"Real Estate and Investments. Legal Regulation", the journal

Issue 4 (5) 2000

Mortgage Lending System in Germany

Osokina I.L., deputy of Moscow Municipal Duma

I. Historical experience of the German hypothecation. Development of normative - legal base and brief review of legislative ensuring of a system of mortgage crediting

In Germany the idea of creation of mortgage crediting as a system of a state scale has arisen in the Middle Ages and was linked to a name of the king of Prussia Fridrich Wilhelm I. After a disastrous Seven-years war (1756-1763) the economy of the country was in decline, and for stabilization of an economic situation the king has decided to introduce a new way of financing - grant of money under the deposit of land. So the documents - predecessors of the modern mortgage bonds entered in circulation. Really, the land in that time was the most reliable of all possible deposits, as could neither disappear, nor to be destroyed during battles.

The following step in a selected direction was made in 1767 by Fridrich II, who legitimated the creation in Silesia of a Landschaft, class feudal association, credit partnership of XVIII century, dealing with granting of mortgage credits. The Silesian Landshaft consisted from seven independent lords' landschafts, the activity of which was governed by the laws in force. Such "dissociation" was natural, because in tat time the level of agriculture in neighboring principalities strikingly differed from each other, and far from all land tenants could carry out the liabilities linked to the mortgage. Not to take into account this fact would be a mistake.

The provisions on Silesian Landschaft adopted on 9 and 15 July 1770 guaranteed to the creditor a solid ensuring under the mortgages. At first, an estate indicated in a mortgage sheet. Secondly, asset of a Landshaft, which ensured first of all the main debt and percents. And at last, - if the demands of the creditor were not satisfied under two previous positions - asset of all remaining land tenants, terms of a Landschaft. The procedure of the deposit was simple: the term of the Landschaft wishing to receive a credit, made out a deposit of the real estate, the Landschaft, in turn, submitted a mortgage, where it pointed out a particular estate serving as ensuring of the given document. And the mortgage was made out only on the half of cost of an estate, that is the Landschaft and creditor were subjects of crediting under the deposit of the real estate. According a conventional rule the transmission of a mortgage sheet was registered and entailed a transmission of the hypothecation. The holder of the mortgage with the indicating of a particular estate, could sell this document to receive the necessary sum, thus circulation of the mortgage became the first step of a capital market.

Right on the mortgage emitting was a privilege in all times and was realized at a sanction of authorities after check of the ensuring reliability. However, till now emitting and the special local law governs circulation of mortgages, and the activity of hypothecation banks is strictly controlled by the state and bodies of bank supervision. First hypothecation banks in Germany began to appear at the end of 60s of XIX century, practically simultaneously with legislative base, governing their appearance and activity. A series of normative acts, passed before that, has generalized and developed the German law on hypothecation banks, which have come into effect since January 1 1900. Primary goal of this major document became settling of three positions: installations of legal limits for the market of capital, ensuring long-term housing construction under acceptable percents and protection of investors and loaners. Later all the best of the German Law on hypothecation banks 1900, supplemented by a wide experience of mortgage crediting and multiplied on changed economic conditions, has constituted a basis of the new legislation of Germany. Further the process was governed by the periodical modifications to the already present legislative acts.

To compare with other European local laws, two additional warranties of reliability and protection of hypothecation bank and mortgages are present in Germany. At first, in every hypothecation bank state supervisory authority on banks assigns a manager and his deputy. These employees are charged to submit to the controlling organization the information on the bank activity, own information received during the work. A main goal of a manager to control a suitable ensuring of the mortgage sheets, regularity of importation in special hypothecation registry of the sum used for ensuring. The mortgage sheets can be produced only after a manager acknowledges presence of their appropriate ensuring and recordings in hypothecation registry. Secondly, - a system of bank supervision, which is realized by verification of the registry, conducted once in two years.

Registration system of the hypothecation is very important. In Germany its basis is constituted by a so-called "land records", and there is a special legislative act concerning the support of this particular registry. Precise veneering of appearance and cease of the land right on this real estate accompany the registration of the real estate at installation of the hypothecation. At registration of the hypothecation contract in the land records the names of the debtor and creditor, aspect of the right, sum of demands of the creditor and interest rate are necessarily mentioned. The hypothecation can be contract or judicial. The difference consists in the fact that in the first case the deposit is the particular plant of the real estate indicated in the agreement, and in the second - the hypothecation has common character concerning the relation to the asset of the debtor. Certainly, such agreement provides the mutual rights and duties. A pledger is obliged to insure a subject of the hypothecation and to accept all measures for ensuring its safety, to inform all consequent pledgees about the present deposits of a subject of the hypothecation, and also to give notice on threat of the forfeit of a subject or possibility of its damage. The pledgee, in turn, has the right to test documentary and actually the presence, state, and also storage conditions of a subject of the hypothecation.

Other significant part of the hypothecation system is the form of realization of the lien. Two aspects of similar procedures - judicial and administrative are applied in the world. In Europe, mainly, the first is in common, and it is most completely present in the German local law. Three ways of realization of the liens are stipulated here: forced hypothecation, forced vendue and forced control. In real practice the liens on asset are realized on the basis of two last ways. The forced vendue represents the judicial procedure, as a result of which the property on asset are transferred to the buyer, and the obtained money are used for sufficing the demands of creditor. The forced control enables the creditors to satisfy the demands at the expense of maintenance of the real property permanently or temporarily, but - it is exclusively in the period precedent to forced vendue.

