a need to define what happens where Realisation is the last resort and before to obtain protection against, actions of enforcement has already started at it occurs the mortgagor should be given the mortgagor that prevent or impede the time of insolvency and whether a fair opportunity to make good his enforcement. the liquidator would have the power failure to pay or other breach. Some The court should be empowered to to allow enforcement to continue laws provide for a grace period before order appropriate remedies, such as enforcement can be pursued. In western ❚ include provisions enabling the a stay on enforcement, ordering the Europe, this typically ranges between proceeds to be released to the mortgagor to take necessary action two days and two weeks, although in mortgage creditor as soon as to enable the sale of the mortgaged practice the period may be longer. Some is practical. property to take place or to desist transition countries provide a 30-day from obstructive actions. It should period, for example, in Kazakhstan, also be able to order either party to e. Preferential claims Serbia and the Slovak Republic. Any pay damages to compensate the other such provision should be designed to A mortgage creditor should maintain for the consequences of wrongful acts. ensure that the bona fide mortgagor a prior claim on the proceeds of has some time to remedy, but without The role for the court is to put back on realisation of the property (subject giving the unscrupulous mortgagor the track a procedure that has derailed or to the right of any pre-existing, prior- possibility of protracting proceedings. gone against the parties’ contractual ranking creditor). Where preferential agreement, not to take over the claims exist their scope should be Even after the initial grace period is proceedings. The ability of the court to defined with certainty and the over the mortgagor should continue react promptly and to order appropriate potentially negative effect on the to have the right to stop enforcement remedies can be a determinant factor secured credit market needs to be by paying the outstanding debt. At this in the efficiency of enforcement. This carefully assessed. Countries that stage, however, the full amount of the may sound a very challenging role in provide privileges to a group of loan may have become due (see Part III transition economies where courts may creditors, such as employees, weaken 5.1 b.) and the mortgagor may not have limited experience in arbitrating significantly the economic role of the be able to stop enforcement merely by between parties in commercial matters mortgage security. paying the overdue instalments. In any and logistical difficulties in intervening event the mortgage creditor should be swiftly. However, this is the objective entitled to require reimbursement of the 5.4 Protection of rights and to strive for. costs he has incurred in commencing achieving fair balance enforcement. Once realisation has Realisation of the debtor’s property – occurred the right of the mortgagor c. Other mortgages – hierarchy of rights especially his home – to enable to remedy should cease. Where there is more than one mortgage payment of his debts is an extreme on a property the priority will usually be solution, only to be used when other b. Rights of appeal – role of the court determined by the time of creation, possibilities have failed. If the system although in some countries this can be for enforcement is to work efficiently Throughout the entire enforcement changed by agreement. The competing there has to be a series of checks and procedure it should be possible for rights of different mortgage creditors balances. The mortgage creditor is either party to involve the court if the need to be regulated.18 The mortgage often in the stronger position and it is circumstances merit it. The role of creditor with first priority should be easy to paint the picture of the creditor the court is important, but as a safety Part III: Mortgage Law 31

in a position to control enforcement. e. Duties of the mortgagor – In practice an enforceable event on a cooperation and no obstruction Endnotes subsequent mortgage is likely to make It is not just the mortgage creditor who 1 See core principle 7, Box 1 on page 11 the prior mortgage also enforceable. has duties on enforcement. Realisation and Annex 1. The rights of subsequent mortgage will normally require some cooperation 2 See Merrill Lynch, Russian mortgage creditors should be defined. If they market, February 2007, p. 13. from the mortgagor. It should be in the significantly dilute the rights under the 3 See core principle 7, Box 1 on page 11 interests of the mortgagor to cooperate mortgage with first priority, this will and Annex 1. to achieve the best financial outcome. encourage the use of negative pledge 4 Other participants are: Austria, England However, there need to be rapid and and Wales, Finland, Iceland, Ireland, and thus reduce the possibility for the the Netherlands, Norway, Scotland and effective remedies if he fails to do so, mortgagor to raise finance by further Sweden. See www.eulis.org. for example if he acts in a way that mortgages on his property (see Box 3 5 An authenticated statement of the putative could diminish the value of the property owner’s consent to creation of a mortgage on page 20). is deposited in the Register of Deposited or prejudice the sale. The mortgagor Contracts kept by local district courts. who fails to cooperate or who actively These statements are planned to be gradually transferred in the land register, d. Duties of the mortgage creditor – obstructs the realisation process once title issues have been resolved. incentives to maximise price should also be liable to the mortgage 6 See core principle 7 in Box 1 on page 11 creditor for the resulting loss or damage. and Annex 1. There can be many reasons why sales 7 See core principle 7 in Box 1 on page 11 on enforcement frequently realise low and Annex 1. value. Some of them have to do with f. Rights of occupants 8 See EBRD Regional Survey for Secured the formalities and inefficient procedures Transactions at www.ebrd.com/st. The occupants of the mortgaged involved but one reason is that the 9 An analysis of the Grundschuld as used in property that is being sold may also Germany is beyond the scope of this work. enforcing creditor may have little Although it has been made to work need protection, because eviction of motivation to realise more than is successfully in Germany and is the people (whether they are the mortgagor, principal instrument used in one of the necessary to pay off the secured debt. largest mortgage markets in the European his dependants or tenants) has Requiring court supervision of Union, it should be noted that the important social consequences. documentation required is more complex realisation or imposing special auction than in most jurisdictions where an However, the situation differs depending procedures will not necessarily lead accessory mortgage is used. See also on the legal ground of occupancy. O. Stöcker (2005), “The Eurohypothec – to a high price (see Part III 5.2 b.). Accessoriness as legal dogma?” in On the contrary, if the mortgage creditor ❚ Where occupants have a valid lease A. Drewicz-Tulodziecka (Ed), Basic Guidelines for a Eurohypothec, Warsaw: has been given a special advantage on the property their basic rights Mortgage Credit Foundation. of being able to lead the enforcement under the lease will normally continue, 10 See www.eurohypothec.com, S. Nasarre- process and choose the method of although in some countries Aznar (2005), “The Eurohypothec: a common mortgage for Europe”, The realisation, part of the quid pro quo enforcement may give a right to the Conveyancer and Property Lawyer (United should be that he is under a duty to enforcing creditor to terminate the Kingdom), January-February 2005, pp. 32-52. act diligently and to maximise the price lease early. In some countries, leases 11 The Green Paper focused on a number of obtained. Failure to do so should lead that have not been approved by the issues mostly relating to the obstacles to liability to the mortgagor in damages. mortgage creditor can be declared faced by lenders in one EU jurisdiction providing mortgage finance in another EU The way that duty is framed will depend null (see Part III 3.2 c.). jurisdiction. The White Paper is expected on the local legal context but it needs to be published in December 2007. ❚ Where there is no lease a fair balance to be meaningful, similar to, for 12 See core principle 10, Box 1 on page 11 needs to be struck between social and Annex 1. example, the duty that would be owed protection and the economic role of 13 See core principle 8, Box 1 on page 11 by a professional person who is mortgage credit. If evicting occupants and Annex 1. commissioned to make a sale. At the is a general problem for mortgage 14 See core principle 3, Box 1 on page 11 same time it should be clear what the and Annex 1. creditors as opposed to one that duty involves and care should be taken 15 See core principles 4 and 6, Box 1 on arises in specific, justifiable page 11 and Annex 1. to ensure that it does not encourage circumstances, this will discourage 16 See F. Dahan, E. Kutenic´ovà and opportunistic litigation. Where the lending to a wider range of people, for J. Simpson (2004), “Enforcing secured mortgage creditor is required (or transactions in Central and Eastern example families with young children Europe: an Empirical Study”, Butterworths chooses) to appoint professional who are likely to represent a sizeable Journal of International Banking and persons to conduct the sale on his Financial Law, Vol. 19, pp 253-257 and segment of the market. 314-318. behalf, those persons should be under 17 See core principle 5, Box 1 on page 11 a similar duty. and Annex 1. 18 See core principle 9, Box 1 on page 11 and Annex 1 32 Mortgages in transition economies

Part IV: Mortgage Regional Survey and comparative overview

Survey description The MRS composite table is set out in The MRS is not specifically designed as Annex 2. It is the most convenient tool a means of measuring legal efficiency, 1 to consult when wanting to know the but the information contained in it is The Mortgage Regional Survey (MRS) answers received on a particular easily linked to the criteria of legal was designed and compiled during question related to mortgage law, efficiency (see Part II 2 and Chart 3 on 2006 and 2007, based on an analysis and the respective strengths and page 9) and provides a useful starting of the relevant legal texts, published weaknesses of transition economies point for such an exercise. information and experience of the covered. If the reader’s interest is When commenting on the survey in this EBRD, supplemented by information and limited to one country, it may be more part, the questions have therefore been advice received from practitioners in the practical to refer to the individual re-grouped according to the six legal relevant countries. The list of persons country tables.2 Explanatory notes on efficiency criteria, that is: basic legal who contributed, to all of whom the the survey, including the criteria used function; simplicity; speed; cost; EBRD is deeply grateful, is provided on for determining the grades on some certainty; and fit-to-context. For each page 2. The MRS has been developed questions, are set out in Annex 3. Less criterion the survey grades have been in a similar manner to the regional extensive research was also conducted used to indicate the relative efficiency survey of security over movable and on selected developed mortgage of each country – there are four levels intangible property, which was first markets, namely England, France, 1 ranging from a clear yes to a definite published in 2000. Germany, the Netherlands and the no. We emphasise that these are United States, in order to look at the The MRS is intended as a tool for intended as indicators of strengths and transition countries against a wider anyone interested in the modernisation, weaknesses, not as a comprehensive context (although making comparisons improvement or reform of mortgage law. assessment. It presents basic information and a with the United States was not practical comparative assessment of the legal because of the differing systems that The information covered by the survey regimes for mortgage in 17 transition apply between individual states). is not comprehensive enough to provide a full assessment (especially for countries, selected because either The questions in the survey are inspired measuring fit-to-context) and a number there already exists an active mortgage more by market reality than legal theory. of questions are relevant to more than finance market or preparations for Based on the EBRD Core Principles for one criterion. However, the results do developing such a market are well a Mortgage Law (see Annex 1), the provide a fair indication of what has been advanced. The survey can be extended survey covers four main areas achieved in each country and useful to other jurisdictions in the future. of mortgage (creation, commercial pointers to what needs to be improved. The questions address simple practical effectiveness, effect on third parties issues that highlight the strengths and and enforcement) and gives a weaknesses of the mortgage regime reasonable indication of the extent in each country in a way that may also to which these principles are upheld. be useful to credit providers and their advisers when assessing the potential value of mortgage security. Part IV: Mortgage Regional Survey and comparative overview 33

Basic legal function of Chart 7 a mortgage law 2 Legal efficiency – basic legal function Czech Republic The basic legal function of a mortgage Estonia Serbia Latvia Latvia Czech Republic Poland law is demonstrated by a number of key Lithuania Slovak Republic Estonia Bulgaria Russia Russia Slovak Republic Slovenia Poland elements addressedGeorgia in five questions of Ukraine Russia the MRS (seeKyrgyz Annex Republic 2 for the full table). Slovenia Lithuania Bulgaria Romania Croatia Ukraine Georgia 1.2 Is the manner of creation of mortgage clearly established?

3.2 Does mortgage give priority in mortgaged property? Czech Republic Bulgaria Estonia Hungary Hungary Croatia Kazakhstan 3.3 Does the mortgage creditor have priority Kazakhstan Kazakhstan Croatia Georgia Kyrgyz Republic Kyrgyz Republic in bankruptcy? Latvia Hungary Slovenia Lithuania Serbia Poland Ukraine Romania Slovak Republic 4.1 Is the manner of enforcement of Romania Serbia mortgage clearly established?

4.4 Is realisation likely to be at market value? Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

It is encouraging to see that across Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes all countries included in the survey in Annex 3 for methodology. in Annex 3 for methodology. 5 the basic rules for creating a mortgage are clear and in almost all there is should be able to rely. In Russia the The priority position of the mortgage established practice. However, question enforcement process is relatively clear 7creditor on bankruptcy has greatly 8 1.2 indicates the very basic position, but the courts have a discretionary improved over recent years, especially and uncertainties arising from the law power to decide whether enforcement in the case of legal entities. Wages may lead to downgrades elsewhere can proceed depending on whether it is and health and safety claims still have in the survey. In Georgia, for example, considered “proportionate”. In the priority in some jurisdictions, such as while the overall creation process is Kyrgyz Republic and Serbia there is as Kazakhstan and Russia. The system established, some provisions of the yet little practice of realisation on of giving priority only to a proportion of law, such as the time of creation of enforcement so procedures are not yet the secured claim, which used to apply the mortgage, are unclear. well established. in the Czech Republic, Hungary and the Slovak Republic, now exists only in Croatia Similarly, for mortgage enforcement the The answers to questionsSerbia 3.2 and 3.3 Ukraine Hungary Kazakhstan Georgia (although the new insolvency answers to question 4.1 indicate that at show that there continue to exist some Serbia Slovenia Czech Republic law is expected to abolish this rule). Tax a basic level the manner of enforcement claims that take precedence over the Ukraine Poland priority is now generallyBulgaria limited to taxes is clearly established. Where right of a mortgageRussia creditor outside the Croatia on the mortgaged Kyrgyzproperty Republic (Croatia and enforcement has to be carried out mortgagor’s bankruptcySlovenia (regardless of Russia are exceptions).Lithuania It should be through the courts (which is the case in their date of creation), even where such Romania noted that personal bankruptcy, where approximately half the countries covered super privileges no longer apply in case the mortgagor is an individual, is barely by the survey, namely in Bulgaria, of bankruptcy (for example wages claims developed in the transition countries. Bulgaria Croatia, Georgia, Latvia, Lithuania, Czech Republic in Poland and Hungary).Estonia In practice it is Estonia Poland, Romania, Russia and Slovenia) not always clear howGeorgia such claims would A country may have clear rules for Lithuania Georgia Hungary Romania there may be uncertainties concerning be enforced and to what extent they creation, priority and enforcement of Kyrgyz Republic Kazakhstan Russia Latvia court procedure and practice. Even pose a significant riskLatvia to the mortgage a mortgage but their usefulness is Slovak Republic Poland where enforcement is out of court such creditor. In SlovakRussia, Republic Croatia and Ukraine curtailed if the proceeds on realisation uncertainties are damaging since they there is uncertainty as to whether tax are not expected to be at or near to weaken the fall-back position on which claims may take precedence. market value of the property. Gradings Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient both mortgagor and mortgage creditor on question 4.4 have to be treated Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology.

9 10

Ukraine Estonia Czech Republic Estonia Latvia Hungary Slovenia Slovenia

Bulgaria Bulgaria Georgia Kazakhstan Croatia Kazakhstan Croatia Kyrgyz Republic Georgia Kyrgyz Republic Czech Republic Latvia Romania Poland Hungary Lithuania Ukraine Russia Lithuania Poland Serbia Romania Russia Slovak Republic Serbia Slovak Republic

Very ef cient Ef cient Some inef ciency Inef cient Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology.

11 12 34 Mortgages in transition economies

cautiously. Information was derived conditions. The Serbian Law on from local practitioners and is to a large Mortgage, adopted in 2005, provides extent impressionistic since hard a complete new system of mortgage statistics are not available. Mortgage enforcement, clearly aimed at making markets in the transition region are still the process more efficient, but there far from fully developed and in most is not enough practical experience to countries enforcement practice is still be able to assess its results. in its infancy. However, in four countries Taking the grades on the five questions (Kazakhstan, Lithuania, the Slovak that relate to basic legal function Republic and Ukraine), realisation is together, nine countries out of 17 score considered likely to be at market value. positively (that is, answer yes, even In Bulgaria, Croatia, Georgia, Hungary, if that “yes” was qualified) on all Poland, Romania and Russia it is questions (see Chart 7 on page 33). expected to be somewhere between All of those that do not score positively 50 and 80 per cent of market value. fail on the value likely to be realised on In some countries booming property enforcement. In addition, Russia fails markets may have ensured that where to give first-rank priority to the mortgage enforcement has occurred, it has often creditor. As seen in Part III 4 and 5, been relatively easy to achieve improving the enforcement procedure satisfactory realisation. The robustness is not always easily addressed and the of mortgage enforcement procedures gradings not only on question 4.4 but will only be truly tested when a on all the MRS questions related to downturn in the market leads to enforcement seem to confirm that this borrower defaults in less favourable area needs attention in many countries. Part IV: Mortgage Regional Survey and comparative overview 35

Maximising economic Chart 8 3 benefit Legal efficiency – simplicity Czech Republic The extent to which the mortgage law Estonia Serbia Latvia Latvia Czech Republic Poland maximisesLithuania economic benefit is shown Slovak Republic Estonia Bulgaria Russia Russia Slovak Republic Slovenia Poland Georgia for each criterion in key elements that Ukraine Russia Kyrgyz Republic are addressed in the listed relevant Slovenia Lithuania Bulgaria Romania questions of the MRS (see Annex 2 for Croatia Ukraine the full table). Georgia

3.1 Simplicity Czech Republic Bulgaria SimplicityEstonia is addressed in two questions Hungary Hungary Croatia Kazakhstan Kazakhstan Kazakhstan Croatia Georgia in theKyrgyz MRS. Republic Kyrgyz Republic Latvia Hungary Slovenia Lithuania Serbia Poland Ukraine Romania Slovak Republic Romania 1.3 Is creation of mortgage simple? Serbia

