Mortgage crediting

Mortgage crediting тАУ to great extent new for our country type of banking services, and there are serious obstacles, which impede its development

The purposes and problems in my thesis work involve the stage analysis of mortgage process for estimation legal side of Russia mortgage, study the factors influence on the reduction credit risks.

This work could not be prepared without of a number of persons. I would like to say special word of thanks to Anders Dahlquist-Sjöberg, LLD for his guidance, providing the ideas, which become the base of the structure of the thesis. I would like to say for the Land Management administration especially to Anders Graad, who has managed the practical materials.

I am very thankful for the possibility given by Sida through the Master of Science in Land Management programme, to come to Sweden and study at the Royal Institute of Technology.

Introduction

As the mortgage operation creates an essential contribution to the development of real estate market the impotence of real estate credit is obvious. It might be used for involvement of additional investment to the different branches of economy: to agriculture, commercial activity, housing etc.

In the modern terms of general stagnation, crisis of non-payments and especially of bankruptcies of enterprises, from one side, and sharp necessity in renovation and technical re-equipment of production , from other side, the mortgage becomes the sole decision of problem.

The system of mortgage crediting for the Russian enterprises , which possess as a rule enormous fixed assets, from my point of view, represents not only acceptable, but solely possible in the present conditions.

The purposes and problems in my thesis work involve the stage analysis of mortgage process for estimation legal side of Russia mortgage, study the factors influence on the reduction credit risks. I will emphasise on the home mortgage, because this kind of mortgage occupies leading position in this section.

The thesis work consists of three main chapters, introduction and conclusion.

The introduction deals with the topicality of the subject matter, purposes and problems posed therein and contents of the thesis.

The first chapter тАЬThe essence of mortgage creditingтАЭ gives a general historical outlook of mortgage lending development and the reasons of necessity to introduce it in the modern Russia.

The essential second part of thesis deals with the current legal base on real estate issues and the possibilities to introduce mortgage lending to the bank activity.

The third part тАЬ The problems and perspective of development of hypothecate creditingтАЭ describes the international experience in this field. The purpose of this to give overview of loan contracts in several countries and to describe American models of hypothecation, which are the most widely used in our mortgage system. Also this chapter is focuses on the existing problems of the mortgage lending and ways their optimal solving.

Chapter 1. The essence of mortgage crediting

1.1. The necessity of mortgage crediting

The establishment of market economy is impossible without attraction of the population masses to the business and production activity, and such forms of crediting investment, which will have not only urgent, paid and returnable character but the mass character, will have the priority development.

As far as the collateral is necessary condition for market crediting, and the main part of the population of the country did not possess at the beginning of the reforms and do not possess at the present time the large real monetary accumulations and considerable movable property, so the mortgage becomes the sole variant of getting credit .

The expectation of activity of investment process is strong as never before for the last years. In this case for restoration of the economy of the country the long-term credits are necessary, because it seems that the period of recovery will be long. In the situation when the wave of unpaid credits overwhelmed the banking system the presentation by the borrower of the most reliable guarantees of repayment of the loan in the time of debentures gets the determined meaning in the case of resolving of the question of granting credit. One of the most reliable means of collateral is real estate, which becomes the subject of collateral in the case mortgage crediting. In the case of appropriate care the real estate and the land almost never lose its value and on the contrary in the future its price will increase.

The actuality of this type of credit consists of the fact that in the terms of the deep crisis of the production and of the economy of the country as a whole, it is possible that the sole way for the national enterprises, which majority is at the edge of bankrupt, to get long-term credits is the mortgage of real estate belonged to them.

In the case of sharp shortage of financial sources of housing construction the necessity in dwelling increases for the account of inflow to Russia of refugees from near abroad and the change of location of troops.

In these conditions the objective necessity in long-term credits granted to the population for housing construction occurs which are not subject considerably to the inflation and which are assured in maximum form from the point of view of their return. Namely the mortgage credit is in conformity with these requirements, which is assured by the collateral of real estate.

The main purpose of creditor is receipt from borrower of the most reliable guarantees of loan return in the time of fulfillment of debentures. It is naturally that the creditor must in the first place have the strict information of financial position of the borrower, check his paying capacity, the condition of his property, the availability of debts and so on. But all that is not sufficient, especially, if the long-term crediting is considered. The mortgage is more reliable form of guarantee (in contradistinction to individual form тАУ warranty) of payment of loan under real estate which owner is not deprived of the right to manage it; the mortgage gives the creditor the right to collect and to sell the property of the borrower in the case of non-payment of indebtedness in the time of fulfillment of the obligation.

In the terms of general stagnation, crisis of non-payments and especially of bankruptcies of enterprises, from one side, and sharp necessity in renovation and technical re-equipment of production, from other side, the mortgage becomes the sole decision of problem for enterprise. Now the banks are ready to give credits for production only in the case of availability of reliable guarantees of loan return.