4.5 Is enforcement procedure simple?

Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient The creation of a mortgage, it has been Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. seen, can be achieved by a simple in Annex 3 for methodology. agreement and a simple registration, 5 but the survey shows quite a range of quite straightforward. In Bulgaria there or the Czech Republic (see Part III 5.1 a.) 7 practices, some very simple and some 8 complex. In Poland, a practice has is a requirement to re-register a or alternative out-of-court options such developed whereby lenders require the mortgage after 15 years and in Romania as a notarial stamp, as in Ukraine, creation of two mortgages: one securing it seems there is a similar requirement or clauses in the mortgage agreement the principal debt and a separate after 10 years (see Part III 3.5 b.). under which the mortgage creditor is granted a direct enforcement right mortgage securing interest and Enforcement of a mortgage, by its in the event of default, as in Estonia, accessories (Hipoteka zwykła and nature, is a more complex process than Latvia and the Slovak Republic. hipoteka kaucyjna, respectively). This creation, but the law and institutions complexity is due to the rigid approach should not provide a system that is Looking at jurisdictions in western towards defining the secured debt and inherently complex. The realisation Europe, the situationCroatia is also contrasted: Serbia doubtsUkraine on the correct interpretation of procedure is shownHungary as relatively simple the Netherlands hasKazakhstan a straightforward 3 the law. The registration process is in a surprising number of countries procedure led by anSerbia authorised notary, Slovenia Czech Republic often responsible for the downgrade Bulgaria (14 out of 17). In the three countries whereas in FranceUkraine the procedure is Poland in the area of simplicity because of Russia Croatia (Georgia, Poland and Russia) where complex. Looking at simplicity for Slovenia complexKyrgyz or Republic formal procedures, (as for Lithuania realisation procedures were not rated creation and realisation together, exampleRomania in Hungary, the Kyrgyz as simple, the result of realisation was 12 countries have the same grading Republic, Poland and Russia) or also shown to be well short of market for both questions and only two (Poland onerous documentation requirements value. In Poland, Bulgariathe procedures are and Russia) have negative gradings (as for example in Bulgaria, Kazakhstan, Czech Republic Estonia formalistic and the operation of the for both (see Chart 8). Estonia Georgia Lithuania and Russia). In Bulgaria, bailiff system is reported to be highly Lithuania Georgia Hungary the Czech Republic and the Slovak Romania inefficient, whichKyrgyz Republic is also reported to be Kazakhstan Russia Republic, multiple copies of the Latvia 3.2 Speed Latvia the case in Russia. In Georgia, court Slovak Republic Poland Slovak Republic mortgage agreement have to be practices can cause uncertainty among Two questions of the MRS deal presented to complete registration. parties as to the correct enforcement with speed. Although not sufficient by itself to make procedure and likely outcome. Very ef cient Ef cient Some inef ciency registrationInef cient complexUnclear this is an example Very ef cient Ef cient Some inef ciency Inef cient 1.4 Is creation of mortgage rapid? Note: The chart is based on gradings in the Mortgage Regional Surveyof –an see unnecessary explanatory notes administrative ComplexityNote: The chartis often is based associated on gradings with in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. burden. Requiring a notarial deed is the inneed Annex to 3 forobtain methodology. a court judgment 4.2 Is enforcement of mortgage rapid? not per se an unacceptable complexity confirming the borrower’s default and (see for example in Ukraine, which has allowing for the mortgage’s enforcement. Taking a mortgage may take time 9 established a simple process), as long Countries where the realisation 10because of negotiations between the as the benefits of such deed are clear procedure is simple generally apply parties or because it is linked to the to the parties.4 Generally the other either a simplified court procedure for acquisition of the property being aspects of creating a mortgage are issuing an executory title, as in Bulgaria mortgaged, but the creation of the

Ukraine Estonia Czech Republic Estonia Latvia Hungary Slovenia Slovenia

Bulgaria Bulgaria Georgia Kazakhstan Croatia Kazakhstan Croatia Kyrgyz Republic Georgia Kyrgyz Republic Czech Republic Latvia Romania Poland Hungary Lithuania Ukraine Russia Lithuania Poland Serbia Romania Russia Slovak Republic Serbia Slovak Republic

Very ef cient Ef cient Some inef ciency Inef cient Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology.

11 12 Czech Republic Estonia Serbia Latvia Latvia Czech Republic Poland Lithuania Slovak Republic Estonia Bulgaria Russia Russia Slovak Republic Slovenia Poland Georgia Ukraine Russia Kyrgyz Republic Slovenia Lithuania Bulgaria Romania Croatia Ukraine Georgia

Czech Republic Bulgaria Estonia Hungary Hungary Croatia Kazakhstan Kazakhstan Kazakhstan Croatia Georgia Kyrgyz Republic Kyrgyz Republic Latvia Hungary Slovenia Lithuania Serbia Poland Ukraine Romania Slovak Republic Romania Serbia

Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology. 36 Mortgages in transition economies 5 7 8

mortgage itself should not be the element that causes delay. If property Chart 9 searches are available online and Legal efficiency – speed registration becomes a notification Croatia Serbia Ukraine Hungary Kazakhstan procedure without authentification (see Serbia Slovenia Part III 3.5 d.) it should be possible to Czech Republic Ukraine carry out all formalities for mortgage Poland Bulgaria Russia Croatia creation within a day. However, the Slovenia Kyrgyz Republic survey shows that this is not yet reality. Lithuania Romania In more than half the countries creation takes over two weeks, and in most cases the principal cause of the delay Bulgaria Czech Republic Estonia is registration. Chart 5 on page 22 Estonia Georgia Lithuania Georgia shows the average time required for Hungary Romania Kyrgyz Republic Kazakhstan Russia registration of a mortgage. Latvia Latvia Slovak Republic Poland There are other causes of delay. In Slovak Republic Estonia it is reported to take two weeks to obtain the requisite appointment with Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient a notary, and in Kazakhstan title checks habitually take two to three weeks. In Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology. some countries it is frequent practice to advance a mortgage loan before registration formalities have been remedy before realisation commences, grading for this as a result of the high completed (for example in the Czech time for publicising the sale and time 9notarial fees that generally apply (see 10 Republic, Estonia, Hungary, Kazakhstan, for the formalities of the sale to be Annex 2). Notary costs are sometimes Poland and Serbia). completed. Completing the process denounced as excessive but a closer within six months is commendable; few examination shows that in transition Where registration is delayed but there western European jurisdictions achieve countries notary involvement does not is little doubt as to the outcome then that.5 Of the five countries where always mean high costs. In Ukraine early disbursement of funds (that is, enforcement is reported to habitually costs are low, despite the fact that a the mortgage loan) is an indication take over a year (the Czech Republic, notarial deed is required. However, in of the market finding a pragmatic Georgia, Poland, Russia and Slovenia) the two countries where creation is solution to reduce the effect of slow Ukraine Estonia Czech Republic Estonia all except the Czech Republic require – shown as the leastLatvia expensive – the Hungary or bureaucratic procedures. But where by law or in practice – realisation to be Czech Republic andSlovenia Russia – Slovenia early disbursement is subject to via a court-led public auction, and all notarisation is not required. In Russia the mortgagor providing insurance except Georgia have a negative grading costs have fallen following the bold or additional security, as is the case for the time taken for mortgage creation. decision to lower notary costs (which in Poland, it indicates a more deep- used to be relatively high) and to repeal rooted inefficiency. Chart 9 shows that, taking creation and Bulgaria compulsory notarisation for mortgage. Bulgaria enforcement together,Georgia more than half Kazakhstan Croatia The speed of enforcement is not as Kazakhstan Kyrgyz Republic the countries have at least one negative The situation regardingCroatia the cost of Georgia slow as it is sometimes perceived, Kyrgyz Republic Czech Republic Latvia Romania grading (that is, showPoland some inefficiency). enforcement is not as good. Almost Lithuania Ukraine especially when compared with the Hungary Russia half the countries Lithuaniaindicated that Poland average time required in advanced Serbia Romania Russia enforcement costs (excluding advisory Serbia markets. In seven countries out of 16 3.3 Cost Slovak Republic fees) amounted to more than 5 per cent Slovak Republic (there are no data on Serbia as the law Here again, the question of cost arises of the amount claimed or the mortgaged is too recent for enforcement practice at two points: creation of mortgage and property’s value.6 Most often high costs to have developed), enforcement is on Very ef cient Ef cient Some inef ciency Inef cient Very ef cient Ef cient Some inef ciency Inef cient its enforcement. are attributable to scale fees paid to average completed within six months, Note: The chart is based on gradings in the Mortgagebailiffs Regional or Survey public – see auctioneers. explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes and in 11 countries it is completed in Annex 3 for methodology. in Annex 3 for methodology. within one year. Unlike creation, 1.5 Is creation of mortgage inexpensive? The combined position on cost is shown realisation on enforcement cannot 4.3 Is enforcement of mortgage inexpensive? in Chart 10 on page 37. become a virtually instantaneous 11 12 operation. There are certain built-in In most countries the cost of creation delays, such as a grace period to give is not a significant problem. Hungary is the mortgagor the opportunity to the only country that is given a negative Czech Republic Estonia Serbia Latvia Latvia Czech Republic Poland Lithuania Slovak Republic Estonia Bulgaria Russia Russia Slovak Republic Slovenia Poland Georgia Ukraine Russia Kyrgyz Republic Slovenia Lithuania Bulgaria Romania Croatia Ukraine Georgia

Czech Republic Bulgaria Estonia Hungary Hungary Croatia Kazakhstan Kazakhstan Kazakhstan Croatia Georgia Kyrgyz Republic Kyrgyz Republic Latvia Hungary Slovenia Lithuania Serbia Poland Ukraine Romania Slovak Republic Romania Serbia

Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology. Part IV: Mortgage Regional Survey and comparative overview 37 5 7 8

procedure without predictable results, Chart 10 but this could not cover the case where Legal efficiency – cost children become occupants after the Croatia mortgage is created. This uncertainty Serbia Ukraine Hungary Kazakhstan Serbia is a deterrent to mortgage lending to Slovenia Czech Republic young families. Ukraine Poland Bulgaria Russia Croatia Only four countries indicated difficulties Slovenia Kyrgyz Republic Lithuania with determining whether a property is Romania mortgaged or otherwise encumbered. In Kazakhstan and the Kyrgyz Republic

Bulgaria there are limits on publicly available Czech Republic Estonia information, in Bulgaria the way the Estonia Georgia Lithuania information is registered can make it Georgia Hungary Romania Kyrgyz Republic hard to find and in the Czech Republic Kazakhstan Russia Latvia Latvia Slovak Republic tax liens on property may not be Poland Slovak Republic registered immediately. The progress being made towards transparency through online availability of land register Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient information (see Table 2 on page 15) Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes should make it increasingly easy to find in Annex 3 for methodology. in Annex 3 for methodology. out about existing mortgages. This is an area where many transition countries 3.4 Certainty have unified their property records and may be moving ahead of some of their 9 use10 one comprehensive public register western European neighbours. In France Certainty is relevant to all aspects of a for all immovable property rights (see and Germany, a third party who mortgage law but six questions in the Part III 3.2 b.). In Lithuania the wants to determine whether a property MRS are especially relevant. mortgage register is separate from the is mortgaged faces considerable real estate register, but information difficulties. 1.1 Can existing title to property be entered in either is automatically fed established with sufficient certainty? Debtor obstruction to enforcement to the other. Some countries, however, is to some extent a problem in every 3.1 Is the mortgage creditor protected from such as Kazakhstan, Serbia and jurisdiction. There are recalcitrant subsequent claims which may adversely Ukraine, have the relevant records Ukraine Estonia affect theCzech mortgagor’s Republic title to the Estonia debtors everywhere who will use all Latvia registered in two orHungary more registers, property? available techniques to frustrate a Slovenia which can hamperSlovenia the process of creditor’s attempts to enforce, so it is 3.4 Can a third party determine whether establishing title. Although great not surprising that only four countries property is mortgaged? progress has been made in improving (the three Baltic states and Slovenia) 4.8 Is mortgage creditor protected against land registration across the region, the report that obstruction is not a mortgagor obstruction? downgrades on this question mostly significant problem in practice. The Bulgaria Bulgaria indicate reform that is not yet complete. Georgia 4.9 Does commencementKazakhstan of enforcement Croatia situation is shown to be worst in Georgia Kazakhstan Kyrgyz Republic Croatia have to be publicised? Subsequent claimsGeorgia adversely affecting and Poland, followed by Russia and Kyrgyz Republic Czech Republic Latvia Romania Poland Hungary 4.10 Is purchaser Lithuaniain enforcement procedure title did not show Ukraineup as a problem. Ukraine. In Russia debtors often apply Russia Lithuania protected? Poland There remains some risk of restitution for postponement, which can be granted Serbia Romania Russia Slovak Republic Serbia claims on property but only in Lithuania, by a court for a period of up to one year. In eight countries,Slovak Republic establishing title Romania and Serbia was there A similar right to apply for postponement to property does not cause significant considered a significant risk that they exists in Kazakhstan. In Georgia, the Very ef cient Ef cient Some inef ciency Inef cient difficulty.Very Onlyef cient in BulgariaEf cient and SerbiaSome is inef ciencycould invalidateInef cient or restrict the value of mortgagor and dependants are legally a negative rating given, in both cases the mortgage. In Ukraine lenders are allowed after realisation to remain in Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgageconcerned Regional Survey by a– seelaw explanatory designed notes to protect the property if they choose to do so in Annex 3 for methodology. becausein Annex of 3 thefor methodology. unsatisfactory state of the land registration system. In general, families with children, which makes as tenants of the property purchaser. countries have significantly reduced the eviction subject to approval from the During the enforcement procedure the amount of unregistered property but Ministry of Youth Affairs. Mortgage 11 12 purchaser is generally protected from this is still a problem for several loans are sometimes made conditional any subsequent challenge that could be jurisdictions (Croatia, Poland, Romania, on receipt of such administrative brought against his title to the property. Russia and Serbia). Most countries approval, which can involve a lengthy In only five countries (the Czech Czech Republic Estonia Serbia Latvia Latvia Czech Republic Poland Lithuania Slovak Republic Estonia Bulgaria Russia Russia Slovak Republic Slovenia Poland Georgia Ukraine Russia Kyrgyz Republic Slovenia Lithuania Bulgaria Romania Croatia Ukraine Georgia

Czech Republic Bulgaria Estonia Hungary Hungary Croatia Kazakhstan Kazakhstan Kazakhstan Croatia Georgia Kyrgyz Republic Kyrgyz Republic Latvia Hungary Slovenia Lithuania Serbia Poland Ukraine Romania Slovak Republic Romania Serbia

Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology. 5 7 8

Croatia Serbia Ukraine Hungary Kazakhstan Serbia Slovenia Czech Republic Ukraine Poland Bulgaria Russia Croatia Slovenia Kyrgyz Republic Lithuania Romania

Bulgaria Czech Republic Estonia Estonia Georgia Lithuania Georgia Hungary Romania Kyrgyz Republic Kazakhstan Russia Latvia Latvia Slovak Republic Poland Slovak Republic

Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes 38 in Annex 3 for methodology. Mortgagesin in Annex transition 3 for methodology. economies

9 10

3.5 Fit-to-context Chart 11 Legal efficiency – certainty There are nine questions in the MRS illustrating the fit-to-context criteria. Ukraine Estonia Czech Republic Estonia Latvia Hungary Slovenia 2.1 Can a mortgage be granted by any Slovenia person?

2.2 Can any person take a mortgage?

2.3 Can the mortgage secure any type of debt? Bulgaria Bulgaria Georgia 2.4 Can the secured debt be inKazakhstan any form? Croatia Kazakhstan Croatia Kyrgyz Republic Georgia Kyrgyz Republic Czech Republic 2.5 Can the mortgage cover all typesLatvia Romania Poland Lithuania Ukraine Hungary of immovable asset? Russia Lithuania Poland Serbia Russia Romania 2.6 Does the mortgaged property include Slovak Republic Serbia subsequent constructionsSlovak and Republic additions? 2.7 Are subsequent mortgages permitted over same property? Very ef cient Ef cient Some inef ciency Inef cient Very ef cient Ef cient Some inef ciency Inef cient 4.6 Can the mortgage creditor decide on Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. the way the salein Annex will be3 for conducted? methodology. 4.7 Can the mortgage creditor exercise control over the realisation process? Republic, Hungary, Kazakhstan, the The11 issue of certainty permeates 12 Kyrgyz Republic and Ukraine) can the most of the questions in the survey. Questions 2.1, 2.2, 2.3 and 2.5 mortgagor or a third party challenge the Uncertainties have been noted together reflect much of the essence purchaser’s title in the absence of fraud elsewhere, for example, in the of core principle 7: “Mortgage should be or exceptional circumstances. In the registration process, preferential claims available (a) over all types of immovable Czech Republic the challenge can be and enforcement procedures. Similarly assets (b) to secure all types of debts made only for certain defined reasons, the answers to question 2.4 (form of and (c) between all types of person”.7 and in Hungary if the sale was not debt) are commented on under “Fit-to- The results are encouragingly positive. conducted by a professional auctioneer context” below, but for Bulgaria, No country is given a negative grading or dealer. Croatia, Georgia, the Kyrgyz Republic on any of these questions. There are and Romania the requirements for Publicising the commencement of merely some reservations. In the describing the secured debt were enforcement provides additional Kyrgyz Republic and Ukraine there are reported as uncertain. relevant and useful information to third restrictions on mortgaging agricultural parties. This is quite separate from Chart 11 gives the composite picture land. In Romania mortgages under the the publicity of auctions, which aims for the gradings on five questions only. Mortgage Lending Law can only secure to advertise the forthcoming sale (see Although desirable, publicising the loans used for investment in the Part III 5.1 e.). A note in the register commencement of enforcement is mortgaged property (but this limitation against the mortgaged property is made not essential and therefore question does not apply to mortgages that are in eight countries, although in Poland it 4.9 has not been included. With the regulated by the Civil Code). There are is done by the bailiff and is sometimes exception of Bulgaria and Serbia all no restrictions on who can grant a late. In five countries there is no the negative gradings relate to debtor mortgage, and only minor reservations publicity. In four countries the publicity obstruction or purchaser protection on (in Croatia and Romania) on the person is limited: in the Czech Republic and enforcement. Unlike the other charts who can take a mortgage. Hungary publicity is only required where on legal efficiency, this chart shows However, if one analyses more closely realisation is through the court (and in that uncertainty is more prevalent as to whether the secured debt can Hungary there seems to be no sanction further east – whereas central European be in any form (question 2.4), an for failing to publicise). In Russia and countries (except Poland) and Romania unqualified ‘yes’ grading is only Slovenia publicity is only made after provide more certainty. received in Estonia, Hungary, the Slovak the court order. Republic, Slovenia and Ukraine. In eight countries requirements for specific definition of the secured debt restrict the ability to use a mortgage to secure Czech Republic Estonia Serbia Latvia Latvia Czech Republic Poland Lithuania Slovak Republic Estonia Bulgaria Russia Russia Slovak Republic Slovenia Poland Georgia Ukraine Russia Kyrgyz Republic Slovenia Lithuania Bulgaria Romania Croatia Ukraine Georgia

Czech Republic Bulgaria Estonia Hungary Hungary Croatia Kazakhstan Kazakhstan Kazakhstan Croatia Georgia Kyrgyz Republic Kyrgyz Republic Latvia Hungary Slovenia Lithuania Serbia Poland Ukraine Romania Slovak Republic Romania Serbia

Less than 1 week 1 to 2 weeks 2 to 4 weeks More than 4 weeks Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology. 5 7 8

Croatia Serbia Ukraine Hungary Kazakhstan Serbia Slovenia Czech Republic Ukraine Poland Bulgaria Russia Croatia Slovenia Kyrgyz Republic Lithuania Romania

Bulgaria Czech Republic Estonia Estonia Georgia Lithuania Georgia Hungary Romania Kyrgyz Republic Kazakhstan Russia Latvia Latvia Slovak Republic Poland Slovak Republic

Very ef cient Ef cient Some inef ciency Inef cient Unclear Very ef cient Ef cient Some inef ciency Inef cient

Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. Part inIV: Annex Mortgage 3 for methodology. Regional Survey and comparative overview 39

9 10

the possibility of appointing a private Chart 12 bailiff. In most countries there appears Legal efficiency – fit-to-context to be a direct correlation between the

Ukraine Estonia Czech Republic Estonia ability to choose and control the Latvia Hungary realisation process and the price Slovenia Slovenia obtained (question 4.4, see Part IV 2). Where such ability exists the recovery is good. But there are notable exceptions in the three Baltic states and Slovenia where, despite the lack of choice, the Bulgaria Bulgaria amount recovered is over 80 per cent Georgia Kazakhstan Croatia Kazakhstan Croatia Kyrgyz Republic Georgia of market value. In Hungary the inverse Kyrgyz Republic Czech Republic Latvia Romania applies: the recovery level is low in Poland Lithuania Ukraine Hungary spite of the mortgage creditor being Russia Lithuania Poland Serbia Romania Russia allowed to choose and control. Slovak Republic Serbia Slovak Republic It must be emphasised that the information covered by the survey does

Very ef cient Ef cient Some inef ciency Inef cient Very ef cient Ef cient Some inef ciency Inef cient not adequately provide a full assessment of the fit-to-context legal Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes Note: The chart is based on gradings in the Mortgage Regional Survey – see explanatory notes in Annex 3 for methodology. in Annex 3 for methodology. efficiency criterion. It essentially only covers the questions on mortgage commercial effectiveness and the two 11 future or fluctuating debts (see Part III subsequent12 constructions on questions (4.6 and 4.7) concerning 3.3 b. for details on what is expected of mortgaged land can only be included by realisation options for the creditor, the legal system). In Latvia registration way of a further mortgage. In Bulgaria, which are omitted from Chart 12 since requirements effectively place limitations the Kyrgyz Republic, Romania and negative answers do not necessarily on securing foreign currency claims. Serbia the position is unclear. mean inefficiency. The survey does Although these claims can be secured not, for example, indicate whether In all countries subsequent mortgages by mortgage, the amount secured is the the mortgage law is compatible with are permitted although their use may Lat amount, which must be shown in existing market and legal practice, often be limited by negative pledge the land register. In Slovenia “maximum or whether it achieves an appropriate clauses, particularly in Kazakhstan, amount” mortgages can be used to balance between fulfilling its economic Romania and Russia (see Box 3 on secure future and fluctuating debts purpose and ensuring that the effects page 20). In Ukraine consent from the but there are restrictions on their of the reform are acceptable in context, prior mortgage creditor is necessary assignment. Intriguingly, in some or whether it achieves specific and in practice a prohibition to sell countries the rules for defining the objectives for which it was designed. the property, opposable to all parties, secured debt are different for mortgage It is nonetheless interesting to see is often registered. than those applicable for pledge. the composite picture for the seven For example, in Bulgaria, Lithuania and In Hungary, Serbia, the Slovak Republic questions covered (excluding 4.6 and Poland following reforms of the pledge and Ukraine the mortgage creditor can 4.7) in Chart 12. The only negative law, the secured debt for pledge can decide on the way the sale is ratings were on questions 2.4 be in any form, whereas all these conducted and can exercise control (form of debt) and 2.6 (subsequent countries receive a negative grading over the realisation process (questions constructions). Three countries on this question for mortgage. 4.6 and 4.7). In the Czech Republic, (Estonia, Hungary and Slovenia) have Kazakhstan and the Kyrgyz Republic the top gradings on all questions and most Also if one looks specifically at whether answer is also positive but subject to have one or two downgrades. Despite the mortgaged property includes some limitation or doubt. For each four downgrades, Romania is still subsequent constructions and country, with the exception of Romania, maintaining a positive rating on all additions, problems come to light in the gradings for questions 4.6 and 4.7 questions. It is also interesting to note seven countries (see Part III 3.1 b.). are similar. In Romania there is no that, if included in the chart, England, Buildings can be mortgaged but the choice as to the method of realisation Germany, the Netherlands and the division of title between land and (the law imposes a sale at public United States would all show as “very buildings can give rise to practical auction) but a bank can use its own efficient” and France as “efficient” difficulties. In the Czech Republic, enforcement officer to carry out the (because of a reservation on the Kazakhstan and the Slovak Republic auction. Also in Bulgaria there is now form of the secured debt). 40 Mortgages in transition economies

Table 5 Endnotes Legal efficiency indicators – composite table 1 See www.ebrd.com/country/sector/law/ Basic legal Fit-to- Simplicity Speed Cost Certainty st/facts/survey.htm. function context 2 See www.ebrd.com/st. Bulgaria 3 See the EBRD report The Impact of the Legal Framework on the Secured Credit Croatia Market in Poland, July 2005, at www.ebrd.com/st. Czech Republic 4 See also Box 2 on page 16 for the registration system in Ukraine. Estonia 5 Based on a study by the European Georgia Mortgage Federation, only in Denmark and the Netherlands does the enforcement Hungary process usually take less than six months. Countries such as Italy, France or Greece Kazakhstan are reported to sometimes require years of procedure (between 5 and 7 years, Kyrgyz Republic 10 months and 2 years; and 3 months and 2 years, respectively). For further Latvia information see European Mortgage Federation (2007), Study on the Efficiency Lithuania of the Mortgage Collateral in the European Union. Poland 6 In some countries costs are calculated Romania as a percentage of the amount realised, in others as a percentage of the amount Russia claimed. 7 See Box 1 on page 11 and Annex 1. Serbia

Slovak Republic

Slovenia

Ukraine

1 very efficient 2 efficient 3 some inefficiency 4 inefficient 5 unclear

Legal efficiency indicators 4 – composite table It is not the purpose of the legal efficiency indicators table in this section to show winners and losers. The assessment methods are inevitably subjective and each country has to be viewed in its own context. However, Table 5, which brings together the six individual charts, gives a useful broad overview of the survey results. 41

Part V: Mortgage securities

Mortgage securities Table 6 1 in transition economies Covered bonds outstanding in Europe (selected countries) in € million Mortgage securities are a vast topic and this work aims only to give a brief 2003 2004 2005 2006 overview of the legal basics and to highlight certain legal issues relating Czech Republic 1,638 1,956 4,452 5,543 to mortgage, mortgage loans and Hungary 3,568 4,962 5,072 5,924 pledge that merit particular attention. Latvia 35 54 60 63 Historically there have developed two ways for a bank providing mortgage Lithuania 0 14 14 14 finance to use its existing portfolio of Poland 160 220 558 453 mortgage loans as a way of facilitating the funding of new loans. In Europe, Slovak Republic 370 792 1,235 1,861 particularly in Denmark and Germany, lending institutions have used the France 21,079 26,816 32,133 43,012 mortgage loans on their balance sheet Germany 256,027 246,636 237,547 223,306 as security for bonds that they issued to investors, and thereby obtained Spain 57,111 94,707 150,213 214,768 funding on more favourable terms than Switzerland 20,735 20,606 21,670 23,096 if they borrowed unsecured. The bonds issued, known as covered bonds (CBs)1 Sweden* 55,208 are a means of secured borrowing, and Source: EMF – European Covered Bond Council. often the legal framework for them is Note: The figures show the volume of bonds covered by mortgage loans. In the period covered other transition set out in special legislation. In the countries do not seem to have issued CBs. United States mortgage lenders have * In Sweden, the first CBs were issued in 2006, based on the 2004 Covered Bonds Act. Before 2006 only mortgage sold their mortgage loans (residential bonds were issued (outstanding volume at the end of 2005: €92.8 billion). As they are not directly comparable to CBs they are not included in the figures. A large part of the mortgage bond stock was also converted into or commercial) to specialised agencies CBs in 2006. The figures include both the converted bonds and the new bonds issued during 2006. (for example, Fannie Mae), which fund their acquisitions by securitising the impediments, such as “structured” comparatively small (see Table 6). mortgage loans they acquire, issuing covered bonds, which are used They are a relatively straightforward and mortgage-backed securities (MBS) to particularly in countries where regulated way of improving the terms investors. The risk attached to the specialised legislation does not exist on which banks can obtain funding and mortgage loans is removed from the and which use elements of the they have been well tested in a number original lender’s balance sheet and structure used for MBS,3 collateralised of western European jurisdictions. assumed by investors. loan obligations (CLOs), and “synthetic” MBS comprise a more complex product In recent years not only has the market mortgage-backed securities where the that provides scope for optimising the for mortgage lending grown, but there risk is transferred without transfer of use of capital and managing risk. has also been both a global surge in the mortgage loans. However, their advantages can only be investor demand for high-grade debt It is to be expected that markets will fully enjoyed in more advanced markets instruments and an increasing trend for hone further the techniques for where the required infrastructure is the segregation and transfer of risk.2 optimising the economic use of in place and there is confidence in Against that background the markets for mortgage loans both through greater the product. They may also transform CBs and MBS have grown and expanded use of “classic” mortgage securities the nature of the mortgage lending geographically. The techniques used and through development of structured business, placing the emphasis on fee have become more complex and the and hybrid products. In the European income and the financial gain that may distinctions between CBs and MBS Union the structure of securities issued be derived from the sale of mortgage blurred. For some CBs, MBS are eligible is influenced by the regulatory loans. The recent financial crisis linked as collateral and for some MBS, CBs treatment for capital and investment to the US sub-prime mortgage market are eligible for the asset pool. purposes (see Box 4 on page 42). may dampen investors’ appetite for Specialised and hybrid instruments MBS in the short term, but it remains have appeared in the markets, whether To date, CBs have been more prevalent likely that MBS will be used increasingly in response to investor demand or to in the transition countries, although in the larger and more advanced accommodate legal or regulatory the total amount issued remains transition economies. 42 Mortgages in transition economies

Because of the higher costs and Box 4 complexity, MBS transactions in UCITS and the Capital Requirement Directive (CRD) transition countries have mostly been in the larger countries with a number There are two EU directives that regulate covered bonds: the 1988 Directive of issues in 2006 and 2007 in on Undertakings for Collective Investments in Transferable Securities (UCITS) Kazakhstan, Russia and Ukraine. and the 2006 EU Capital Requirement Directive. Transactions were mostly structured off- shore, using an issuing vehicle located UCITS defines the basis for privileged treatment of covered bonds in European in a tax-neutral jurisdiction such as the financial market regulation (article 22(4)). Covered bonds that comply with Netherlands or Ireland. International those requirements are considered safe investments and investment funds, financial institutions and bilateral such as pension funds, can invest up to 25 per cent of their assets in covered organisations (such as the US Overseas bonds of a single issuer that meet certain criteria (as opposed to 5 per cent Private Investment Corporation (OPIC), otherwise). The 1992 EU directives on life and non-life insurance similarly the International Finance Corporation allow insurance companies to invest up to 40 per cent in UCITS-compliant (IFC) or the EBRD) have provided covered bonds of the same issuer. support to many of the transactions by The criteria are: purchasing subordinated tranches or providing guarantees. The first Russian ❚ the covered bond issuer must be a credit institution onshore MBS took place in June 2007 ❚ covered bond issuance must be governed by a special legal framework when the Russian State Agency for Housing Mortgage Lending issued ❚ issuing institutions must be subject to special prudential public supervision mortgage securities, with the EBRD ❚ the set of eligible cover assets must be defined by law purchasing a subordinated tranche of notes. There was also an MBS issue ❚ the cover asset pool must provide sufficient collateral to cover bondholder in 2004 covering the Baltic states. claims throughout the term of the covered bond Romania and Poland have both adopted ❚ bondholders must have priority claim on the cover asset pool in the event a legal framework for MBS but have not of issuer default. as yet seen any issues. Mortgage securities are not solely for The 2006 EU Capital Requirement Directive, which is based on Basel II but the benefit of mortgage lenders and adapted to the specificities of the EU financial markets, has established professional investors. The ability of a privileged credit risk weighting for covered bonds if they comply with the banks to issue mortgage securities following criteria (as provided in Annex VI, paragraphs 68-71): has an impact on the entire property ❚ the covered bonds must comply with UCITS article 22(4) finance market and encourages the availability of competitive financing ❚ the asset pools that back the covered bonds must consist of only specifically- for any person wishing to purchase a defined asset types and be of a certain credit quality home, or any business wishing to use ❚ the issuers of covered bonds backed by mortgage loans must meet certain immovable assets to raise finance. minimum requirements regarding monitoring and regarding mortgaged The appetite of institutional investors property valuation (the ratio of the loan to the property’s collateral value (including pension funds) for high quality must be 80 per cent for residential mortgages and 60 per cent for debt securities is likely to provide an commercial property). ongoing investor base for the market. However, as mortgage securities Part V: Mortgage securities 43

become more complex, the need to ❚ By selling a pool of mortgage loans understand and manage the risks to investors who acquire the portfolio becomes even more critical, and the outright with all underlying credit role of rating agencies who give a credit risk through mortgage-backed rating to each issue (and on whom securitisation. The bank frees up investors increasingly rely) becomes capital and can use the price paid more important. for the portfolio for new business. One element of the risk is the legal risk. CBs and MBS are two distinct The jurisdiction that wishes to maximise techniques. It is not a question of the potential economic benefits from choosing to legislate for one or the mortgage securities needs to ensure other. An advanced economy should be that the legal framework (i) provides able to accommodate both, and should sufficient certainty as to what rules allow mortgage lenders wide flexibility apply and how they will be applied, (ii) is to use their mortgage loan assets in hospitable to both CBs and MBS, giving the way that best suits the market market players the choice as to which needs of the moment.4 instrument to use, and (iii) gives broad flexibility to enable parties to tailor the Much has been written about mortgage bonds or notes issued to the needs of securities.5 This part gives a broad their particular transaction and to adapt overview of the legal framework that with future trends. A permissive legal is needed for the issue of CBs and framework does not preclude regulation MBS and, in the context of transition of markets for monetary, consumer countries, looks at specific legal issues protection or other purposes. that need to be addressed for mortgage securities to be used efficiently. Banks that have a portfolio of mortgage loans derive value from it through the income that the loans generate. However, as seen before, they increasingly want to make greater economic use of their portfolio and they can do this in two ways. ❚ By using a pool of mortgage loans as security for the bank’s borrowings through CBs. Banks needing to fund their business seek better terms for that funding by offering the mortgage pool as security. 44 Mortgages in transition economies

Legal basics – Table 7 2 covered bonds Steps for the issuance of covered bonds In essence, covered bonds (sometimes Create the pool Identify the loans (segregation, registration in cover register) referred to as mortgage bonds) involve of mortgage loans Ensure the loans meet required standards (under the law, a mortgage provider issuing bonds to the UCITS and market criteria) investors secured by mortgage loans. Ensure uniformity of documentation The mortgage loans remain on the mortgage provider’s balance sheet Give bondholders By pledge or by special law (even where a special vehicle is used priority security right Covers all rights under mortgage loans in the mortgage pool the bonds will usually be included in the Continues on issuer insolvency issuer’s consolidated accounts) and the Formalities required (form of pledge, registration) legal structure is most often provided Repaid loans, and maybe doubtful loans, fall out and under specific legislation. security extends to new loans that come in In the European Union the effect of the Give bondholders Payments under mortgage loans applied for servicing bonds Directive on Undertakings for Collective priority right in cashflow (segregation, special bank account, pledge, escrow) from the mortgage pool Investments in Transferable Securities Protected on insolvency (UCITS) and the Capital Requirement Issue bonds The issuer must be authorised to issue bonds Directive (CRD) is that most CBs Terms of the bonds determined by law, regulation (for conform to specific criteria (see Box 4 example, UCITS) and market criteria on page 42). These are likely to become Bonds listed on stock exchange or other market increasingly accepted because the Offer to investors including information on mortgage loans European Union has imposed a market Bonds are freely tradeable securities (all rights under the standard and failure to comply with that bond pass to the acquirer) standard will limit the attraction of a Maintain pool and The issuer continues to service loans as before covered bond issue to the market. service loans There will inevitably be many exceptions, The cover pool is monitored for maintenance of criteria as illustrated by the recent emergence Sub-standard loans are removed (or discounted) and new loans are added of structured and hybrid products, and transition economies that adopt rules Maximise economic Capital treatment (UCITS and CRD) narrowly focused on EU conditions will benefit Rating agency criteria be limiting the potential scope of the Tax mortgage securities market. Costs

Table 7 summarises the steps that are Note: The first column lists the basic elements of each step, the second column summarises what each element typically involved in an issue of CBs. involves in practice. The key issues include: 2.1 Segregation of mortgage loans that applies to Spanish cédulas as ❚ segregation of the mortgage loans provided by the 1981 Law on the Segregation is important to identify the from the issuer’s portfolio that are Regulation of the Mortgage Market. loans that are included in the mortgage to form the cover pool pool. It is an identification process and ❚ To include assets in the cover pool, ❚ granting bondholders a priority right does not affect the obligors of mortgage the issuer has to register them in a over the cover pool loans who do not need to be involved. general cover register, as for example Cover segregation happens in broadly provided by the German Pfandbrief ❚ terms of the bonds and bondholder one of four ways. Act, but there is only one such rights register so again all CB issues share ❚ All qualifying assets are automatically ❚ ongoing maintenance and monitoring the same security. included in the cover pool, and the of cover pool issuer can make periodic issues of ❚ To be included in the cover pool, assets ❚ the effect of bankruptcy/insolvency CBs all covered by the same mortgage have to be registered in a special of the issuer and/or the servicer loans, subject to complying with an cover register, which is created for a overall minimum cover requirement. specific CB issue (this is the approach ❚ regulation. Effectively the cover assets are adopted in Ukraine). Here the security segregated by legal definition and all is not shared with other CB issues of CB issues of the same issuer share the same issuer. the same security. This is the system Part V: Mortgage securities 45