The system of mortgage crediting for the Russian enterprises, which possess as a rule enormous fixed assets, from my point of view, represents not only acceptable, but solely possible in the present conditions. The enterprises need for restoration of production in the first place the renovation of means of production in accordance with modern technologies. And for realisation of such modernisation the considerable long-term and relatively cheap credit resources are necessary. The mortgage credit is in conformity with such conditions.

The history of establishment and the experience of mortgage crediting in Russia.

The combination of experience of mortgage crediting of expenses for purchase of land before revolution with the practice of individual crediting of dwelling construction in the soviet time is the reliable theoretical foundation for development of recommendations on mortgage crediting at the present time.

In Russia the first mortgage organizations appeared in the second part of XVIII century. In contradistinction to the other countries where the land was the subject of mortgage, in Russia the subject of mortgage were serfs. In 1860 the state mortgage credit organizations which existed before reforms were liquidated. After cancellation of serf right by the decree of the tsar Alexandre II the commission for development of the mortgage law was organized on which basis the mortgage banks of different form of property began to arise. However the private banks had the problem of resources attraction for a long period of time, and in connection with that the necessity in the state guarantees on attraction of such means appeared. The state took measures operatively for increase of liquidity of mortgage bonds: the persons who had them got the possibility either to use them as collateral in the purpose to get credit or to sell them.

It is important that the section appeared in the banking legislation, which regulated the activity of mortgage credit organizations, and then this legislation was divided into two parts: one тАУ for commercial banks, which were considered as the banks of short-term crediting, the other тАУ for mortgage banks, which acted on other principles.

The establishment of mortgage credit after 1861 was stipulated by the needs of landowners holding, which faced the difficulties of the тАЬreconstructionтАЭ in the period of reforms. The noblemen preserved their rights on real estate, but they did not have large capitals. The need of landowners in means was satisfied for account of land long-term crediting.

The considerable demand on mortgage loans was also in the cities among the house-owners from petty bourgeoises and merchants. The development of trade and business activity, the increase of the offers of stock values in connection with the wave of joint stock foundation, required the large cash means.

In the middle of 60 years of XIX century the mortgage organizations began to appear in Russia, which were founded on the capitalist principles of functioning. At the end of 80 years the system of mortgage credit was built, which consisted of corporation, mutual and joint stock, private and state credit organizations. This system enveloped the territory of the whole European Russia.

The mortgage banks granted long-term loans (till some decades) under the collateral of real estate: private lands in the country and houses (constructions) in the cities. The banks accumulated the means for granting credits for account of issue of mortgage bonds тАУ mortgage sheets. These bonds were supported by the property pledged as security in the bank.

The amount of interest, which was paid by the borrowers to the bank for granted loan, exceeded the amount of the interest, which was paid by the bank to the holders of mortgage sheets. This difference was the main source of the bank profit. The amount of issued into circulation mortgage sheets should not exceed the joint stock and the stock capital more than in 10 times.

The joint stock land banks tried to develop the mortgage crediting also in the cities. However the government limited in the interests of landowners its operations in the cities in the frames of one third of the total of unpaid loans.

The joint stock land banks realized its activity with support and under control of the government. The body, which effected the immediate control over the bank activity, was special office on credit affairs of the Ministry of finances. The government realized the control over issuing of shares and mortgage sheets, provided coordination of private banks with state - Noble and Peasant тАУ banks.

The structure of the profit of the joint stock land banks was typical. The long-term loans gave approximately half of the profit, the short-term credits and the securities, belonged to the bank, gave the other part of the bank profit.

The mortgage banks invested their capitals in the state and assured by the government securities, and because of this fact the demand on their mortgage sheets and shares was increasing constantly. The demand on the shares grew also because of constant high dividends.

Creating mortgage organizations, the government saw their tasks in the fact that the land and the city property, attracted into the banking circulation, was transferred from тАЬweakтАЭ to тАЬstrongтАЭ owners, who could organize developed production and thus could serve for increase of welfare of Russia. /11/

In Russia before the revolution the dynamic market of houses was organized, which was based on strong crediting-financial system, which was founded on pledges and promissory notes. None the less the main object of the mortgage crediting was the land but not the dwelling. The mortgage credit at that time as a rule was associated with land credit and was granted by the different types of land banks, that is the mortgage without dwelling dominated. On the contrary for the period after revolution the granting of credit under dwelling, but without mortgage, was typical, because there were not conditions for development of mortgage: the land тАУ the invariable factor of mortgage тАУ was nationalized.

None the less, in the soviet period the experience of dwelling crediting was formed in our country, which is in principle the base of mortgage crediting. The practice of crediting of dwelling construction in the USSR presents considerable interest. So for a long period of time the organizations of the State Bank of the USSR granted long-term credits to the population for cooperative and individual dwelling construction. The typical feature of organization of individual dwelling construction was the absence of immediate contact of the borrower with bank. The credits were granted to the population not directly but through the organizations in which the individual borrowers worked; the enterprises were guarantors of loans return. The redemption was realized by deduction of payments for credit directly from salary of the borrowers of their enterprises. The credits for dwelling were not assured by real estate or other property, and withdrawal of the property for realization in the purposes of redemption of loan was not used.

In the future, with the reorganization of the credit system, the range of the granted credits developed. The loans began to be granted not only for individual construction of the house, but also for purchase of dwelling, and for construction of second house. The question of crediting of dwelling through construction cooperative societies was resolved.

The State Bank of the USSR had separate elements in the organization of crediting of individual construction which were typical for mortgage system. Particularly the connection of construction of house with land was stipulated.

The practice of bank right protection before the other creditors existed in the form of immediate redemption of the loan from the value of the house. In the case of insufficient amount from the sale of the house for covering the claim the receipt of necessary amount for account of collection of other property of the borrower was stipulated. There were features of mortgage accountability: in the case of full redemption by the borrower of indebtedness before the bank or organization, though which the crediting was organized, the notary was informed of the fact of cancellation of prohibition on sale or transmission of the house. /9/

The limited combination of home experience of mortgage crediting of expenses for purchase of land before revolution with the practice of individual crediting of dwelling construction in the soviet time is the reliable theoretical foundation for development of recommendations on mortgage crediting in the transitional period.

Chapter 2.Construction of safe system of crediting in modern Russia

Legislation on Mortgage Crediting

The present chapter describes legal fundamentals of mortgage crediting in Russia, and also depicts the most important changes in legislation on mortgage for the last years. At the same time, I am trying to attract attention to main тАЬperilsтАЭ of considered legal relations and specifies basic directions of their optimal overcoming.

The term тАЬmortgageтАЭ in legal practice usually covers two concepts:

1. тАЬMortgageтАЭ (as legal relation) is the gage of a real estate with the purpose of receiving a mortgage credit (as a rule, in a bank). For mortgage it is characteristic to leave property with the debtor. Gage in civil right is one of methods to back obligations - in this case of bank credit. In so doing, in all cases it is mandatory to register with the State bodies the gage of any real estate. In case of insolvency of the debtor, claims of the creditor are satisfied from the proceeds from sold property with priority before other creditors or by transferring the incorporated real estate in the property of the pledge.

2. тАЬMortgageтАЭ (as a security) means a тАЬbondтАЭ - debt tool certifying the rights of the pledge on a real estate. Mortgage usually has a free circulation in the market.

Institute of mortgage has not received in Russia considerable development till nowadays due to different encumbrances, both economic and legal, therefore it is regulated by a rather small array of normative acts.

To the most important of such acts refer Federal Act of 1998 тАЬOn mortgage (gage of the real estate)тАЭ. General provisions on gage, not defined in the indicated law, are contained in appropriate articles of the Civil Code of the Russian Federation. Federal Act from 1997 тАЬOn State Registration of Rights on Real Estate and of Transactions With ItтАЭ governs registration of real estate, the most important function of the state, absence of which would make stable turnover of real estate completely impossible.

Actual realization of bankтАЩs rights on the mortgage is possible within limits of the law тАЬOn executionтАЭ. Separate special provisions, which nevertheless should be taken into account while making conclusions on the mortgage agreements, are scattered as well in articles of appropriate laws, such as, for example, the law тАЬOn companies of living accommodation proprietorsтАЭ. In the mortgage of housing accommodations it is necessary to follow requirements of the branch housing legislation, including Housing code of RSFSR, and as well laws and regulations on registration of citizens in their places of residence. Members of the borrowerтАЩs family also have rights, established by legislation and described in Family and Civil codes of the Russian Federation. Special acts defend interests of infants, elderly persons and disabled persons.

Up to the beginning the ninetieth years mortgage practically missed. Temporary transfer of property rights on real estate, being the object of mortgage, to the creditor, was a kind of pseudo-mortgage. After settlement of accounts between the debtor and creditor rights on the real estate were transferred back. It was necessary to pay twice rather high State duties, levied from the borrower, and to be ready to run risks connected with possible dishonesty of the creditor receiving rights on real estate for undercharge. Besides, term of rights registration was rather long. In these conditions the above described scheme badly protecting the borrower, could not be distributed broadly. But also after legalization of the mortgage as civilized legal institution, in 1992, contradictions between the out-of-date branch laws did not give lawyers practical possibility to defend effectively rights, but this time not of a borrower, but of the bank-creditor. /11/

There was an impassable gap between тАЬsocialistтАЭ housing legislation and new Russian right.

Unfortunately, recent laws have only partly corrected this intolerant situation. For example, before acceptance of the law тАЬOn mortgageтАЭ there were no serious basis for ejection of insolvent debtor and his family from the gaged flat. The bank could hope only on transferring property rights with exception of the right of use or its limitation (depending on the size of living space per tenant). Nowadays ejection is quite possible, but under condition of.. granting other living quarters in the same city - in our it means in Moscow, - and with allowance for all existing sanitary requirements.* There is no court practice on realization of the rights of creditor banks in new legal conditions. Earlier collection on gaged flat could be imposed only judicially. With the purpose of avoiding the indicated rule, there was widely used practice of conclusion with insolvent borrower an agreement тАЬon buy offтАЭ. But from the moment of replacement of initial agreement with a new one, the mortgage contract was terminated and there emerged competition with other creditors. Not all banks took it into account and bargains on purchase and further disposal of the real estate received by agreement тАЬon buy offтАЭ could be recognized invalid.