❚ Segregation is by transfer of mortgage The cover pool should provide sufficient ❚ payments under the mortgage loans loans to a special vehicle and the security for all payments under the are applied for servicing the bonds cover pool only secures issue(s) where bonds and the issuer will be obliged ❚ the cover pool is regularly monitored that vehicle is used. This is the to maintain the pool to ensure that this to check that the loans meet the practice in the Netherlands and the remains the case throughout the life relevant criteria (term, payment United Kingdom, where the assets of the bonds. record, security cover, credit risk, used as cover of the issue are Some terms of the CBs may be dictated and so on) specified in the sale agreement to the by regulation, for example in the special vehicle and thus segregated ❚ loans that fail to meet the criteria are European Union the issuer will want to from the other assets of the issuer. removed from the pool (or discounted) meet the requirements of the CRD and and replaced or topped up by new loans for investors it may be important that 2.2 Priority right of bondholders they meet the UCITS criteria (see Box 4 ❚ rights of the issuer under the loans over the cover pool on page 42. It is usual for national laws are properly exercised. providing for CBs also to specify terms The covered bondholders will receive a of the bonds, for example that the This additional role may be filled by a right to the mortgage loans in the cover outstanding amount of the underlying special auditor appointed by statute, by pool ahead of all other creditors of collateral, as well as its average maturity an independent trustee or monitoring the issuer. This may be achieved by and interest payments, must be at least agent appointed under the terms a contractual pledge or by special law. as high as all outstanding CBs. of the bonds, or as part of regulatory The priority rights should extend to all supervision. In France, credit rights of the issuer under the mortgage Bondholders and the market will want institutions appoint a registered auditor loans (including the mortgages) and the information concerning the underlying with prior consent of the banking formalities required for creating the mortgage pool in order to assess the regulator. In the Netherlands, the priority should be simple. In particular: strength of the security and the credit monitoring of the cover pool is risk of the bonds. Normally this will be ❚ it should be possible to extend the performed by an independent auditor generic information and will not extend priority in such a way that it covers appointed in relation to that specific to personal information related to the the whole cover pool (and any later CB issue. The Spanish regime does individual mortgage loans protected by additions) without the need for not provide for special monitoring of law or rules of banking secrecy (see individual formalities for each loan the cover pool; it is checked within Part V 4.5). and with sufficient certainty for the prudential banking supervision bondholders procedures conducted by the central 2.4 Ongoing maintenance and bank involving regular disclosure of ❚ it should not be necessary to notify, monitoring of cover pool information about the pool assets. or obtain consent from the underlying Similarly, in Denmark, the issuer’s obligors (see Part V 4.1 a.) From the perspective of the obligors internal auditors are responsible for under the mortgage loans, it makes ❚ registration in the land or mortgage everyday monitoring of the cover pool. no difference whether CBs are issued. register should not be required (see They continue to make payments to and Part V 4.1 d.). deal with the original lender and there 2.5 Effect of bankruptcy/ is no need for them even to know that insolvency of the issuer 2.3 Terms of bonds and bondholder their mortgage loans have been used and/or the servicer rights to back an issue of CBs. However, The intention underlying CBs is to reduce from the perspective of the investing The bonds will most often be issued by the credit risk to the bondholders and it bondholders the ongoing servicing the originator of the mortgage loans who is essential that, if the issuer becomes and administration of the cover pool is will remain fully liable for all obligations insolvent, they have a prior claim important for the quality of the cover under the bonds. The cover pool merely against the cover pool ahead of other pool. Often the issuer will continue serves as security and reduces the risk creditors. That prior claim needs to to service the loans although the attached to the bonds when compared extend not only to the rights under the appointment of another company within with unsecured bonds of the issuer. mortgage loans but also to the money the same group or third party is payments made by the mortgage possible. What the bondholders will obligors to the issuer. If the issuer require in addition is a system which became insolvent it could be envisaged ensures that: that the bonds may continue to normal 46 Mortgages in transition economies

maturity without acceleration, with 2.6 Regulation payments continuing to be assured If CBs are to be used efficiently the by the cover pool. Under the 1997 regulatory and taxation framework must Luxembourg Law, the creditors of be compatible, for example: Lettres de gage enjoy an absolute priority claim on the covered assets, ❚ the procedures for authorising the which are separated from the other issuer to issue the bonds should be assets of the insolvent mortgage bank. straightforward and without The task to continue the servicing of inappropriate requirements (for the bonds is assigned to the supervisory example, as to minimum capital) authority, who may name another ❚ the capital treatment of the bonds will servicer – usually another institution be important (see Box 4 on page 42) that issues CBs. ❚ the procedures for offering the bonds Where a separate party is appointed to to the public and the requirements for service the mortgage loans, protection obtaining a public listing of the bonds will also be needed to ensure that the on the relevant stock exchange should payments received under the mortgage be clearly defined and appropriate loans are outside the servicer’s bankruptcy or that bondholders have ❚ any costs or tax charge arising a prior right to them ahead of other out of the bond issue will reduce creditors. the economic advantage of using CBs and should therefore be kept Although the bondholders should be to a minimum. adequately secured by the cover pool, the bonds remain obligations of the The market for CBs has to be properly issuer and bondholders are entitled regulated and supervised but avoiding to claim any shortfall as ordinary unnecessary complexity, cost and unsecured creditors. delays arising from any regulation and supervision can, in practice, significantly affect the overall efficiency of the market, and hence the benefits it contributes to the economy. Part V: Mortgage securities 47

Legal basics – Table 8 3 mortgage-backed securities Steps for the issue of mortgage-backed securities In essence, MBS involve the sale by Create the pool of Identify the loans (through segregation, and so on) a mortgage originator and purchase by mortgage loans Meet required standards (law, market criteria) a special purpose vehicle (SPV) of Ensure conformity of documentation mortgage loans which the SPV uses to Create the issuer Onshore or offshore support the issue of notes to investors. (SPV) Company or fund The proceeds from the note issue are Separate from originator (no account consolidation, isolated from used to pay the purchase price for the originator insolvency) portfolio of mortgage loans. The Limited activity and limited scope for external creditors “Bankruptcy remoteness” protection from insolvency proceedings mortgage originator is not liable for (limited recourse of creditors, non-petition covenants) payment under the notes and the Transfer of the Ability to assign loans (restrictions on assignment of customer mortgage loans are removed from its mortgage pool loans, for example) balance sheet. Unlike CBs the risk to SPV “True sale” (no risk of recharacterisation) under the mortgage loans is transferred Covers all rights under mortgage loans including (i) right to enforce from the originator to the investors. mortgage and (ii) insurance proceeds and other ancillary rights Opposable on subsequent insolvency of originator (problems of Table 8 summarises the steps that claw-back, recharacterising as not a true sale) are typically involved in an issue of Formalities required (form of assignment, registration in mortgage mortgage-backed notes. register) Entitlement of SPV to mortgage information The key issues include: Mortgage loans removed from the originator’s balance sheet ❚ the nature and structure of the SPV Give noteholders Pledge of mortgage pool by SPV priority security Covers all rights under mortgage loans including (i) right to enforce ❚ the transfer of mortgage loans to right in mortgage mortgage and (ii) insurance proceeds and other ancillary rights pool the SPV The right continues on SPV insolvency Formalities required (form of pledge, registration) ❚ terms of notes and noteholder rights Entitlement to relevant mortgage information in case of enforcement ❚ ongoing servicing and administration Give noteholders Protection against commingling of the mortgage loans priority right in Payments under mortgage loans belong to SPV (segregation, special cashflow from ❚ effect of bankruptcy/insolvency of the bank account, escrow) mortgage pool Pledge of SPV rights over bank accounts and accounts receivable originator and/or the SPV and/or the Protected on insolvency of originator/servicer servicer Give noteholders Ability to agree enhancement (hedging of currency or interest risk, ❚ regulation and tax. additional rights/ liquidity facility, and so on) protection Pledge of additional rights/protection

3.1 Nature and structure of Issue notes The SPV must be authorised to issue notes Terms of the notes determined by law, regulation (such as UCITS) the SPV and market criteria The SPV needs to be an independent Tranching (subordination, hierarchy of noteholder rights) Notes rated and listed on stock exchange or other market legal entity, bankruptcy-remote and Public offer to investors, including information on mortgage loans separate from the originator so that: Investor requirements (who can invest, how to market) ❚ the originator or its creditors have Notes are freely tradeable securities (all rights under the notes pass to the acquirer) no claim on the assets of the SPV Maintain pool and Originator may continue to service loans as before ❚ the originator has no liability for the service loans Ability to appoint third-party servicer (this requires full access to debts of the SPV information, no need for consent from mortgagors and so on) Monitoring of mortgage pool (such as by independent monitor, ❚ the accounts of the SPV are not regulatory supervision) consolidated with those of the Maximise Mortgage loans removed from capital requirement calculations of originator. economic benefit originator Capital treatment for investors The SPV must have the ability to own Rating agency criteria mortgage loans and to issue notes. Tax Costs Its liabilities will be strictly limited to ensure that the only creditors entitled Note: The first column lists the basic elements of each step, the second column summarises what each element involves in practice. 48 Mortgages in transition economies

to claim against the mortgage loans are 3.3 Terms of notes and noteholder 3.4 Ongoing servicing and the noteholders. Offshore SPVs are rights administration of mortgage often used, especially when there is loans The notes will be issued by the SPV and little practice onshore or when domestic their value to investors will depend on The obligors under the mortgage loans SPVs may not meet the necessary the certainty of the availability of the need not be aware of the transfer of criteria. There is no overriding reason cashflow from the mortgage pool to their loans to the SPV and the issue of against using an offshore vehicle as service payments on the notes. The SPV the MBS. Often they continue to make long as there is adequate regulation and will be structured so that the mortgage payments to and deal with the original transparency, and any tax and currency pool (together with any enhancement lender, who will act as servicer and issues are resolved. Many jurisdictions and hedging arrangements) are its only continue receiving payments on behalf encourage the use of a domestic SPV assets and its only liabilities are under of the SPV. In some cases another by adopting specific legislation (for (or related to) the notes. In addition, the servicer will be appointed, in which example in Bulgaria, Kazakhstan, SPV may give security over the mortgage case mortgage obligors may have to Poland, Romania, Russia and Ukraine). pool (and the cashflow it generates) in be advised of the change in payment However, insisting on a domestic SPV favour of the noteholders, in the form instructions (but not of the underlying can be counter-productive, particularly of a pledge over the mortgage loans reason for that change). Noteholders if it is over-regulated, as it may not and the mortgage rights, for example, will require assurance that: be suited to the particular transaction plus a pledge over bank accounts and and may introduce uncertainty and ❚ payments under the mortgage loans future receivables. complexity. The Italian 1991 Law No are applied for servicing the notes 52, for example, requires that the SPV As with CBs some terms of the notes ❚ the mortgage pool is diligently is registered as a financial institution may be dictated by regulation. For managed and rights of the SPV under with the Ufficio Italiano Cambi, which example, for investors in the European the loans are properly exercised can take up to 60 days. Union it will be important to meet the UCITS criteria (see Box 4 on page 42). ❚ a professional person independent It is usual for an MBS issue to be of the SPV will often be appointed 3.2 Transfer of mortgage loans divided into several tranches, each with to protect the interests of the For MBS it is not only necessary to its own risk rating. Legal restrictions on noteholders (akin to a “trustee” in identify and segregate the mortgage the terms that can apply to securities, common law jurisdictions). In addition, loans but also to transfer all rights for example on the ability to achieve regulatory authorities may be given a under those loans from the originator subordination of different creditor’s monitoring role. to the SPV. The transfer needs to be rights, or uncertainty on the robustness a “true sale”; in other words, it needs of such subordination in the context The contractual right allowing to be a transaction that achieves a of insolvency, may limit the scope prepayment of mortgage loans before definitive transfer of the mortgage loans for creating different tranches. contractual maturity and the resulting and whose nature cannot subsequently complications for the terms of MBS Noteholders and the market will want be re-characterised or challenged by are sometimes raised as a legal issue. information concerning the mortgage any third party (for example, because Mortgagors exercising that right may pool in order to assess the credit risk of of price adjustment provisions). Where cause a cashflow mismatch between the notes. As with CBs this will normally a transfer by true sale is problematic, receipts under the mortgage loans and be generic information, and will not a “synthetic” solution is sometimes payments due on the mortgage extend to personal information used to transfer the risk without legally securities. However, this is principally protected by data protection law assigning the mortgage loans. a market issue. There is a conflict or rules of banking secrecy. between the interests of retail The transfer needs to be simple and borrowers who expect a prepayment fast and should not involve unnecessary right before contractual maturity, and formality or significant expense and it issuers of mortgage securities who wish should be possible to transfer a number to reduce it as far as possible, since of mortgage loans in a single document. the inability to predict when this right The procedure for transfer can give rise will be exercised may add complexity to various issues, and in many countries to the terms of the notes or adversely is one of the principal obstacles to affect their pricing. mortgage securitisation. These issues are addressed in more detail below (see Part V 4.1). Part V: Mortgage securities 49

3.5 Effect of bankruptcy or The SPV 3.6 Regulation and tax insolvency of the originator, In principle the SPV will be structured The requirements for a compatible and/or SPV, and/or the servicer in such a way that it should be regulatory framework are similar to Investors (noteholders) want protection “bankruptcy-remote”, with no risk of it those for CBs, including: from the bankruptcy or insolvency of any ever becoming insolvent. Its obligations ❚ the procedures for setting up the SPV, of the key parties to the MBS structure. to noteholders will be covered by the enabling it to have mortgage loans mortgage pool (and any enhancement) transferred to it and authorising and it should not have any other Originator it to issue the notes should be creditors. straightforward and without Noteholders will normally have no claim In reality the position may not always inappropriate requirements against the originator but they will be so simple and additional steps may need assurance that, if the originator ❚ the accounting treatment should be taken to protect against the risk of becomes insolvent, a liquidator or reflect the transfer of risk from the insolvency, such as: administrator will have no grounds to originator to the SPV challenge the transfer of the mortgage ❚ restricting the rights of individual ❚ the capital treatment of the notes for loans to the SPV, including preference, noteholders to commence insolvency investors will be important (see Box 4 under value or interested party proceedings on page 42) transaction or suspect transfer, nor will ❚ limiting the rights of other creditors it have any grounds to claim a continuing ❚ the procedures for offering the notes to pursue for insolvency. right in the mortgage loans by having to the public and the requirements for the transfer “re-characterised”, for obtaining a public listing of the notes example as a security arrangement, Servicer on the relevant stock exchange should rather than an outright assignment (true be clearly defined and appropriate. Where a separate servicer is appointed sale). This issue, which again is key to the position is similar to that of CBs: the feasibility of securitisation in many As with CBs any costs or tax charge protection will be needed to ensure emerging markets, is further developed arising out of the issue of the notes will that the payments received under below (see Part V 4.1 c.). Where the reduce the economic advantage of the the mortgage loans are outside originator also services the mortgage transaction and should therefore be the servicer’s bankruptcy or that loans protection will be needed to kept to a minimum. The scope for tax noteholders have prior right to them ensure that the payments received complications in MBS structures is ahead of other creditors. under the mortgage loans are outside greater and it is usually important to the bankruptcy of the originator or that ensure that the effect of using an SPV noteholders have prior right to them is tax neutral. ahead of all other creditors. Again, proper regulation and supervision is essential but an efficient market for MBS can only be developed if unnecessary complexity, cost and delays are avoided. 50 Mortgages in transition economies

Specific legal issues ❚ payments and ongoing servicing This seems to have been well understood of mortgage loans in transition countries, where no country 4 requires mortgagor consent to enable ❚ the right of the SPV to enforce the It is clear from the overviews above the transfer of a mortgage loan. There defaulting mortgage loans that mortgage securities are complex is, however, some uncertainty in this instruments that can be affected by ❚ confidentiality of information. respect in Russian law, which provides a host of legal and regulatory issues. that if the identity of the creditor They can only be used effectively if (originator/lender) is of importance, 4.1 Transfer of mortgages and the investors can be convinced that there an assignment can only be made with loans they secure is a sufficiently robust legal framework the obligor’s (the mortgagor’s) consent. not only for mortgage but also for the In the case of MBS, transfer of However, experts report that there issue of securities, for the transfer the mortgage loans is, from a legal is no conclusive position as to when and pledge of mortgage loans and standpoint, probably the most important the identity of the originator will be of other assets, for insolvency and for feature. In most cases the mortgage importance for the obligor. enforcement of creditor rights. To quote transfers with the loan. It is essential from a World Bank policy research that the conditions for transfer are 6 b. Notice to mortgagor working paper: clear, not onerous and involve minimum “The sheer difficulty of developing costs. As clearly expressed by the Similarly any requirement to give notice infrastructure is one reason why there European Securitisation Forum: to the mortgagor, although less onerous since the transaction does not depend has been only limited success in “Credit risk of assets must be divorced on obtaining consent, is likely to impose introducing mortgage securities from the credit risk of the originator an additional burden and cost, which are in emerging markets. The legal and of those assets. To achieve this, rules best avoided. Again, it is the position in regulatory complexities of mortgage relating to the sale, transfer and most of the transition countries covered securities and specialized institutions isolation of assets should be certain in this work that notice is only required are formidable even in sophisticated and not such as to leave the credit in order to make the transfer opposable developed economies... . It is the case risk with the originator following sale. against the mortgagor. The transfer is that many pieces of the puzzle have Provisions relating to sale and transfer valid as between the parties without to be put into place before a picture should not be onerous, time-consuming notice and all rights pass to the emerges and in a number of countries, or expensive. Originators must be able transferee. However, in order to require the introduction of mortgage securities to retain or create specified and limited that payment under the loan is no is still a work in progress.” risks and/or retain the right to longer made to the original lender, economic benefits on the assets It is far beyond the scope of this work or to prevent set-off, or to enforce the without prejudicing the sale, transfer to attempt to cover in detail all the mortgage, it is necessary to give notice and legal isolation of such assets.”8 issues that have to be addressed to the mortgagor. In practice, for MBS in order to put in place a legal and issues, immediate notice at the time regulatory framework for mortgage a. Consent from mortgagor 9 of transfer should generally not be securities. As a practical (but not needed, especially where the originator A loan is a financial asset which should a legal) matter, standardisation of continues to service the loans, although be tradeable as any other asset. mortgage loans is essential for the cautious legal advisers may often 7 In modern practice the nature of the efficient use of mortgage securities. recommend otherwise. In some relationship between a lender and a Here, however, we dwell on certain countries uncertainty prevails. In a mortgagor-borrower rarely falls into the aspects of law and regulation affecting recent securitisation of mortgage loans special personal category that merits mortgage, mortgage loans and pledge in Ukraine,10 it was deemed necessary restrictions on transfer. The effect of that can be critical for achieving the to notify the mortgagors of the the assignment is only to transfer the necessary flexibility and legal efficiency assignment. Article 24 of the Ukrainian rights of the lender under the loan and to make mortgage securities viable Mortgage Law provides that the mortgage. The lender remains liable once the rest of the framework is in mortgage creditor must notify the for performance of any continuing place and the market players are ready mortgagor of the assignment within obligations. Any legal requirement for to seize the new opportunities. five days, although the sanction for obtaining borrower consent subsequent failing to do so is unclear. These aspects are: to the time of the mortgage loan should ❚ the transfer of mortgages and the be strongly resisted since this will loans they secure almost inevitably endanger the viability of potential MBS transactions. ❚ the pledge of mortgage loans and ancillary rights Part V: Mortgage securities 51