According to the new act тАЬOn mortgageтАЭ contractual selling of real estate is possible.

The most important novelty of this law was emerging тАЬmortgage bondтАЭ-encumbrance as a kind of securities, freely circulating in the market.** Though Commissions on Securities under President still has not issued appropriate instruction, but at first glance, there are no encumbrances for issue of mortgage bonds already nowadays. There is no need to prove advantages of the mortgage over тАЬsimpleтАЭ agreement on mortgage crediting. Mortgage bond is a nominal security certifying right of its holder on fulfillment of liability, backed by mortgage of property indicated in the agreement on mortgage, without submission of other proofs of existence of this obligation and the very

* Decree of the Moscow Government N365 from the 25th of April 1995 тАЬOn

principles of mortgage crediting in MoscowтАЭ.

** Chapter 3 of the Federal law N102-FL of July 16, 1998 тАЬOn MortgageтАЭ.

right of gage on property indicated in the agreement on mortgage. The mortgage bond is issued to the initial pledge by body conducting State registration of mortgage, after actual State registration of the mortgage and is transferred by fulfillment of endorsement (partly similar to bill, under condition of observance rules of state registration).

The mortgage ensures payment to the pledge of capital amount of the debt under the credit agreement or other liability, backed by mortgage, completely or in a part, foreseen by agreement on mortgage.

Table 1

Obligation Secured by Mortgage

The mortgage established for backing of fulfillment of the credit agreement with condition of paying interest, ensures as well payment to the creditor of interest on the credit, due to him for usage of credit.

Usually, mortgage ensures as well payment to the pledge of the sums due to him:

- as compensation for damages and / or as a forfeit penalty (fine) in the case of default, delay in performance or other inadequate fulfillment of obligations, backed by the mortgage;

as interest for wrongful usage of otherтАЩs money resources, foreseen by obligations, backed by the mortgage, or by federal act.* The problems of possibility to collect percents for usage of otherтАЩs monetary resources from a physical person who is not a businessman is not solved nowadays and as well there are no positive judicial precedents. The matter is that in court it is necessary to prove, that the citizen had possibility for settlement of the debt, but has not returned borrowed money resources, available to him, and has used them in different way. For participants of enterprise activity this fact is not proved, but presumed.

as reimbursement of legal costs and other expenses borne due to imposing collection on gaged property;

* Article 393 of the Civil Code of the Russian Federation

- as reimbursement of expenses borne in the course of selling gaged property.

If other is not stipulated in agreement, the mortgage backs claims of the pledgee in amount existing as of the moment of their satisfaction at the expense of gaged property.

Provisions of the law on mortgage are applied to gage of real estate, arrears of housing, provided that it is being constructed on the plot allotted for construction in the order, established by the current legislation.* But it is prohibited to accept in gage village house from family, earning its living by agriculture, because it is impossible to impose collection on such house.** Here, we can see, potential for fraud. But if the house itself is constructed on unpaid credit, it is possible to impose collection on such a house. Common difficulties arising at imposing collection on housing accommodations will be described below. It is evident, that mortgage of real estate being in joint property is possible only on consent of all proprietors. But gage of a share in common property does not require consent of remaining joint owners. Though, in this case there may arise additional difficulties in the course of selling the gage, including difficulty connected with pre-emption right arising for other joint owners.

In agreement on mortgage there should be indicated the right, by virtue of which the property being subject of the mortgage belongs to the pledger. In case of housing accommodation it may be only property right.

Table 2

Contents of the Mortgage Agreement

The agreement on mortgage should be attested by a Public Notary and is subject to State registration.* It is put in force from the moment of such registration. It is very important, that the credit agreement, which is backed by the mortgage, can be concluded after registration of the mortgage agreement. Thus the right of the gage arises from the moment of conclusion of the credit agreement and the borrower risks nothing, if the credit agreement will not be concluded at all. To make legal status of the parties unambiguous it is useful to conclude as well preliminary agreements. Before rise of gage right the property will not be considered charged as mortgage before the third persons.

* Article10 of the Federal law N102-FL of July 16, 1998 тАЬOn MortgageтАЭ.

Insurance of real estate is conducted in accordance with conditions of the mortgage agreement, thus the bank - pledgee has right of preference satisfaction of claims from insurance compensation before all other creditors. Therefore it is useful to insure gaged property, insured amounts being not lower than the size of the basic debt with allowance for interest. The bank has possibility to check availability and state of the gaged property in a nature and according to documents. Disposal of the gaged property by the proprietor is possible only on consent of the bank. At any universal succession (for example, by way of inheritance) the mortgage is saved, even if the succession took place with violation of law on transfer of rights. Bargain on disposal of property without consent of the bank is considered invalid.