Although it is important to establish Box 5 a clear base position for the classic Mortgage certificates transaction, it is equally important to recognise the ever-growing trend of the Mortgage certificates are sometimes issued in addition to the existing market to create “hybrid” or “synthetic” mortgage agreement (for example in Russia, the so-called zakladnaya, and structures, and to allow broad flexibility in Ukraine) to facilitate the transfer of mortgage and to simplify enforcement to parties to adapt the transaction procedures. They are instruments that entitle the holder to a lender’s rights by agreement. If, for example, the under a mortgage loan, including the right to start enforcement of the originator is to retain some continuing mortgage. Once it is shown in the land register that the mortgage is in exposure to credit risk it should be certificated form, transfer or enforcement is not possible without production possible to agree to this, and at the of the certificate. However, transfer does not require registration. There are same time for parties to ascertain any usually separate loan and mortgage agreements, the certificate containing consequences that this may have (for merely a summary. example on the accounting treatment of the transaction or the risk that the On transfer, endorsement on the certificate and a separate transfer transaction will not be recognised as agreement are generally required. As with other legal contrivances that a true sale). have been invented to support mortgage activity, an analysis of the reasons for using mortgage certificates shows that if the underlying issues are addressed, the reasons then fall away. Certainly avoiding the need for d. Registration of new mortgage registration on transfer may be a significant advantage but this can be creditor in the mortgage register achieved more simply by removing any requirement to register mortgage One of the biggest complications for transfers. Requiring a physical document evidencing the mortgage to be MBS is the requirement to register the handed over on transfer is cumbersome and runs counter to current trends change of mortgage creditor in the towards dematerialisation. There is also little logic in allowing mortgages land or mortgage register. In a classic evidenced by a mortgage certificate to be enforced more simply than those covered bond issue the mortgage that are not. It is preferable to establish efficient procedures for enforcement creditor remains the same and so there and make them applicable to all mortgages. is no need for any entry in the mortgage register (but there may be registration in the “cover register” maintained by c. Nature and effect of transfer of are either included in the transfer the issuer). But for MBS (and for some mortgage loans automatically or can be included structured CB issues) the mortgage without onerous formality, so that In a classic MBS transaction it is is transferred and in many countries the SPV is given in substance the important that, as a result of the a change in mortgage creditor either same package of rights against the transfer of the mortgage loans: has to be registered or is registered mortgagor to that previously enjoyed as a matter of practice because of ❚ a “true sale” is achieved whereby all by the originator. For example, having uncertainty as to the validity of rights in the mortgage loans pass to issue new insurance contracts unregistered transfers. This can entail from the originator to the SPV naming the SPV as the new beneficiary extra costs, which may even be such as under the existing insurance policies ❚ the mortgage loans are isolated from to discourage the issuing of MBS.12 In is clearly unduly onerous the originator: there is no prospect some cases, devices such as mortgage for the originator or any liquidator ❚ separate ongoing obligations of the certificates may be used to avoid the or administrator on the originator’s originator to the mortgagor are not requirement but this is not without insolvency to establish any continuing transferred, unless specifically drawbacks (see Box 5). right in the mortgage loans or to agreed. If, for example, the originator The question that needs to be “claw back” any interest in them. has incurred obligations towards the addressed is why registration of a The risk of the sale of the loans being mortgagor as part of the conduct of change in mortgage creditor should re-characterised, for instance as a its business outside the contractual be required at all. The issue is closely secured loan or conditional sale, must framework of the mortgage loan (for linked to the effects of mortgage be addressed. These issues are to example under consumer protection registration discussed in Part III 3.5 c. a large extent untested in transition legislation) those obligations properly On initial registration of a mortgage, countries belong with the originator and should the identity of the mortgage creditor is not be transferred to an SPV that is ❚ ancillary rights of the originator included in the information submitted acquiring financial assets.11 (such as rights in credit and property for registration. This is easy to do, can insurance or ancillary security) be useful and causes no particular 52 Mortgages in transition economies

problem. There is, however, no the pledge; notice to the mortgagor free to appoint any other person to fundamental need that the identity of should not be needed as a condition of collect payments and service the any person to whom the mortgage is the validity of the pledge but merely to mortgage loans. subsequently transferred should appear make it opposable, and it should not be The obligation on the mortgagor under in the register. Third parties are alerted necessary to enter the rights of the the mortgage loan is to make payment that a mortgage is claimed over the bondholders or noteholders as pledgee as instructed. Payment by a mortgagor property belonging to the mortgagor, in the mortgage register. Registration of to a servicer in accordance with and the time from which it has priority the pledge in a “pledge register” may instructions fulfils this obligation. No is established. Third parties have no be required but this should be a simple liability of the mortgagor should arise specific need to know who is currently formality requiring a single registration if the originator or the servicer fails to entitled to that claim. It is sufficient covering all the mortgage loans.13 account to the SPV. From the standpoint that any person seeking to exercise Because the cover pool for CBs is likely of the SPV (and the noteholders) it rights under the mortgage is able to to be dynamic, it will be necessary in is crucial that all payments made to demonstrate that he is entitled to do so. the pledge to describe the mortgage the originator or other servicer are loans generally, including future loans, The different practices that have segregated. The money paid belongs to so as to avoid any requirement to renew developed to avoid registration show the SPV and is held by the servicer on the pledge registration each time the that there is no need to register the its behalf. If the payments become cover pool is amended. Much progress identity of persons to whom the mixed with other money held by the has been made in transition countries mortgage creditor assigns his rights. servicer there is a risk upon the on pledge laws but still not all countries If it is acceptable to create mortgage insolvency of the servicer of competing give this flexibility. certificates that can be transferred claims from other creditors (the so-called without registration (see Box 5 on page The ability to easily and effectively give commingling risk). Segregation can be 51), or to allow unregistered fiduciary security by way of pledge can greatly achieved by various techniques, for transfers or equitable assignments, facilitate the contractual arrangements example creating a special account into why should registration be required to mitigate risks in mortgage securities which payments are made, or setting up for other transfers? transactions. This concerns not only a trust or fiduciary arrangement. the pledge of the mortgage loans but There may be advantages in registering also, for example, pledge over cash, a change in mortgage creditor (for 4.4 Right of the SPV to enforce bank accounts and accounts receivable. example to facilitate enforcement) and defaulting mortgage loans Countries that have a modern the possibility of making such framework for secured transactions, The particular legal quality of a registration can be left open as an enabling the grant of an enforceable, mortgage loan that makes it attractive option for the new creditor if and when first-ranking pledge right that remains for securitisation transactions is the this is judged useful. But if it is made effective on the insolvency of the mortgage (security) that is attached to an obligation any advantages are more pledgor (be it the issuer or the it. When a mortgage loan defaults, the than outweighed by the negative impact originator), will have a great advantage.14 SPV – as the new mortgage creditor on mortgage securities transactions. replacing the originator – should have A country that wants to establish a the right to enforce the mortgage. It is framework permitting the efficient use of 4.3 Payments and ongoing essential that mortgage enforcement is mortgage securities should remove any servicing of mortgage loans quick and efficient (see Part III 4 and 5). requirement for mandatory registration An SPV acquires mortgage loans as a The formalities for enforcement should of a change of mortgage creditor. financial asset, without any intention to also not be made more complex, for carry on mortgage business, and it will example by a requirement to join the 4.2 Pledge of mortgage loans and not be equipped to receive payments originator as a party. Typically the task ancillary rights under, and to service, the mortgage of recovering defaulting mortgage loans, loans it has acquired. It will normally and if necessary enforcing, will be In covered bond transactions the rights rely on either the originator or another entrusted to the servicer and it should of bondholders to the mortgage loans in person to provide this service. The be possible for the servicer (or other the cover pool will often be given by way appointment of the originator to carry person appointed by the SPV) to of pledge. In MBS transactions the SPV out administrative tasks on behalf of exercise enforcement rights on behalf will often give a pledge of the mortgage the SPV should not affect the of the SPV. Similarly an SPV or its agent loans in favour of the noteholders. “isolation” of the mortgage loans or should be able to enforce rights against Similar issues arise on pledge as on give the originator any rights beyond insurance proceeds and other security transfer. It should not be necessary to those of any other agent carrying out rights connected to a defaulting obtain consent from the mortgagor for such tasks. The SPV should also be mortgage loan. Part V: Mortgage securities 53

4.5 Confidentiality of information Endnotes A mortgage securities transaction requires information about the 1 Covered bonds are debt securities issued 6 See Chiquier et al, page 33. by credit institutions and covered by mortgage loans to be made available to 7 See the EBRD List of Minimum Standards certain types of assets – usually mortgage of Mortgage Loans and Mortgage Manual, persons who are not party to the loans. loans but it can also be public sector debt July 2007, for standards and best practices. Consumer protection or banking secrecy or ship loans. This work only deals with bonds covered by mortgage loans 8 European Securitisation Forum (2002), rules should not (subject to appropriate (sometimes referred to as mortgage bonds). A Framework for European Securitisation, protections) prevent information on London. 2 As The Economist put it: “The art of mortgage loans being provided to: securitisation, as it is called, adds liquidity 9 It is assumed that mortgagor and debtor to the market and allows risk to be parcelled are the same person, but this may not ❚ an SPV in the context of a transfer out to those most eager to bear it. Over always be the case. the past few years, it has also freed up of a mortgage pool 10 In February 2007 PrivatBank, the largest cash for more lending and earned banks Ukrainian bank, issued MBS for US$ 180 pots of money.” (17 February 2007, p. 80) ❚ investors in the context of the issue million. 3 As in the UK’s HBOS structured covered of CBs or MBS 11 See European Securitisation Forum (2002), bond issue in 2003, and the issue of A Framework for European Securitisation, covered bonds by Washington Mutual Bank ❚ goal 1.2: “To have laws and regulations a third party appointed to service in September 2006 in the United States. loans that do not transfer or impose liability 4 See European Mortgage Federation (2007) which is properly borne by the originator Study on the Efficiency of the Mortgage onto an assignee or financier of assets.” ❚ a person entitled to enforce the loan. Collateral in the European Union: “Mortgage 12 This is reported to have been the case, lenders should be free to choose the for example, in Poland. A balance has to be achieved that most appropriate funding strategy for their business and have equal access to 13 See EBRD Guiding Principles for the affords adequate protection to mortgage funding markets and investors Development of a Charge Register at mortgage borrowers while avoiding irrespective of their location. Any regulation www.ebrd.com/country/sector/law/st/ should not favour one form of funding core/pubsec.pdf. unnecessary restrictions that may above another, since each funding 14 For further details on secured transactions instrument has its own advantages and hamper mortgage securities regime in transition economies see disadvantages based on its particular “Regional Survey” at www.ebrd.com/st. transactions. The Mortgage Funding product characteristics.” 15 Expert Group recommended: 15 The Mortgage Funding Expert Group was 5 See the bibliography in Annex 5 and in created by the European Commission as particular L. Chiquier, O. Hassler and an ad hoc expert working group in 2006. “1. that personal data be permitted M. Lea (2004) Mortgage Securities in For more details see http://ec.europa.eu/ to be transferred between originators Emerging Markets, World Bank Financial internal_market/finservices-retail/home- Sector Operations and Policy Department, and third parties, including lenders loans/integration_en.htm#mfeg. Policy Research Working Paper 3370. and servicers that have a legitimate professional reason to review the data. The receiver must, however, treat the information confidentially. 2. that personal data, excluding borrower’s name or address, be permitted to be disclosed to investors for the purposes of investment decisions.” 54 Mortgages in transition economies

Part VI: Conclusions

Mortgage markets may appear hugely Integral part of secured Specific issues and complex but the legal basics for transactions law recommendations mortgage are (i) in all models fairly The regime for mortgage should be similar and (ii) quite simple. Secured debt or claim similar to that for security over any Providing the right legal framework – other asset. Some special rules specific By restricting the form of debt secured or to use the concept underpinning to the particular nature of real property by mortgage, especially by imposing the whole of this work, an efficient are needed but having different rules a specific definition of the debt at legal framework – is very much within apply to common issues (such as the the time the mortgage is created, the reach of transition countries. description of the secured debt and the the law may negatively influence the Commitment to reform has already method of enforcement) depending on development of mortgage lending paid off: the Mortgage Regional Survey whether the charged asset is movable products, such as loans with variable shows that a number of countries or immovable does not make sense. payments or lines of credit secured by already go a long way towards offering The inefficiency of such an approach mortgage, and so on. These restrictions efficient systems, which over the becomes all the more apparent in the arise principally from legal doctrine and coming years may compare favourably context of mortgage securities, when tradition. The resistance to making the with systems in operation in security is given both in the form of necessary (and sometimes difficult) western markets. mortgage and of pledge. changes to the law generally fall away when the economic role of security We summarise below some of the more is well understood. important findings and conclusions, Consensual nature of mortgage distinguishing between those that are Modern markets continue to create broadly relevant across the field of Constructions many variations on the way mortgage mortgage law and matters of more finance can be structured. A mortgage over land should include specific application. Notwithstanding the essentially simple constructions on it, including new and standard nature of a mortgage the constructions after the date of the Broad conclusions and parties should be allowed to shape all mortgage. Treating constructions, for recommendations aspects of their agreement according to purposes of ownership and registration, the circumstances of their transaction. as separate from the land plot on which Essential requirements they are built creates problems for establishing adequate security over Giving security by way of mortgage is a Compatible with mortgage securities the property, particularly in the case relatively simple and standard operation Mortgage markets depend on the of new construction projects. that is frequently carried out between availability of finance, and for that willing parties to facilitate economic mortgage securities are increasingly activity, mostly in the private sector. Transparency of information important. Mortgage securities are not The legal framework for mortgage should feasible unless there exists a sound For a mortgage to be created and the be designed to maximise economic and compatible regime for mortgage. rights of the mortgage creditor to be benefit. The legal efficiency criteria Transition countries that are reforming subsequently protected, information (simplicity, speed, low cost, certainty their mortgage law have a unique on title and mortgages needs to be and fit-to-context – see Part II 2 opportunity to ensure that it does exist. available. The internet provides the and Chart 3 on page 9) can be used to most efficient way of giving immediate assess whether it achieves this. The public access to that information and it basic requirements for a mortgage law Precondition for mortgage reform is already used in a number of countries. are encapsulated in the core principles The success of any mortgage reform This should be strongly encouraged. (see Box 1 on page 11 and Annex 1). will largely depend on the understanding by all parties involved of the economic role of mortgage and the way secured credit markets work, and a determination to remove unnecessary mystique, formality and complexity. Without that understanding there is little chance that the law and the legal institutions that implement it will operate in a way that realises the full potential economic benefits of the reform. Part VI: Conclusions 55

Registration of mortgages Role of the court in enforcement Registration of mortgage is needed to Enforcement represents the execution publicise the existence (or claimed of a contractual agreement and should existence) of a mortgage and to primarily be led by the parties. The establish the precise time from which it principal role of the court is to resolve would have priority. A requirement that disputes and uphold the parties’ rights, registration also guarantees the validity if and when requested to do so. The of the mortgage (in the same way as for court must be prepared and equipped a transfer of land) is unnecessary and to react promptly and order appropriate inefficient. With a notification system remedies. immediate registration of mortgages at minimal cost becomes a real possibility. Transfer of mortgage Mortgage securities transactions Flexibility in enforcement methods require the transfer or pledge of The principal aim of enforcement is to mortgage loans and it should be realise the mortgaged property promptly possible to achieve this efficiently at market value. Recent reports indicate without onerous requirements as to that many transition countries are documentation, notice, consent or relatively successful in this respect, but registration. It is preferable that this that may be due as much to favourable is the case for all mortgage loans, market conditions as to the strength not just those that are structured in a of their systems. Allowing the mortgage particular way (for example, as mortgage creditor choice as to the manner of certificates) when transfer or pledge is realisation, and control over the envisaged. Transition countries could realisation process (linked to a duty achieve more efficient systems than of diligent execution), is likely to be those operating in many western conducive to improving and sustaining jurisdictions. enforcement results.

Registration of the mortgage creditor Efficient enforcement process The complication that regularly hampers Mortgagor and mortgage creditor the transfer of mortgage loans is the should share a similar interest that requirement to register the change the mortgaged property be realised in mortgage creditor in the mortgage at the best price. The prerequisites to register. There is no fundamental need enforcement and the process by which to publicise that change on the register. it is achieved from the formalities Any advantage that may arise from of commencement to the distribution registration is more than outweighed of proceeds should be legally efficient. by the inefficiency that this creates If they are not, delay and complexity are for mortgage securities transactions. likely to increase the costs, therefore In spite of recent concerns affecting reducing the net proceeds, and mortgage finance markets it is evident inefficiency may give the mortgagor that there is enormous growth potential opportunities to obstruct the process. in the transition countries. The economic advantage resulting from that growth will be all the greater where the legal framework for mortgage has been made legally efficient. 56 Mortgages in transition economies

Annex 1: EBRD Core Principles for a Mortgage Law

The principles are drawn on the assumption that the role of Principle No 3 a mortgage law is economic. It is not needed as part of the If the secured debt is not paid the mortgage creditor should essential legal infrastructure of a country: its only use is to be able to have the mortgaged property realised and to have provide the legal framework which enables a market for the proceeds applied towards satisfaction of his claim prior mortgage credit to operate. to other creditors.