In the case of confiscation of real estate by way of sanction for committing crime, under general rule the gage ceases *, but the law on mortgage provides its preservation as well in this case**. It seems, that in this case governs the norm of the special law. That is, the mortgage is saved as well in the case of transfer of property rights to the State. But in the case of vindication of gaged property (recovery to the rightful owner from another's illegal possession according to court decision) the mortgage ceases. It will happen, for example, in the case of purchase of living apartments from realtor, to whoms it did not belong to or in the case if the court considers invalid transfer of rights on living apartments to this realtor.***

In general, legislation allows multiple subsequent gage of property, already charged with mortgage, which drastically reduces credit status of the borrower, expected by the bank as of the date of concluding agreement. In order to prevent this negative factor it is necessary to include appropriate forbidding term in each mortgage agreement.

In its part, the bank can concede its rights on the mortgage. But concession by the pledgee of rights for agreement on mortgage to other person is valid, if to the same person are conceded rights of claim from the debtor on the basic liability backed by the mortgage. Or else, the mortgage always follows the credit. The mortgage simplifies cession of rights on considered legal relations. Being a circulating in the market security, the mortgage is transferred by executing the next endorsement (it is required only subsequent State registration of such transfer). The mortgage is as well convenient due to the fact that it can be in its turn a subject of gage.

The foreclosure. The bank can impose collection on gaged property for satisfaction at the expense of this property of its claims emerged due to default or inadequate fulfillment of obligations, backed by the mortgage, in particular in the case of complete or partial non-payment or delayed payment of amount due. In case of periodic payments: if there happens violation of installment terms more than three times within 12 months, even if each delay is minor.****

* Item 2 of the Article 354 of Civil Code of the Russian Federation

** Item 2 Article 41 of the law N102-FLof July16,1998тАЬOn MortgageтАЭ.

*** Article 42 of the law тАЬOn MortgageтАЭ

**** Item 2 of the Article 50 of the law тАЬOn MortgageтАЭ

Collection, as a rule, is imposed under appropriate decision of a court. And, if the pledger is a citizen, the court can at his request postpone fulfillment of imposed collection for 1 yearтАЩs term, provided that the sum of increasing debt will not exceed cost of the real estate. Ex curia realization can happen on the basis of the notarially certified agreement between the parties (the above mentioned тАЬbuy offтАЭ), but in this situation the right of gage does not cease.

Mortgage of housing accommodation has features, which are not applicable to bowers and garden houses. But it remains not quite clear, how they can actually be differentiated from each other. In the bower it is also possible to тАЬregisterтАЭ a relative and it suddenly becomes тАЬthe only house of a farmerтАЭ. The agreement on mortgage of housing accommodation can not be concluded by representative (тАЬby proxyтАЭ), except for property of the wards, but in this case are required appropriate sanctions of authorized State bodies. An apartment house or a flat bought at the expense of credit of the bank in the property are considered as a gage from the moment of State registration of the contract on purchase of the apartment house or the flat (Paragraph 77 of the Laws тАЬOn mortgageтАЭ). The pledgee under the given gage is bank or other credit organization, which granted credit for purchase of this apartment house or this flat. To the gage of apartment house or the flat arising on the basis of indicated provision of the law, are applied rules governing gage of real estate arising in pursuance of the agreement. Indicated norm of the law on mortgage is convenient for the purposes to simplify accumulation of evidence for possible in the future judicial proving of the bankтАЩs rights.

It is desirable to include all essential conditions and even all details, being at the first glance of little significance, in separate agreement. Though, Moscow mortgage program uses simplified approach. All essential conditions of the mortgage are supposed to be included in the credit agreement with the bank and in contract on purchase of the flat, acquired on the credit, and the right of gage will arise by virtue of the above mentioned provision of Paragraph 77 of the Law тАЬOn mortgageтАЭ.

To my regret, the problem of тАЬmembers of the familyтАЭ and their possible ejection still remains actual with any even most legally worked agreement. Imposing collection by the pledgee on the gaged apartment house or flat and selling of this property are not considered to be a basis for ejection by purchaser of this apartment house or this flat of jointly living in this premise pledger and members of his family, if for them it is the only available premise suitable for permanent residence.