The principles do not seek to impose any particular solution This principle is also at the core of the mortgage’s on a country – there may be many ways of arriving at a economic purpose. The exact nature of the proprietary right particular result – but they do seek to indicate the result that that arises when security is granted has to be defined in should be achieved. As with any set of general principles of the context of the relevant legal reform, but if it is to be this nature they must be read within the context of the law effective it must link to the creditor’s claim the remedy and practice of any particular country and they do not aim of recovering from the property given as security. to be absolute; exceptions inevitably have to be made. The mortgage creditor should maintain a prior claim on the proceeds of realisation of the property (subject to the right Principle No 1 of any pre-existing, prior-ranking creditor). A mortgage should reduce the risk of giving credit, leading to an increased availability of credit on improved terms. Principle No 4 The first principle is overriding: If the legal framework for Enforcement procedures should enable prompt realisation mortgage does not lead to a reduction in the risk of giving at market value of the mortgaged property. credit and an increased availability of credit on improved terms, then there is no point in the law providing for What gives a mortgage its value, and therefore enables mortgage at all. This goes to the basic assumption made by borrower and lender alike to derive benefit from it, is the EBRD on all its work on mortgage law reform. Every element confidence that it can be used, if necessary, to repay the of the legal framework should be analysed against this creditor’s claim. The greater the doubts of the creditor as basic principle. to his ability to enforce or the conditions under which he would do so, the less will be the influence of the mortgage when he decides whether to lend and on what terms. Principle No 2 The law should enable the quick, cheap and simple creation When a creditor comes to enforce he needs to be able to of a proprietary security right without depriving the person realise the property rapidly. Delays in realisation are likely giving the mortgage of the use of his property. to be a source of uncertainty and cost. The property should be realised at the same value as on any other sale in the The second principle relates specifically to creation. It is market. Any surplus proceeds beyond those needed for more prosaic than the first but it permeates many aspects satisfying the secured claim returns to the mortgagor, and of the law on mortgage. The trio of simplicity, speed and there is no justification for penalising him by a realisation inexpensiveness is fundamental and ties in directly with the at below market value. concept of legal efficiency: formal requirements should be kept simple and the costs low. Every cost, irrespective of who bears it, that is involved in the creation of mortgage detracts from the benefits that mortgage provides. Any delays or complexities translate into cost. Annex 1: EBRD Core Principles for a Mortgage Law 57

Principle No 5 Principle No 8 The mortgage should continue to be effective and There should be an effective means of publicising the enforceable after the bankruptcy or insolvency of the person existence of a mortgage. who has given it. Publicity is needed to ensure that any person can be alerted The position against which the creditor most wants protection to the existence of the mortgage. When taking a mortgage is the bankruptcy or insolvency of the debtor. Any reduction the creditor will want to discover whether any pre-existing of rights or dilution of priority upon bankruptcy or insolvency mortgages have a prior claim. And once his mortgage is will reduce the value of security. The validity of the mortgage created he will want to be sure that anyone subsequently should not be affected by insolvency (with the exception of claiming a right in the property is made aware of his claim. fraudulent or preferential transactions or those carried out Without a reliable system for publicity a creditor is unlikely in the suspect period, but the same rules should apply as to have sufficient certainty in his rights in the mortgaged for other pre-insolvency transactions). Any rules permitting property. a moratorium or reorganisation of the debtor’s assets should aim to strike a fair balance between the interests of the mortgage creditor and other parties. Principle No 9 The law should establish rules governing competing rights of persons holding mortgages and other persons claiming rights Principle No 6 in the mortgaged property. The costs of taking, maintaining and enforcing a mortgage should be low. Certainty in his rights over the mortgaged property is key to the mortgage creditor. He needs to know what rights The mortgage creditor will usually ensure that all costs of other persons may take precedence over his right of connected with the mortgage are passed on to the debtor. mortgage, for example, other mortgages, tax liens, rights High costs of mortgage creation (mortgage agreement, of occupation or rights of spouses, in order to be able registration and so on) will increase the cost of borrowing to assess and value his security. The political or social and thus diminish the efficiency of the secured credit justification for any right of a third party which dilutes market. Enforcement costs will reduce the proceeds or compromises the ability of the mortgage creditor to on realisation and will influence a mortgage lender’s recover his claim out of the mortgaged property should assessment of the value of his security. Simple and fast be balanced against the loss of credit opportunity which procedures for creating and enforcing mortgage will help may result. to reduce costs.

Principle No 10 Principle No 7 As far as possible the parties should be able to adapt a Mortgage should be available (a) over all types of immovable mortgage to the needs of their particular transaction. assets (b) to secure all types of debts and (c) between all types of person. The law is there to facilitate the operation of the mortgage market and to ensure that necessary protections are in This principle covers a multitude of issues that may arise place to prevent the debtor, other creditors or third parties from legal tradition, the way the law is applied and the needs being unfairly prejudiced by the existence of the mortgage. of commercial reality. A mortgage should be available over Parties should be allowed wide contractual flexibility. There all types of immovable assets. There is little justification to are few cases which justify the law, or the institutions allow mortgage over some properties and not over others. that implement it, creating rules or barriers which limit the Similarly a mortgage should be capable of securing all manner in which parties can structure their transaction. types of debts, present and future, specifically or generally defined, that can be expressed as a money amount. Any physical or legal person (whether in the public or private sector) who is permitted by law to transfer property should be able to grant security over it to any other person. 58 Mortgages in transition economies

Annex 2: Mortgage Regional Survey –

The survey is best understood if read in conjunction with the EBRD Core Principles for a Mortgage Law (see Annex 1), which specify the basic criteria for modern mortgage law, and the explanatory notes (see Annex 3), which describe the methodological approach to the survey.

Czech Kyrgyz Slovak Bulgaria Croatia Estonia Georgia Hungary Kazakhstan Latvia Lithuania Poland Romania Russia Serbia Slovenia Ukraine Republic Republic Republic 1 Creation of the mortgage 1.1 Can existing title to property be established with sufficient ✖✖ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † certainty? 1.2 Is the manner of creation of mortgage clearly established? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

1.3 Is creation of mortgage simple? ✖✖ † ✖✖ † ✔✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔ † ✖✖ † ✔✔✔ † ✖✖ † ✔✔ † ✔✔✔ † ✔✔✔ ✔✔✔

1.4 Is creation of mortgage rapid? ✔✔ ✔✔ ✖✖ † ✖✖ † ✔✔ ✖✖ † ✖✖ † ✔✔ ✖✖ ✔✔ ✖✖✖ † ✔✔ † ✖✖✖ ✖✖ † ✖✖ † ✖✖ † ✔✔✔

1.5 Is creation of mortgage inexpensive? ✔✔ ✔✔✔ ✔✔✔ ✔✔ ✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔

2 Commercial effectiveness

2.1 Can a mortgage be granted by any person? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

2.2 Can any person take a mortgage? ✔✔✔ ✔✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

2.3 Can the mortgage secure any type of debt? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

2.4 Can the secured debt be in any form? ✖✖ † ✔✔ † ✖✖ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔ † ✔✔ † ✖✖ † ✖✖ † ✖✖ † ✔✔ † ✖✖ † ✖✖ † ✔✔✔ ✔✔✔ † ✔✔✔

2.5 Can the mortgage cover all types of immovable asset? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † 2.6 Does the mortgaged property include subsequent constructions ✔✔ † ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✖✖ † ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔ † ✖✖ † ✔✔✔ ✔✔✔ and additions? 2.7 Are subsequent mortgages permitted over same property? ✔✔✔ ✔✔✔ † ✔✔✔ † ✔✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ † ✔✔ † ✔✔ † ✔✔✔ † ✔✔✔ ✔✔✔ † ✔✔ †

3 Effect of the security right on third parties 3.1 Is the mortgage creditor protected from subsequent claims which ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ † ✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † may adversely affect the mortgagor’s title to the property? 3.2 Does mortgage give priority in mortgaged property? ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ †

3.3 Does the mortgage creditor have priority in bankruptcy? ✔✔✔ ✔✔ † ✔✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

3.4 Can a third party determine whether property is mortgaged? ✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

4 Enforcement of the mortgage

4.1 Is the manner of enforcement of mortgage clearly established? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔

4.2 Is enforcement of mortgage rapid? ✔✔ ✔✔ ✖✖ ✔✔✔ ✖✖✖ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✖✖✖ ✔✔ ✖✖ ? † ✔✔✔ ✖✖ ✔✔✔

4.3 Is enforcement of mortgage inexpensive? ✖✖ ✔✔✔ ✖✖ ✖✖ ✖✖✖ ✖✖ ✔✔✔ ✖✖ ✖✖ ✔✔ ✖✖✖ ✔✔ ✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

4.4 Is realisation likely to be at market value? ✖✖ ✖✖ ✔✔ ✔✔ ✖✖ ✖✖ ✔✔✔ ✔✔ † ✔✔ ✔✔✔ ✖✖ ✖✖ ✖✖ ? † ✔✔✔ ✔✔ ✔✔✔ †

4.5 Is enforcement procedure simple? ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✖✖ † ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✖✖ † ✔✔ † ✖✖ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ 4.6 Can the mortgage creditor decide on the way the sale will be ✖✖✖ ✖✖✖ ✔✔ † ✖✖✖ ✖✖✖ ✔✔✔ ✔✔ † ✔✔ † ✖✖✖ ✖✖✖ ✖✖✖ ✖✖✖ ✖✖✖ ✔✔✔ ✔✔✔ ✖✖✖ ✔✔✔ conducted? 4.7 Can the mortgage creditor exercise control over the realisation ✖✖ † ✖✖✖ ✔✔ † ✖✖✖ ✖✖✖ ✔✔✔ ✔✔ † ✔✔ † ✖✖✖ ✖✖✖ ✖✖✖ ✔✔ † ✖✖✖ ✔✔✔ ✔✔✔ ✖✖✖ ✔✔✔ process? 4.8 Is the mortgage creditor protected against mortgagor ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✖✖✖ † ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✖✖✖ ✔✔ † ✖✖ † ✔✔ † ✔✔ † ✔✔✔ ✖✖ † obstruction? 4.9 Does commencement of enforcement have to be publicised? ✖✖✖ ✔✔✔ ✖✖ † ✖✖✖ ✖✖✖ ✖✖ † ✔✔✔ ✔✔✔ ✖✖✖ ✔✔✔ ✔✔ † ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✖✖ † ✖✖✖

4.10 Is purchaser in enforcement procedure protected? ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✖✖ † ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✖✖ † Annex 2: Mortgage Regional Survey – composite table 59

composite table

✔✔✔ Yes ✔✔ Yes, but with some reservations ✖✖ Indicates that response is negative, but there are some mitigating factors in law or practice ✖✖✖ Categorical no ? Uncertain † Indicates there is an accompanying note. Please see pages 60-62.

Czech Kyrgyz Slovak Bulgaria Croatia Estonia Georgia Hungary Kazakhstan Latvia Lithuania Poland Romania Russia Serbia Slovenia Ukraine Republic Republic Republic 1 Creation of the mortgage 1.1 Can existing title to property be established with sufficient ✖✖ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † certainty? 1.2 Is the manner of creation of mortgage clearly established? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

1.3 Is creation of mortgage simple? ✖✖ † ✖✖ † ✔✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔ † ✖✖ † ✔✔✔ † ✖✖ † ✔✔ † ✔✔✔ † ✔✔✔ ✔✔✔

1.4 Is creation of mortgage rapid? ✔✔ ✔✔ ✖✖ † ✖✖ † ✔✔ ✖✖ † ✖✖ † ✔✔ ✖✖ ✔✔ ✖✖✖ † ✔✔ † ✖✖✖ ✖✖ † ✖✖ † ✖✖ † ✔✔✔

1.5 Is creation of mortgage inexpensive? ✔✔ ✔✔✔ ✔✔✔ ✔✔ ✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔

2 Commercial effectiveness

2.1 Can a mortgage be granted by any person? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

2.2 Can any person take a mortgage? ✔✔✔ ✔✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

2.3 Can the mortgage secure any type of debt? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

2.4 Can the secured debt be in any form? ✖✖ † ✔✔ † ✖✖ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔ † ✔✔ † ✖✖ † ✖✖ † ✖✖ † ✔✔ † ✖✖ † ✖✖ † ✔✔✔ ✔✔✔ † ✔✔✔

2.5 Can the mortgage cover all types of immovable asset? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † 2.6 Does the mortgaged property include subsequent constructions ✔✔ † ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✖✖ † ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔ † ✖✖ † ✔✔✔ ✔✔✔ and additions? 2.7 Are subsequent mortgages permitted over same property? ✔✔✔ ✔✔✔ † ✔✔✔ † ✔✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ † ✔✔ † ✔✔ † ✔✔✔ † ✔✔✔ ✔✔✔ † ✔✔ †

3 Effect of the security right on third parties 3.1 Is the mortgage creditor protected from subsequent claims which ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ † ✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † may adversely affect the mortgagor’s title to the property? 3.2 Does mortgage give priority in mortgaged property? ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ †

3.3 Does the mortgage creditor have priority in bankruptcy? ✔✔✔ ✔✔ † ✔✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

3.4 Can a third party determine whether property is mortgaged? ✔✔ † ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

4 Enforcement of the mortgage

4.1 Is the manner of enforcement of mortgage clearly established? ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔

4.2 Is enforcement of mortgage rapid? ✔✔ ✔✔ ✖✖ ✔✔✔ ✖✖✖ ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✖✖✖ ✔✔ ✖✖ ? † ✔✔✔ ✖✖ ✔✔✔

4.3 Is enforcement of mortgage inexpensive? ✖✖ ✔✔✔ ✖✖ ✖✖ ✖✖✖ ✖✖ ✔✔✔ ✖✖ ✖✖ ✔✔ ✖✖✖ ✔✔ ✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔

4.4 Is realisation likely to be at market value? ✖✖ ✖✖ ✔✔ ✔✔ ✖✖ ✖✖ ✔✔✔ ✔✔ † ✔✔ ✔✔✔ ✖✖ ✖✖ ✖✖ ? † ✔✔✔ ✔✔ ✔✔✔ †

4.5 Is enforcement procedure simple? ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✖✖ † ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✖✖ † ✔✔ † ✖✖ † ✔✔ † ✔✔✔ ✔✔✔ ✔✔✔ 4.6 Can the mortgage creditor decide on the way the sale will be ✖✖✖ ✖✖✖ ✔✔ † ✖✖✖ ✖✖✖ ✔✔✔ ✔✔ † ✔✔ † ✖✖✖ ✖✖✖ ✖✖✖ ✖✖✖ ✖✖✖ ✔✔✔ ✔✔✔ ✖✖✖ ✔✔✔ conducted? 4.7 Can the mortgage creditor exercise control over the realisation ✖✖ † ✖✖✖ ✔✔ † ✖✖✖ ✖✖✖ ✔✔✔ ✔✔ † ✔✔ † ✖✖✖ ✖✖✖ ✖✖✖ ✔✔ † ✖✖✖ ✔✔✔ ✔✔✔ ✖✖✖ ✔✔✔ process? 4.8 Is the mortgage creditor protected against mortgagor ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✖✖✖ † ✔✔ † ✔✔ † ✔✔ † ✔✔✔ ✔✔✔ ✖✖✖ ✔✔ † ✖✖ † ✔✔ † ✔✔ † ✔✔✔ ✖✖ † obstruction? 4.9 Does commencement of enforcement have to be publicised? ✖✖✖ ✔✔✔ ✖✖ † ✖✖✖ ✖✖✖ ✖✖ † ✔✔✔ ✔✔✔ ✖✖✖ ✔✔✔ ✔✔ † ✔✔✔ ✖✖ † ✔✔✔ ✔✔✔ ✖✖ † ✖✖✖

4.10 Is purchaser in enforcement procedure protected? ✔✔✔ ✔✔✔ ✔✔ † ✔✔✔ ✔✔✔ ✔✔ † ✖✖ † ✖✖ † ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✔✔✔ ✖✖ † 60 Mortgages in transition economies

Notes to the composite table on the previous page

Bulgaria 4.9 Enforcement is only registered if it is carried out through court procedure and then only after a court order is obtained. 1.1 Registration is currently being converted from a personal to a property-based system and from a paper-based to an 4.10 The law provides for a three-month period within which an electronic system. There are also unregistered restitution auction can be challenged but allows a limited list of reasons claims outstanding. justifying such a challenge. 1.3 There are title and searching problems, onerous registration Estonia formalities and problems in obtaining required tax certificates. Re-registration is required after 10 years. 1.4 Registration takes about one month but mortgage lenders 2.4 Specific description of the secured debt is required and there is commonly disburse loans after the application for registration uncertainty over securing credit facilities and fluctuating debt. has been submitted. The creation process is also delayed by time taken to obtain necessary notarial intervention. 2.6 There is some uncertainty and in practice future constructions are often specifically referred to in the mortgage agreement. 2.7 A clause prohibiting further mortgages is void. 3.4 There can be some uncertainty due to the person-based Georgia records. 4.7 The mortgage creditor can appoint a private bailiff to conduct 2.4 In principle, it is possible to secure generally described the sale. and fluctuating debt but practice is not well established. 4.8 In the case of residential property, the mortgagor can apply to 3.3 Priority only applies to 75 per cent of the secured debt. court to suspend the procedure or reschedule the payments. 4.5 Court practices can cause uncertainty. 4.8 The mortgagor and dependants are legally allowed to remain Croatia in the property as tenants. The mortgagor could also apply 1.1 Land registry has greatly improved in the last few years but for suspension of the public auction for a period of up to remains incomplete in some parts of the country. six months. 1.3 Additional security (for example, personal guarantee, seizure Hungary on salary) is usually requested, which makes the transaction more complex. 1.3 The formalities of land offices and inconsistencies of practice 2.2 For a fiduciary transfer a foreigner would need governmental can complicate the registration process. approval. 1.4 Registration may take well in excess of the prescribed 30-day 2.4 There is some uncertainty in practice. maximum, but there is a system of noting pending registration. 2.7 For fiduciary transfer it is not possible. A clause prohibiting 1.5 Costs are relatively high for lower amounts of debt. It has further mortgages is void. been assumed that a notary is used. 3.2 There is some uncertainty on the priority of tax claims. 3.2 Claims (child support, alimony, wages of employees and other employment-related benefits) may have priority. 3.3 There is some uncertainty on the priority of tax claims. 4.5 Some uncertainties exist in relation to out-of-court 4.5 The procedure for public auction is court-led and rather procedures. formalistic. 4.8 The mortgagor can delay the enforcement procedure. 4.8 The mortgagor could cause severe delays by submitting multiple objections. 4.9 There is a requirement to register the commencement of court-led enforcement but there appears to be no sanction Czech Republic for failure to do so. Enforcement through a private sale is not publicised. 1.3 Mortgage agreement must be presented in several copies 4.10 On out-of-court enforcement the purchaser will not be (depending on number of parties involved, plus two). protected against third-party claims unless the sale is 1.4 Registration of mortgages takes between two weeks and conducted by a professional auctioneer or dealer. six months. However, banks often disburse mortgage credit following the application for registration. Kazakhstan 2.4 A mortgage can only secure, up to an agreed amount, a debt 1.1 The legal cadastre (run by the Ministry of Justice) and of a specific kind during a defined period. land cadastre (run by the Land Committee) contain many 2.6 Additions to land encumbered by a mortgage would not discrepancies on title. automatically be included in a mortgage of the land. 1.3 The registration process can be complex and different 2.7 A clause prohibiting further mortgages is void. practices are reported between different registration offices. 3.3 On the basis of the new Law on Insolvency that comes into 1.4 Mortgage registration takes about three weeks. However, force early 2008, a mortgage creditor will have full priority banks disburse mortgage credit after the application for over the mortgaged property. registration has been submitted. 3.4 There may be a time gap between the moment tax liens 2.4 Requirements for specification of secured debt limit the become effective and their registration. possibility to describe debt generally. 4.6 There is a choice between court-led sale and a privately 2.6 The legislation does not provide for automatic inclusion in the led auction. mortgage of future buildings erected on the mortgaged land. 4.7 Privately led auction is carried out by a private auctioneer 2.7 Prohibitions on further mortgage may be registered in the real and gives the creditor limited control subject to complying estate register. with detailed rules under auction law. 3.3 Some claims (damage to health, claims for wages and alimony) 4.8 The public auction is open to challenge in which case have priority. its continuation becomes subject to court approval. Annex 2: Mortgage Regional Survey – composite table 61