The law makes exception in cases with mortgage of housing accommodation purchased on the bank credit. Insolvent tenants under the law on mortgage are obliged to eject by themselves. Though, this obligation arises within a monthтАЩs term after actual selling of this housing accommodation to third persons.* It is clear, that the price of the flat with tenants, who are still to be ejected, will

* Article 78 of the Federal law N102-FL of July 16, 1998 тАЬOn MortgageтАЭ.

considerably reduce, unless gangsters will purchase it with moderate discount. But I think, what even when the law on mortgage foresees ejection, calling it тАЬduty to release the premiseтАЭ, there is no court able to satisfy the claim of purchaser on ejection of the former tenants without granting them other housing accommodation. The matter is that in the case of competition (contradiction) of provisions of different laws, preference is given to special provisions of branch legislation, that is in this case to Housing Law, instead of the Law тАЬOn mortgageтАЭ. To this legislation there exists as well direct reference in the Civil Code: тАЬMembers of proprietorтАЩs family living in belonging to him living quarters have right to use this premise on conditions, foreseen by housing legislation.тАЭ** And Housing Law foresees ejection without giving other living quarters only in one case: if tenants systematically destroy or spoil living quarters, or will use it in improper ways.*** However, this provision was not widely used for many years of its operation. In all other cases in the court decision on ejection there should be indicated other living quarters, satisfying to sanitary regulations and located in the same city, where is obliged to move ejected family. Therefore the bank should be ready to situation, when in the course of wide implementation of the program of mortgage crediting it will find necessary to organize special fund of living apartments for dislodged families.

Perspective direction for protection of the creditor bank interests is insurance of its risks, but taking into consideration all above mentioned, it is most likely to increase significantly the cost of the credit.

2.1.2. The subjects and types of mortgage and mortgage crediting.

The mortgage of land, enterprises, living houses, apartments has its own peculiarities. The inhabited house or apartment can be the object of mortgage if the owner and members of his family live in other house.

The mortgage can be established on every real estate, which the creditor has the right to sell or to alienate in other manner. The mortgage is not permitted with respect to the property, to which it is impossible to make a claim in accordance with the law.

In accordance with the main purpose the objects of mortgage distinguish:

* Article 42 of the law тАЬOn MortgageтАЭ

** Item 1 of the Article 292 of Civil Code of the Russian Federation

*** Article 98 of the Housing Code of RSFSR

Table 3

Property which may be the Subject of Mortgage

In the case of mortgage of the right of rent of real estate the rules , which regulate mortgage of the property, which is let out on lease, are used.

The mortgage of land, enterprises, living houses, apartments has its own peculiarities.

Mortgage holder in accordance with the mortgage agreement of land and in accordance with the mortgage agreement of pledge on land can be the bank, which has the license from the Central Bank of Russian Federation on realization of mortgage operations. In this case the estimation of land cannot be established in the pledge less than its normative price.

The normative price for land тАУ is a special type of payment for land. The price represents the index which characterizes the value of the land of definite quality and location, proceeding from potential income for the calculated time of recoupment. The normative price for land is used in the case of purchase and repayment of land, in the case of transmission of the land in property, in accordance with inheritance , donation, and also in the case of receipt as a collateral of banking credit.

It is necessary, however, to take into consideration, that neither home experience nor experience of foreign countries of determination of land price in the modern Russian conditions can provide strict and reliable result.

The most complicated situation became with estimation of land. The imperfection of home methodical developments consists of the fact that they are based in principle on cost estimation of the capital invested in the land, without taking into consideration its possibilities of rent formation and real behaviour of both sellers and buyers of land property, the volume and the structure of demand and offer and so on. Such determined factors as the size of rent, the possibility of different using of land, economic solvency of social demographic environment as a bearer of consumer demand, manpower, competitive relations and so on.

Namely similar methodical approach determined laughably small size of so named normative price of land. The richest chernozems of Krasnodarskiy and Stavropolskiy krais, Rostovskiy, Voronezhskiy, Volgogradskiy and the number of other regions of the country, which possess the lands of high productivity, are sold at the worthless prices in accordance with normative state estimations. In the case of such price policy and tax system the mortgage form of crediting is blocked, and the most important element of market regulation of land relations is excluded, the market mechanism of the price self regulation becomes deformed, and not only in agrarian sphere, but in the whole production economic structure of the country. /12/

If the object of the mortgage is enterprise as a whole as the sole property complex, so all the property , belonged to the enterprise as legal person , enters into the structure of mortgaged property, including the rights of requirement, patents and other exclusive rights, and also debts and obligations of this enterprise, which pass to the buyer from the moment of the state registration of the right of ownership for the purchased property. The received incomes of the enterprise, the purchased property and also debts, received by the enterprise in the period of mortgage, enter into the structure of mortgaged property.* The structure of the property, transferred to the mortgage of the enterprise, and the estimation of its cost are determined on the basis of full inventory of the enterprise property. The act of inventory, the balance sheet and the conclusion of the independent auditor of the structure and the value of the enterprise property are the obligatory appendices to the pledge.**

*Item 2 of the Article 340 of Civil Code of the Russian Federation

** Item 3 of the Article 70 of the law тАЬOn MortgageтАЭ

The mortgage of inhabited house or the apartment is permitted for providing repayment of the loan, granted for construction, reconstruction or capital repair of inhabited house (apartment). The inhabited house (apartment) can be the object of mortgage if the owner and members of his family live in other house, in accordance with the norms of living square for occupants. The living rooms, as a part of the whole house, cannot be the subject of the mortgage on the general basis.