3.4 Some registration offices are reported to require Poland authorisation from the mortgagor for obtaining information from the register. 1.1 There is still a significant amount of land for which checking title may be difficult. 4.5 The legislation does not currently provide for the method for holding tenders in out-of-court proceedings. This causes 1.3 Registration procedures are formalistic (although they uncertainty and fear that the tender may be declared invalid. have been simplified for banks’ mortgages) and practice is not consistent. It is often necessary to create more than 4.6 There is a choice between court-led and out-of-court one mortgage because of technical distinctions between enforcement (if so provided in the mortgage agreement). different debts. Sale is at public auction in both cases. 1.4 Banks commonly disburse loans before registration is 4.7 The mortgage creditor may appoint the executor who carries completed, based on confirmed registration application out the auction in out-of-court enforcement. and/or additional collateral. 4.8 In the case of property not used for business activities and 2.4 A generally defined debt or a fluctuating pool cannot agricultural land the mortgagor can apply to the court for be secured. A future debt can only be secured if defined enforcement to be postponed for one year. specifically. There is a complex distinction between “capped” 4.10 The mortgagor may appeal within three months after and “fixed amount” mortgages. the auction. 2.7 A clause prohibiting further mortgages is void. Kyrgyz Republic 3.1 There is still some limited risk of a restitution claim. 3.2 Some claims (alimony, last three months’ employee wages 1.1 Titles are not always accurately registered and can be subject and invalidity pensions) take priority over the mortgage to challenge. creditor’s claim. 1.3 Registration requires presentation of many documents. 3.4 Obtaining excerpt may be limited to interested persons. 2.4 There is some doubt whether a mortgage can secure 4.5 The procedures are formalistic and the operation of the bailiff a generally described debt. system is reported to be inefficient. 2.5 Restrictions apply on agricultural land. 4.9 The bailiff is required to register commencement of 2.6 Parties could agree so but it is uncertain how this clause enforcement in the land register, but in practice there would be upheld in practice. may be delay before registration is completed. 3.4 Only limited information is publicly available. Romania 4.1 There is little practice. 4.2 The realisation procedure should be quick but practical 1.1 A significant amount of property is not registered. Even experience is limited. where a property is registered it may be necessary to check previous transfer deeds since entry into the register does not 4.4 Practical experience is limited. guarantee title. 4.5 Detailed procedures are provided in the law but there is little 1.3 It is simple unless there are problems establishing title. experience in practice. 1.4 It is quick unless there are problems establishing title. 4.6 The law gives the creditor choice but there is uncertainty if this is always available in practice. 1.5 Costs are relatively high for lower amounts of debt. 4.7 The law gives the creditor control but there is uncertainty 2.2 There are restrictions on who can take mortgages under if this is always available in practice. the Mortgage Lending Law. 4.8 The mortgagor can challenge the private sale. Evicting 2.3 There are restrictions on what debts can be secured occupants from the property is reported to be difficult. by a mortgage under the Mortgage Lending Law. 4.10 Purchaser’s title can be challenged on specific grounds. 2.4 There are conflicting views on the way the secured debt should be described in the register, especially its amount. Latvia 2.6 Additional procedures are necessary to include future additions. There is a practice of registration of mortgage 2.4 Although the secured amount may be in a foreign currency, over future constructions in the Electronic Archive for the amount secured is the Latvian lat amount that is shown Security Interests in Personal Property to cover subsequent in the land register. improvements. Lithuania 2.7 Prohibitions on further mortgage may be registered in the land register. 1.3 The form of the mortgage agreement is strictly defined and 3.1 There are a number of restitution claims which are registration requires various documents and information on unresolved. the value of the mortgaged property. 4.5 Court procedures are necessary both to confirm executory 2.3 Consumer loans cannot be secured by a mortgage. title and authorise realisation. Greater court involvement 2.4 If the mortgage does not secure a specific debt, the is necessary if the creditor is not an authorised bank. maximum amount and use of monies have to be stated 4.7 Banks can use their own enforcement officer but the and the mortgage validity is limited to five years. mandatory public auction procedure has to be followed. 3.1 There are still unresolved restitution claims, and these 4.8 The mortgagor has scope to delay enforcement. are not registered against the land. 62 Mortgages in transition economies

Russia Slovak Republic 1.1 Rights acquired since 1998 are registered but there can 1.3 The process for applying for registration is simple but be uncertainty establishing title acquired before then. mortgage agreement must be presented in several copies 1.3 There are a number of documents required for registration (depending on number of parties involved, plus two). There that, along with inconsistencies in practice of registration are some inconsistencies of practice between different offices, make registration formalistic and complex. cadastre offices. 2.4 Specific identification of secured debt is generally required 1.4 Registration can take one month or more. Expedited which makes it difficult to secure future, fluctuating or registration (normally within 15 days) is available at a higher generally described debt. fee. 2.7 Prohibitions on further mortgage may be registered in 1.5 Costs are relatively high for lower amounts of debt. It has the land register. been assumed that expedited registration is used. 3.2 Imprecise wording of the Enforcement Law leaves doubt as to 2.6 Additions to land encumbered by a mortgage would not whether the secured claim would not be superseded by other automatically be included in a mortgage of the land. claims, such as tax claims. 4.8 Debtor obstruction is reported to be a problem, in particular 3.3 Claims for personal injury and employees’ claims take with regards to occupant eviction and access to premises precedence if arisen before the mortgage right. There is for expert evaluation. uncertainty as to whether the secured claim would not be superseded by other claims, such as tax claims. Slovenia 4.1 The process is clear but courts are reported to have 1.4 Registration can take more than one month. A note is made discretionary power to decide whether or not enforcement in the register of pending applications. is “proportionate”. 2.4 There are restrictions on the transfer of “maximum amount” 4.5 Obtaining a court decision to enforce a mortgage is complex mortgages. and the outcome of the court-led sale is uncertain. 2.7 A clause prohibiting further mortgages is void. 4.8 Mortgagors often successfully apply for postponement 4.9 Mortgage enforcement is publicised only after the court order of the enforcement for a period of up to one year. is obtained. 4.9 Enforcement is registered after the court order is obtained. Ukraine Serbia 1.1 The immovable property registration system has not yet been 1.1 There are currently three separate and non-consolidated unified, and title cannot always be established with certainty. regimes for the registration of immovable property. Unification 2.5 There are limitations on mortgages over agricultural land. of these systems is ongoing. Many properties are not yet registered at all. 2.7 Consent of the prior mortgage creditor is necessary. Parties are likely to register a prohibition to sell the property, which 1.3 The process can be complex if the property is under would be opposable to all. construction or unregistered. 3.1 Minors can acquire the right to stay in the premises. See 1.4 Registration can take some time to complete but mortgage question 4.8. creditors are reported to disburse after the application for registration has been submitted. 3.2 There is some uncertainty as to whether tax liens would not take precedence. 2.4 Requirements for specific description of debt would make it difficult to secure fluctuating and generally described debt. 4.4 There are doubts that realisation would remain close to market value in less buoyant conditions. 2.6 This seems possible but it would be preferable to register a mortgage over the building in construction. 4.8 Remedies of the mortgage creditor against obstruction are limited. Laws protecting minors place barriers on the simple 2.7 A clause prohibiting further mortgages is void. and fast eviction of occupants. 3.1 There is a risk of unresolved restitution claims. 4.10 The public auction can be appealed against within three 4.1 There is little practice. months. 4.2 The new out-of-court enforcement procedure has not yet been put to the test. 4.4 The new out-of-court enforcement procedure has not yet been put to the test. 4.5 There is uncertainty as to how the courts may interpret the out-of-court enforcement rules. 4.8 The law is clear but practice is still limited. 63

Annex 3: Mortgage Regional Survey – explanatory notes

The questions in the survey are designed to be 1.3 Is creation of mortgage simple? straightforward and easily understood. The following The most frequent problems relate to inefficient and/or notes provide background information on how the scope unnecessary administrative requirements, especially for of the questions has been defined in practice and on the formalities of agreement and for registration (for example, methodology used for deciding the grading. for documents and/or information that has to be produced, for the formal manner in which they have to be presented For the legal efficiency indicator charts and table (see and the method and extent of checking required). Where Charts 7-12 and Table 5), countries were rated as follows: creating a mortgage is complex because of ancillary requirements – for example, obtaining a mortgagor’s tax certificates – this is taken into account. Very efficient – Unqualified yes (✔✔✔) on all relevant questions 1.4 Is creation of mortgage rapid? The grade given is based on the time likely to be taken Efficient – Unqualified or qualified yes (✔✔✔ or ✔✔) on all relevant questions to complete all necessary steps for a simple mortgage transaction (checking title, signing agreement, registering): Some inefficiency – Negative rating (✖✖ or ✖✖✖) on one relevant question ✔✔✔ 1 week or less ✔✔ 1-2 weeks Inefficient – Negative rating (✖✖ or ✖✖✖) on two or more relevant questions ✖✖ 2-4 weeks

Unclear – Unclear rating (?) on one or more relevant ✖✖✖ More than 4 weeks questions. When registration takes over two weeks but there is a notation system alerting third parties of pending 1 Creation of mortgage registration, and as a result banks commonly advance credit This section relates solely to mortgages created by prior to the completion of registration, these circumstances agreement between the parties and excludes any are taken into account. consideration of the creation of mortgages (or equivalent) by operation of law or by judicial or administrative order. 1.5 Is creation of mortgage inexpensive? The question looks at direct costs that specifically apply For the purposes of the survey a mortgage is treated as to the legal process of creating a mortgage over a property, created when it is opposable against third parties. “Creation and that in practice cannot be avoided. These include of mortgage” covers the whole process necessary to title search fees, registration fees, taxes (including VAT), constitute a mortgage, including any registration or publicity but exclude any costs that would apply to the transfer of that may be required to make it opposable to third parties. title (which would apply in the case where the mortgage 1.1 Can existing title to property be established with sufficient loan is used to purchase a property). In countries where certainty? the services of a notary are mandatory or in practice The effectiveness of a registration system for establishing systematically sought, notary fees have been included. title depends on whether all title claims are apparent from Preferential or subsidised rates have been ignored. When a search of the register and can be relied on. Title can also costs would vary depending on whether individuals or be established through title deeds. legal entities were involved, it has been assumed that the mortgage was given by an individual. 1.2 Is the manner of creation of mortgage clearly established? Costs that do not arise from the legal process (such as This question takes into account (i) whether the rules are property evaluation or bank fees) and costs that are linked clear; (ii) whether there is established practice; and (iii) the to the complexity of the creation procedure (for example extent to which there are uncertainties in practice. legal advice) are outside the scope of this question. 64 Mortgages in transition economies

Costs have been assessed on three different loan values 2.4 Can the secured debt be in any form? (see the table below). The selected debt values are This question covers four issues: designed to reflect amounts of credit typically provided ❚ Can the secured debt be defined generally? Where there in the transition countries. is an obligation of specific identification of the secured debt which precludes or limits the ability to use a general Cost on secured Costs on secured Costs on secured description, this is noted and reflected in the grade. debt of debt of €20,000 debt of €50,000 €200,000 ❚ Can a future debt be secured? ✔✔✔ Up to 0.75% Up to 0.5% Up to 0.25% ❚ Can the debt be in a foreign currency? A requirement to state the equivalent in local currency will lead to a Between Between Between ✔✔ downgrade if this may limit the ability of the creditor to 0.75 and 1% 0.5 and 0.75% 0.25 and 0.5% recover the full foreign currency amount on enforcement. Between Between Between ✖✖ On the contrary, where the register or the mortgage 1 and 2% 0.75 and 1% 0.5 and 0.75% document has to specify the amount in local currency ✔✔✔ ✖✖✖ Over 2% Over 1% Over 0.75% solely for information purposes, the grade of is given. Exchange control restrictions are not taken into account. The treatment of foreign currency claims under 2 Commercial effectiveness bankruptcy/insolvency procedures is outside the scope of this survey. The questions in this section are designed to assess ❚ Can a fluctuating pool of debt be secured? An obligation the extent to which the legal framework and the way it is to specify the secured debt, or a restriction on future applied in practice are adapted to the needs of commercial debts, which precludes or limits the ability to secure a transactions in modern market economies. fluctuating pool of debt (for example, amounts borrowed 2.1 Can a mortgage be granted by any person? on overdraft or a revolving credit facility where the amount It is assumed in the grading that the person has a right outstanding may decrease or increase from day to day), over the property that is mortgaged (he cannot create a is noted and reflected in the grade. mortgage over another person’s property) and has legal authority or capacity to grant a mortgage (for example, 2.5 Can the mortgage cover all types of immovable assets? he is not a minor or mentally incapacitated). When a prohibition applies to property of particular historic, artistic or national security significance, this does not lead In many jurisdictions there are restrictions on the right to to a downgrade. mortgage state-owned property. 2.6 Does the mortgaged property include subsequent 2.2 Can any person take a mortgage? constructions and additions? It is assumed that the person has legal authority or capacity This question covers mainly the automatic inclusion within to take a mortgage. the mortgaged property of subsequent constructions on Special rules that may apply to authorised mortgage lenders and additions to the mortgaged property. are not taken into account. Restrictions on foreign persons The question does not extend to the ability to grant a owning property are not taken into account unless the mortgage over a separate future property (for example an mortgage or its enforcement requires the mortgage creditor apartment not yet built), but where the practice exists it to become owner. may be noted.

2.3 Can the mortgage secure any type of debt? 2.7 Are subsequent mortgages permitted over same property? The question assumes that the debt is defined or definable Where there is a practice of registering the agreement of in monetary terms. It does not relate to restrictions on the the mortgagor not to create further mortgages (negative person who can be mortgagor or mortgage creditor that are pledge) in order to make it effective against third parties, noted under questions 1 and 2 in this table. Restrictions on a downgrade is given. The invalidity of negative pledge consumer lending are not taken into account. clauses is also noted for information. Banking or other regulations requiring banks to take a first-ranking mortgage (for example in order to qualify for the issue of mortgage securities) do not result in a downgrade. Annex 3: Mortgage Regional Survey – explanatory notes 65

3 Effect of the security right on third parties question. Also, provisions under bankruptcy/insolvency laws that provide for a moratorium on creditors’ rights, including 3.1 Is the mortgage creditor protected from subsequent mortgage creditors, do not affect the rating. claims which may adversely affect the mortgagor’s title to the property? 3.4 Can a third party determine whether property is mortgaged? The question covers all claims that may affect the If mortgages are publicised through registration then a third mortgagor’s title (and thus the mortgage creditor’s right) party should be able to determine whether a property is over the property once the mortgage has been taken. mortgaged by examining the register. This question seeks In many countries restitution claims have not yet been to assess whether any third party can in principle, and in finally resolved, but a downgrade is only given where it is practice, discover any other mortgages that exist or may considered that there is a significant risk that they could exist. A downgrade is given if access to the information is invalidate or restrict the value of a mortgage. restricted (for example to persons who can show an interest in the property). 3.2 Does the mortgage give priority in mortgaged property? The grade given in this question reflects the extent to 4 Enforcement of mortgage which the principle of the mortgage creditor’s priority in the mortgaged property is respected outside the case of The manner in which a mortgage can be exercised will be mortgagor bankruptcy/insolvency. It is considered normal influential in determining its value to the mortgage creditor. for the costs of enforcement of the mortgage and taxes The questions seek to establish the position that exists in on the property to rank ahead of the mortgage creditor’s practice, not just on a strict reading of the law, although secured claim and this does not prevent a ✔✔✔ rating. inevitably the practice on enforcement takes time to develop. Claims for personal injury are sometimes ranked ahead of secured claims. This does not prevent a ✔✔✔ rating 4.1 Is the manner of enforcement of mortgage clearly as these are often not of consequent amount. established? Where priority is given, for example, for other tax and/or Enforcement may be covered by separate legislation on civil social security claims, the rating depends on the extent and commercial procedure with distinctions applicable to of the priority. specific groups of mortgage creditors or mortgagors. Also, if relevant secondary legislation has not been adopted, the 3.3 Does the mortgage creditor have priority in bankruptcy? market may feel unsure about using alternative means of This question covers two issues: enforcement. ❚ the continued existence of the security right in 4.2 Is enforcement of mortgage rapid? bankruptcy/insolvency Grades are based on the estimated length of the ❚ the priority of the mortgage creditor in the proceeds of process necessary for successful enforcement, from the sale of the mortgaged property (which may be different commencement of the enforcement process (after any after bankruptcy/insolvency). mandatory grace period) down to completion of distribution of the sale proceeds. The extent to which the enforcement The costs of realising the mortgaged property in procedure depends on the courts and the speed and bankruptcy/insolvency will normally have priority over the effectiveness of the court system in general are taken into claim of the mortgage creditor. However, where other costs account. However, provisions under bankruptcy/insolvency of the bankruptcy/insolvency procedure take priority over laws that provide for a moratorium on creditors’ rights are a mortgage, a lower grade is given. not taken into account. Where a general priority on bankruptcy/insolvency is given for wages claims and/or for tax and/or social security ✔✔✔ Up to 6 months claims the rating is ✖✖, but this may be raised to ✔✔ ✔✔ 6-12 months if it is limited in scope, for example to three months’ outstanding wages. ✖✖ 12-18 months

A mortgage may often be set aside under bankruptcy/ ✖✖✖ More than 18 months insolvency rules if it was granted too close to the time of bankruptcy/insolvency. This is not covered under this 66 Mortgages in transition economies

4.3 Is enforcement of mortgage inexpensive? 4.7 Can the mortgage creditor exercise control over the realisation Grades are based on calculations of average costs for process? mortgage enforcement including court costs, bailiff fees, The question complements question 4.6, for example when notary fees (when involved), evaluation costs, but excluding the mortgage creditor cannot decide on the way the sale costs of legal advice. Cross-country comparison is difficult will be conducted but can appoint the person in charge of as the basis for calculating these costs varies. Costs may the sale. Where realisation is through court procedure the be evaluated as a percentage of the sale proceeds or creditor will normally have little control, but even where property value, but in some countries they are calculated it is outside the court the scope for creditor control may on the amount of the secured claim, or a mixture of both. be limited.

✔✔✔ Costs less than 2.5% 4.8 Is mortgage creditor protected against mortgagor obstruction? In any jurisdiction there is some scope for a well advised, ✔✔ Costs between 2.5 and 5% unscrupulous debtor to delay and hamper the enforcement ✖✖ Costs between 5 and 10% procedure. The question aims to assess, both on the basis of the relevant laws and procedures and taking into account ✖✖✖ Costs above 10% reports from local practitioners, the extent to which debtor obstruction is a significant problem in practice.

4.4 Is realisation likely to be at market value? 4.9 Does commencement of enforcement have to be publicised? The grades are principally based on estimates by local A third party dealing with the mortgagor may want to know practitioners of the likely return on the realisation of the not only whether a mortgage has been given, but also mortgaged property minus the enforcement costs. This whether it is being enforced. This information can most question takes into account enforcement procedures but easily be made available through a registration requirement. not the effect of bankruptcy/insolvency. If there is a significant delay before publication/registration takes place, a downgrade is given. ✔✔✔ Realisation generally at market value The requirement to advertise a public auction of mortgaged ✔✔ Proceeds within 80-100% of market value property is not counted for this purpose as the auction may ✖✖ Proceeds within 80-100% of market value happen a long time after enforcement has commenced.

✖✖✖ Proceeds constantly below 50% of market value 4.10 Is the purchaser in enforcement procedure protected? One of the factors that may make satisfactory realisation more difficult, particularly in the case of private sales, is 4.5 Is enforcement procedure simple? the concern of prospective purchasers that the mortgagor or The most frequent problems relate to formalistic and/or other creditors may be able to attack the sale and/or claim unnecessary administrative requirements, especially for competing rights in the sold property. Where protection is establishing an executory title and for the sale procedure, only given where the sale is at public auction or it is a court- and slow and/or inefficient court procedures. led sale, a ✔✔ grade is given. If the purchaser’s title can be challenged for a certain period after the sale, a downgrade 4.6 Can the mortgage creditor decide on the way the sale will is given, which depends on the length of this period and the be conducted? Grades on this question reflect the extent to which the grounds allowed for challenge. mortgage creditor can, at the time of enforcement, decide on the way the sale will be conducted. Where a private sale is allowed only if the mortgagor’s consent is obtained after commencement of enforcement, this is not taken into account since a mortgage creditor cannot rely on obtaining consent at this stage. 67

Annex 4: Terminology

Legal concepts have many subtle variations from one Mortgage loan or debt – loan or debt secured by mortgage. jurisdiction to another and in this work rigid definitions that Mortgage register – the register in which a mortgage has are inappropriate for cross-national comparison have been to be registered in order to be valid or opposable to third avoided. There follows comments on certain key terms to help parties. Depending on the jurisdiction this may be the title readers understand the way in which they are used in this work. register or a separate register. Bond – see mortgage securities Mortgage securities – tradeable obligations where the payment obligations are secured, or otherwise supported, Claim/debt – these terms are used interchangeably. In civil by a pool of mortgage loans. This includes both MBS and law jurisdictions it is more usual to refer to the claim of the covered bonds. Generally, “bond” is used when referring creditor on the debtor, whereas in common law jurisdictions it to covered bonds and “note” when referring to mortgage- is more usual to refer to the debt of the debtor to the creditor. backed securities. Covered bond or CB – a bond where the payment Mortgagor – the person who grants a mortgage. The obligations are secured by a pool of mortgage loans. Often mortgagor is always the owner of the property that is CBs are provided for by specific legislation and normally: mortgaged, and most often he is the debtor of the secured ❚ they are issued by a mortgage provider (or company within claim, although sometimes one person will give a mortgage the same group) to secure the debt of someone else. In this work it is ❚ the mortgage loans remain on the mortgage provider’s generally assumed that the debtor and the mortgagor balance sheet. are the same person. Although CBs may sometimes be secured by public sector Non-accessory mortgage – a mortgage which is created debt or shipping loans, this work only deals with bonds independently from any debt and which is used to secure covered by mortgage loans. claims that are defined separately. Neither the claim nor the identity of the creditor need to be known at the time Cover pool – the mortgage loans that are used to secure the mortgage is created. a covered bond. Note – see Mortgage securities Debt – see Claim Originator – the lender who makes available a mortgage Enforcement – the process of exercising the right to recover loan to a borrower. the secured debt out of the mortgaged property, including establishing the right to enforce, realising the mortgaged Owner – generally used to indicate the person who has property and distribution of the proceeds from the realisation. the primary right to use, alienate and derive income from a property. Enhancement or credit enhancement – in the context of mortgage-backed securities, additional assets or rights Pledge – is used generally for charge over movables (often derivatives or a liquidity facility) acquired by the SPV, (including intangibles), and not in the restrictive sense which reduce the credit risk of the notes issued. of a charge with dispossession. Mortgage – an ancillary right in immovable property entitling Realisation – in the context of mortgage enforcement, the a creditor to recover his claim out of the mortgaged property. process by which money is generated out of the mortgaged In legal terms it is important to make the distinction between property in order to repay the secured claim. In most cases the mortgage and the loan that it secures. this involves the sale of the mortgaged property. Mortgage-backed security or MBS – a mortgage security Special purpose vehicle or SPV – a company or other legal (referred to here as “note”) where the rights of noteholders entity created specifically for the purpose of issuing are limited to the underlying pool of mortgage loans plus mortgage-backed securities. any credit enhancement. Features normally include: Title – the extent of an owner’s rights in a property. ❚ issue by an SPV Where property is registered the right of ownership, and ❚ an insolvency-remote structure any limitations or reservations on that right, are normally ❚ mortgage loans are removed from mortgage originator’s set out in the register. balance sheet Title register – the register where the title to a property ❚ noteholders have no claim against the mortgage originator. is recorded. This can be different from the cadastre, which Mortgage creditor – the person in whose favour the contains primarily records of a descriptive nature (including mortgage is granted or, where relevant, the person to property type, location, boundaries, and so on). whom it is transferred. Because of the accessory nature of mortgage the mortgage creditor is always the same as the person entitled to the secured debt. 68 Mortgages in transition economies

Annex 5: Selected bibliography

T. Beck (2006), Creating an Efficient Financial System: European Commission (2005), Green Paper Mortgage Credit Challenges in a Global Economy, World Bank Policy Research in the EU Working Paper 3856 European Commission, Delegation Representation Office S. Butler (2003), “Enforcement of Mortgage Rights in to Ukraine, Moldova and Belarus (2005), Strengthening the Housing Finance”, World Bank Housing Finance in Emerging Ukrainian Mortgage Structure Markets: Policy and Regulatory Challenges European Commission, DG Internal Market and Services L. Chiquier (2006), Poland Housing Finance Policy Note, (2003), Working Paper of the Commission Services on the World Bank Housing Finance Group Treatment of Covered Bonds

L. Chiquier, O. Hassler and M. Lea (2004), Mortgage European Commission, DG Internal Market and Services Securities in Emerging Markets, World Bank Financial Sector (2006), Report of the Mortgage Funding Expert Group Operations and Policy Department, Policy Research Working Paper 3370 European Covered Bond Council (2006), European Covered Bond Fact Book F. Dahan and J. Simpson (eds) (in press) Secured Transactions Reform and Access to Credit, Edward Elgar European Mortgage Federation (2003) Mortgage Banks Publishing and the Mortgage Bond in Europe, 4th Edition

F. Dahan, E. Kutenic´ovà and J. Simpson (2004), “Enforcing European Mortgage Federation (2004) Covered Bonds secured transactions in Central and Eastern Europe: an & Mortgage-Backed Securities in the European Union Empirical Study”, Butterworths Journal of International European Mortgage Federation (2006), Hypostat 2005, Banking and Financial Law, 19 pp. 253-257 and 314-318 A Review of Europe’s Mortgage and Housing Market J. Deacon (2004), Global Securitisation and CDOs, European Mortgage Federation (2002, 2007), European Chichester: John Wiley & Sons Ltd Survey 2002, Efficiency of Mortgage Collateral in the H.J. Dübel (Finpolconsult) (2006), Lending for the acquisition European Union – Comparative Study, and 2007 Update of unfinished housing units and linkage of sales and loan European Securitisation Forum (2002), A Framework for contracts – Options for better consumer protection for European Securitisation, London Ukraine based on international experiences, Kyiv European University Institute (European Private Law Forum) European Bank for Reconstruction and Development (2007), and the Deutsches Notarinstitut (2005), Real Property Law List of minimum standards for mortgage loans and the and Procedure in the European Union Mortgage Loan Minimum Standards Manual Fitch Ratings (2006), Comparative Study of European European Bank for Reconstruction and Development (1994), Covered Bonds Model Law for Secured Transactions H. Fleisig, M. Safavian and N. de la Pena (2006), Reforming European Bank for Reconstruction and Development (2005), Collateral Laws to Expand Access to Finance, Washington: The Impact of the Legal Framework on the Secured Credit World Bank Market in Poland Forum Group on Mortgage Credit (2004), The Integration European Bank for Reconstruction and Development (2006), of the EU Mortgage Credit Markets, European Commission – Transition Report 2006 – Finance in transition DG Internal Market and Services Annex 5: Selected bibliography 69

Freshfields Bruckhaus Deringer (2004), True-sale Organisation for Economic Co-operation and Development securitisation, Central and Eastern Europe (prepared by J. Thompson) (1995), Securitisation – International Perspective Freshfields Bruckhaus Deringer (2005), True-sale securitisation, Central and Eastern Europe: Croatia, Romania, Organisation for Economic Co-operation and Development Serbia and Slovakia (2005), Housing Finance Markets in Transition Economies – Trends and Challenges Global Legal Group (2006), International Comparative Legal Guide to Real Estate 2006, William Clowes Ltd J.-H. Röver (2007), Secured Lending in Eastern Europe, Oxford University Press Global Legal Group (2006), International Comparative Legal Guide to Securitisation 2006, William Clowes Ltd Rural Development Institute (2001), Land Reform in Eastern Europe Globe White Page Ltd. sponsored by Deutsche Bank (2006), Global Securitisation and Structured Finance K. Scanlon and C. Whitehead (2004), International Trends in Housing Tenure and Mortgage Finance, London School International Finance Corporation – Global Financial Markets of Economics (2004), Securitisation Key Legal and Regulatory Issues Standard & Poor’s (2005), Legal Criteria for European International Finance Corporation – Global Financial Markets Structured Finance Transactions 2005 (2005), Securitisation in Russia – Ways to expand markets and reduce borrowing costs Ukrainian National Mortgage Association (2006), Housing Mortgage Lending in Ukraine, Analytical Report for the first International Finance Corporation (2006), Central Asia 6 months of 2006 Housing Finance Gap Analysis United Nations Economic Committee for Europe (2005), International Monetary Fund (2006), Global Financial Housing Finance Systems for Countries in Transition, Stability Report, Market Developments and Issues Principles and Examples, Geneva

London Economics (2005), The Costs and Benefits Urban Institute (prepared by C. Rabenhorst and S. Butler) of Integration of EU Mortgage Markets, a report for the (2004), The Legal Framework of Mortgage Markets in European Commission, DG Internal Market and Services Southeast Europe – Assessments of the Legal Framework of Primary and Secondary Mortgage Markets in Croatia, Lovells (2005), Securitisation in Central and Eastern Europe Romania and Bulgaria Merrill Lynch (2007), Russian Mortgage Market H. Wolfsteiner and O. Stöcker (2003), “A Non-accessory Mortgage Credit Foundation, edited by A. Drewicz- Security Right over Real Estate for Central Europe”, Notarius Tulodziecka (2005), Basic Guidelines for a Eurohypothec, International, pp. 1-2, 116-124 Warsaw P.R. Wood (2007), Project Finance, Securitisations, S. Nasarre-Aznar (2005), “The Eurohypothec: a common Subordinated Debt, The Law and Practice of International mortgage for Europe”, The Conveyancer and Property Lawyer Finance Series, Vol. 5, London, Sweet & Maxwell (United Kingdom), January-February 2005, pp. 32-52 70 Mortgages in transition economies

Full list of contents

Acknowledgements and sources 5 Enforcement of mortgage – specific legal issues 5.1 Prerequisites to realisation: the mortgage creditor’s obligations Part I: Introduction a. Existence and validity of the secured claim and the mortgage Part II: Legal efficiency b. Event of default c. Need to involve the court 1 The economic and historic context d. Notice to the mortgagor e. Publicising the commencement of enforcement 2 Legal efficiency criteria 5.2 Realisation procedure: incentives and obligations a. Method of sale Part III: Mortgage Law b. Who is responsible for sale? c. Transfer of the mortgaged property to the purchaser 1 Legal basics – core principles 5.3 Insolvency and bankruptcy 2 Creation of mortgage – overview a. Validity b. Setting aside 3 Creation of mortgage – specific legal issues c. Reorganisation 3.1 Mortgaged property d. Liquidation a. Identification of property e. Preferential claims b. Constructions on land 5.4 Protection of rights and achieving fair balance c. Financing future or unfinished constructions a. Opportunity of the mortgagor to remedy d. What is included in the mortgage? b. Rights of appeal – role of the court 3.2 Title to mortgaged property c. Other mortgages – hierarchy of rights a. Who can grant a mortgage? d. Duties of the mortgage creditor – incentives b. How to establish title to maximise price c. Third-party rights in the property e. Duties of the mortgagor – cooperation and d. Restitution rights no obstruction f. Rights of occupants 3.3 The secured claim a. Who can receive a mortgage and what types of claim can be secured? Part IV: Mortgage Regional Survey and comparative b. Nature of the debt overview c. Accessority – should the mortgage be accessory to the secured debt? 1 Survey description

3.4 The mortgage agreement 2 Basic legal function of a mortgage law a. Content of agreement b. Form of agreement 3 Maximising economic benefit 3.5 Publicity of mortgage through registration 3.1 Simplicity a. Where mortgages are registered 3.2 Speed b. Information to be registered c. Effect of registration 3.3 Cost d. Registration process 3.4 Certainty e. Relying on registration f. Access to registered information and search process 3.5 Fit-to-context

4 Enforcement of mortgage – overview 4 Legal efficiency indicators – composite table Full list of contents 71

Part V: Mortgage securities Annexes

1 Mortgage securities in transition economies 1 EBRD Core Principles for a Mortgage Law

2 Legal basics – covered bonds 2 Mortgage Regional Survey – composite table

2.1 Segregation of mortgage loans 3 Mortgage Regional Survey – explanatory notes 2.2 Priority right of bondholders over the cover pool 4 Terminology 2.3 Terms of bonds and bondholder rights 5 Selected bibliography 2.4 Ongoing maintenance and monitoring of cover pool 2.5 Effect of bankruptcy/insolvency of the issuer and/or the servicer 2.6 Regulation

3 Legal basics – mortgage-backed securities 3.1 Nature and structure of the SPV 3.2 Transfer of mortgage loans 3.3 Terms of notes and noteholder rights 3.4 Ongoing servicing and administration of mortgage loans 3.5 Effect of bankruptcy or insolvency of the originator and/or the SPV, and/or the servicer 3.6 Regulation and tax

4 Specific legal issues 4.1 Transfer of mortgages and the loans they secure a. Consent from mortgagor b. Notice to mortgagor c. Nature and effect of transfer of mortgage loans d. Registration of new mortgage creditor in mortgage register 4.2 Pledge of mortgage loans and ancillary rights 4.3 Payments and ongoing servicing of mortgage loans 4.4 Right of the SPV to enforce defaulting mortgage loans 4.5 Confidentiality of information

Part VI: Conclusions

About this publication

The European Bank for Reconstruction and of the Swiss State Secretariat for Economic Development (EBRD) seeks to foster the transition Affairs (SECO). Although great care has been from centrally planned to market economies taken to provide accurate information, it does not in its 29 countries of operations. This includes constitute legal advice, and parties to mortgage encouraging countries to improve their legal transactions should seek their own advice. environments by modernising their legal rules In preparation for this publication, the EBRD and institutions. conducted a survey of mortgage laws in 17 This publication aims to identify what legal reform transition countries that have an active mortgage is needed to achieve an efficient legal framework finance market or that are actively developing for mortgage. It was prepared by the EBRD’s Office such a market. The survey can be extended of the General Counsel with the generous support to other countries.

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EBRD countries of operations © European Bank for Reconstruction and Development, 2007 One Exchange Square 01 Albania 09 Estonia 17 Moldova 25 Slovenia London EC2A 2JN United Kingdom 02 Armenia 10 FYR Macedonia 18 Mongolia 26 Tajikistan Web site: www.ebrd.com

03 Azerbaijan 11 Georgia 19 Montenegro 27 Turkmenistan Although great care has been taken to provide accurate information, nothing in this document constitutes legal advice and parties to mortgage transactions should seek their own legal advice. 04 Belarus 12 Hungary 20 Poland 28 Ukraine All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, 05 Bosnia and Herzegovina 13 Kazakhstan 21 Romania 29 Uzbekistan without the written permission of the copyright holder. Such written permission must also be obtained before any part of this publication is stored 06 Bulgaria 14 Kyrgyz Republic 22 Russia in a retrieval system of any nature. Designed and produced by Gargoyle – ref: 7093 Mortgages in transition economies (E) – December 2007. 07 Croatia 15 Latvia 23 Serbia Cover printed on Core Gloss; text pages printed on Core Silk. The paper used in this report is manufactured to the strictest environmental standards from Elemental Chlorine Free pulps in a mill which holds ISO 14001 certification and EMAS (Verified Environmental Management) accreditation. 08 Czech Republic 16 Lithuania 24 Slovak Republic Printed in England by Bishops Printers using their environmental print technology. The printing inks are made using vegetable-based oils. No film or processing chemicals were used.

Countries covered by the EBRD Mortgage Regional Survey are shown in dark green. Cover photography: BSR Europe The legal framework for mortgages and mortgage securities mortgage and mortgages for framework legal in transition economies – The Mortgages Mortgages in transition economies The legal framework for mortgages and mortgage securities

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