In the terms of economic crisis, which enveloped all sections of economy, neither the state nor the enterprises could finance sufficiently the social programs, in particular, housing construction. The resolution of living problems is laid on the population. However, the major part of the population does not have the large monetary amounts or considerable movable property, and that is why the sole variant of the credit receipt for improving of living conditions becomes mortgage.

The mortgage living credits are subdivided to the following:

the credits granted for construction of dwelling;

the credits for purchase of dwelling.

Depending on the subject of crediting the mortgage loans for construction of dwelling are divided to the credits, granted immediately to the future owner, and to the loans, granted to contractors.

The pledge becomes very important in the process of the mortgage crediting of dwelling. The creditor тАУ holder of pledge in the case of non-fulfillment by the mortgagor of the obligation to return the loan gets the right to receive non-returned means for account of realization of mortgaged real estate in immediate order by comparison with the other creditors. The variety of mortgage is pawning. In the case of pawning in contradistinction to ordinary mortgage the property is managed not by the mortgagor but the holder of the pledge, that is bank. So, for the period of pawning the apartment mortgaged by the borrower is at the disposal of the bank.

The construction of apartment in the structure of the house with many flats or in the structure of individual living house and the expenses for its purchase can be the objects of mortgage crediting. In this case the different variants of combination of object of collateral and object of crediting are possible: the loan for living construction is granted under mortgage of dwelling; the loan for living construction is granted under mortgage of land; the loan for purchase of dwelling is granted under mortgage of dwelling. /11/

As far as in the last time it is practically impossible to receive means from the federal treasury for development of social sphere of region, the municipal banks of mortgage crediting for support of housing construction began to arise. That is why the mortgage business became attractive for many commercial structures and also for the banks.

2.2 The stages of organization of mortgage relations between the bank and the borrower. The main directions of decrease of credit risks.

Reduction of credit risk to minimum is the main target of the right organization of crediting. There are the whole range of the legal principal of crediting, which shall be observed both by creditors and borrowers.

The mortgage credits are issued, as a rule, by the banks, which specialize in granting long-term loans under real estate mortgage. There are first of all mortgage banks and land banks, which grant long-term loans on the whole under the mortgage of land. Commercial, agricultural and other banks can be engaged in the stated operations.

The enterprise or individual, who presumes to get banking credit, must conclude the credit agreement with the bank in written form. The preliminary stage is presentation of application for getting credit. For the bank the receipt of application for granting credit is the reason for:

examination of credit solvency and financial soundness of borrower;

conclusion of credit agreement;

conclusion of agreement of credit assurance.

In Russia the main question in the case of making decision of crediting in the modern situation is assurance of return of credit means. Proceeding from that it is necessary to consider the main methodological and organizational principles of mortgage crediting which is called in its essence to resolve the present problem.

Before direct estimation of the object of crediting and granting of credit for dwelling, it is expedient to resolve the strategic questions of crediting: concerning optimal utmost share of credit in the cost of the house, and also concerning the tactics of distribution of credit risk among the creditor, the borrower and the securities investors. /6/

Reduction of credit risk to minimum is the main target of the right organization of crediting. There are four types of risks in the western practice of mortgage crediting:

credit;

risk of agent;

risk of interest rates;

risk of advance payment.

The credit risk consists of the fact that the borrower does not realize payments for redemption of the loan in the stipulated time. The risk of agent is connected with the possibility of withdrawal by the clients in uncomfortable moment. The risk of interest rates is caused by the fact that the price of the means used by the creditor increases above the interest rate, collected by him from the client for using the credit, on unpaid loans that leads to losses on these loans. This type of risk is classic risk of long-term investments, which are financed for account of short-term deposits or from other short-term sources.

The risk of advance payment consists of the fact that the borrower pays the indebtedness in advance, when the interest rates for the credit decrease, and in its essence it is close to the risk of interest rates, that is why some specialists do not include the stated risk in separate category.

The main principle of the risk distribution тАУ to distribute it among those who are better prepared for protection from it. So, the credit risk (the whole or by parts) can be transferred to insurance companies, and a part of the risk of agent and the risk of interest rates can be transferred to the investors of securities. The determination of the optimum share of the credit in the cost of object of crediting and in the amount of collateral assures reduction of the risk.

The correlation between the volume of the loan and the cost of mortgage characterizes the quality of the sources of debts return and permits to determine, which part of credit can be paid for account of realization of real estate, and which part of credit will be compensated by the insurance company. This question shall be the main in the case of conclusion of the credit agreement. The lower interest of the loan in the size of the collateral reduces the risk of the bank, but brings down its competitiveness and it does not attract clients. The increase of the stated correlation attracts clients, but in this case the risk of creditor grows. At the present time in the western countries we can see the increase of the share of loan in the collateral. So in the USA for a long period of time it was considered as usual the granting of loan in the size of 50% of the estimated cost of mortgage, and the last time the loans reach 80% of the mortgage.

One of the universal method of assurance of guarantee of loan return is diversification, which permits to distribute in even manner the risk among borrowers. The principle of action of this mechanism consists of the following.

As a rule, not all the clients of the bank become defaulters at the same time. Usually one client from fifty does not fulfill obligations on repayment of credit, however, it is very difficult to determine in good time the concrete defaulter. In such conditions the private person, who grants credit the other person, bears the whole risk. In contradistinction to him the bank, which grants credits different clients under collateral of real estate, can afford considerable number of non-returns of loans, establishing the norm of interest for their use, which can compensate this risk. In this case all the depositors become united in original pool on loans under pledge, and everyone from them participates in compensation of possible risk.

For assurance of opportune return of payments the right choice of instrument of housing crediting is rather important, which could take into consideration all modifications of business solvency of the client at the different stages of payment of the loan and the real possibilities of creditor. Among the proposed range of such instruments тАЬthe instrument with regulated delay of paymentsтАЭ (IRDP) is the most popular, which is recommended by Marisol Ravitse (the Institution of economy of the city, the USA). The basic interest rate on IRDP is established on some points above, than the interest rate on interbanking credit market, and that exceeding becomes constant during all credit period. The payments on loan in this system do not exceed 30% from the income of family also during all period of loan validity. /6/

Now we shall consider the main stages of credit process.

In the case of resolution of question of granting credit for purchase of dwelling the bank-creditor shall estimate the possibility of the borrower to assure opportune return of the loan. From this point of view in the foreign practice there are two main stages in the process of crediting of dwelling:

analysis of credit solvency of the borrower;

estimation of the collateral.

These two aspects are in conformity with two manner of return of granted means: from salary and other incomes of the borrower or in the result of sale, mortgage. In this case the first variant has dominated meaning.

2.2.1. The analysis of credit solvency of the client.

The main purpose of creditor is receipt from borrower of the most reliable guarantees of loan return in the time of fulfillment of debentures. It is naturally that the creditor must in the first place have the strict information of financial position of the borrower, check his paying capacity, the condition of his property, the availability of debts and so on.

Before conclusion of credit agreement with client, the bank shall examine thoroughly the person of the borrower, taking into consideration three main factors: stability, payment solvency and readiness to pay debts.

In the case of analysis of the first factor тАУ the stability тАУ the bank considers the duration of living of the client on the present location and the stable place of working, taking into consideration that the changes of work could influence on opportune payment of debts, and the change of living location will complicate the inquiry of the borrower.

In the process of determination of payment solvency the incomes of the borrower shall be estimated, including principal incomes, additional incomes and others, which shall be compared with the present and proposed expenses. The criterion for making positive decision is the condition, that the borrower has cash in the size not less than 20% from the amount of purchased house. For estimation of payment solvency the following coefficients are used : construction coefficient тАУ the correlation of received salary and other monthly incomes to the debts on dwelling; opposite to the construction coefficient the debts coefficient, which characterizes the total amount of the borrower debts ; the coefficient of correlation of loan to the value of the house. /9/

In the case of analysis of the borrower readiness to pay debts it is necessary to take into consideration the fact if the borrower realized in time all payments in the past. The bank examines all information, connecting with the creditors of the borrower and using in this case the services of private agents, who collect information concerning borrowers and banks-creditors. The banks may use special questionnaires for receipt by the borrowers of housing credit in the necessary cases in the process of examination of credit solvency of the client.

In the case when the enterprise is a borrower or, for instance, farming keeping, the determination of credit solvency of the received result depends considerably on the quality of collected information. The credit solvency is determined by the indices, which permit to reveal exactness of the client in the calculations on previously issued credits, current financial position, perspectives of its change, possibility to attract different sources for mobilization of monetary means.

In this purpose тАЬthe financial faceтАЭ of the enterprise shall be determined in the first place, its financial economic activity shall be examined in the purpose to provide promptness, payment and return of credit.

But helping the enterprise, the bank shall remember about its own interest. This process is realized especially sickly at the present time тАУ in universal mass non-payments of the enterprises to each other and to banks. At the present time the information centers are absent , which develop information concerning financial position of enterprise and render such information in accordance with the requirements of interested individuals. There are many reasons of these facts тАУ confidence of reported information of financial economic activity of the enterprise. That is why any creditor is obliged to estimate independently the financial stability of the future borrower. Simultaneously the reputation of the client is examined тАУ his honesty and decency in the calculations, attitude to his obligations in the past. The source of information for analysis of credit solvency of the enterprise is balance sheet. In the case of consideration of the borrower reporting the creditor shall determine: has he good payment solvency, is his balance liquid, has he and in what size proper circulating capital, how manoeuvrable are his means, to what degree does he depend on the used sources of the means, is he stable in financial position, what is the perspective of improvement of his financial economic activity, is his sphere of activity profitable.

For replying to the established questions it is necessary to use many indices which method of calculation is presented in the table 4.

Table 4

Indices of financial position of the enterprise