II. A transfer of ownership on plant of sale and purchase

At a transfer of ownership on the real estate the paragraph 925 CC provides a special procedure: the notary should declare that particular act. The transition of the property right results in appearance for the buyer of need in warranties, as at present, according the contracts of purchase, he is competent only in the liabilities-legal sense. Therefore a buyer, in a time interval between making a contract and importation of results in the land records, should be protected from the further orders of the vendor concerning plant of sale and purchase. For a warranty of demand of confession or abolition of the property right on plant of the real estate according the paragraph 883 CC a preliminary recording can be made in the land records. Any order of plant of the real estate accomplished after preliminary registration is considered invalid if it can break or outrage the interests of a stated beforehand claim. Let's assume that a buyer and seller conclude a contract of the housing purchase and certify it at a notary. Then they should file to the Uniform State registry of the property laws on the real property the application signed by both parties and certified by a notary. The document contains the information that the contract of purchase of housing is concluded between the parties, and they give notice to a registering body on the exclusion of accomplishment of any operations with the given real estate (sale, exchange, donation, succession, deposit) during the indicated period of time. A notarially certified copy of the agreement is necessarily enclosed to the application. If the process of registration runs smoothly, the will be annulled recording after the expiration of the indicated period, and the parties are mutually satisfied.

The land records are not only register wearing an extremely declarative character, it has an immediate effect on the legal relations that the paragraphs 891-893 CC provide an operation of the presumption and certainty to recordings in the land records.

III.Suggestions on perfecting a system of legal and normative ensuring of state regulation of the honest purchaser rights protection

1. Creation of a shielding system of the rights of a honest purchaser.

The concept " protection of the right of a honest purchaser " long ago became a basis of the rigorous property right all over the world, where a honest purchaser remains the owner of the acquired asset. The opposite situation exists only in the Russian local law: for us this category of individuals, suffered in a result of mistakes, fraud or abuses, has the right to the damages compensation only, and their right on asset is unprotected.

In the world there are two alternatives: either the refund of such injury is transmitted to the private insurance companies, or the main guarantor is the state. In the first case, warranty of the property laws of the buyer is his personal business. If Russia selects this way, a buyer will pay for a warranty to the insurance company big money (more than 10 % of cost of housing), as the level of risk appears rather high. It is necessary to pay for state filing of the agreements, but the state will not be responsible for their reliability.

The second variant assumes that the state as the Supreme warrantor of the rights of citizens declares as priority the protection of the rights of an honest purchaser of the real estate. In this case all procedures of state filing will be as much as possible completed so that to reduce to the minimum a possibility of mistakes, fraud and fabrications. In case of their rise the warranties of damages will be stipulated at the expense of the party at fault, or - at lack of such possibility or lack of the party at fault - at the expense of the means of fund formed of a part of registration payings.

The second way is most acceptable for Russia of the orientation on the uniform strong state and state authority, which has formed historically in the society. However it is necessary to develop the local law, registration and judicial procedures in this direction, to found the Warranty Fund by a special governmental order of Russian Federation, the which state will administer, and also to set a provision that the means of the Fund should be shaped at the expense of a part of a registration board and can not be used for other purposes.

Some suggestions on a reliability augmentation at committing the agreements of sale and purchase, state filing, receiving of the mortgage credit by a honest purchaser - loaner with the purposes of creation of a system of warranties from mistakes and abuses are sentenced below.

2.Suggestion on a modification of the procedure of real property acquirsition and putting the property rights in order.

The buyer and seller conclude a preliminary contract of purchase of secondary housing, then file to the Uniform state registry of the property laws on the real property an application certified by the notary and signed by both parties where they give notice to a registering body on forbidding accomplishment of any operations with the particular real estate (sale, exchange, donation, succession, deposit) for the indicated period of time. The preliminary agreement can be recorded at the request of parties, thus an additional fee is collected, one part of which is directed to the Warranty Fund, and another is spent for check of legality of the acquired property. If after a conclusion of the preliminary contract of housing purchase there was no any action of the seller and buyer, the recording about forbidding and registration of a preliminary agreement will be annulled on expiration of the period, indicated in an application.

The payment for registration of a preliminary agreement and check of property legality is effected by a seller of the property to receive from the Uniform state registry a document reconfirming, that the check is effected on previous agreements. If it is detected afterwards, that at the legality checks an official admitted mistakes or a check was not conducted properly, the state takes up the liability. At acquiring of a new housing there is no necessity of legality check in a complete volume and the main contract of purchase can be concluded without a preliminary one as well.

If a buyer is ready after the conducted check to pay the cost of housing in a complete volume, the parties conclude the main contract of purchase, sign the ownership transfer act of use and possession of the agreement subject, pay its registration and file the agreement with the necessary enclosed documents to the Uniform state registry for the purpose of registration. A previous recording about an interdiction of any operations with housing will be annulled in the registry and the recording that the housing is found in the deposit of the buyer will be imported, and the latter receives an abstract from the Registry, certified by the seal.

The housing is found in the deposit of the buyer up to the moment of the termination of veneering of all procedures necessary for registering a new holder of housing in the Uniform registry as a new owner and receiving by him of the testimony on the property law. At output of it to the buyer - owner, the recording about the deposit will be annulled in the registry, and the buyer resets the abstract. It may seem absurd however it has some sense. The registration of newly received property right takes some time, that is when the buyer already has placed money, and the procedure of veneering of his rights is not yet finished. If a registration of property right does not take place due to cease of the rights veneering procedure (death of a seller, declaration of the relatives, legal action etc.) or in view of new circumstances. In this case there can be some situations:

1. A seller or his heirs reset the money to the buyer and there are no claims on the part of the buyer.

In this case a seller or the heirs and a buyer file to the Uniform registry an application signed by both parties for the cease of the property laws veneering procedure on the new holder, enclose the payment document on return of the means in a complete volume, act about a transfer of ownership with recording about its annulling, contract of purchase with the notarially certified recording about its abrogation and lack of the claims from both parties. In the Uniform State registry the recording testifying that the housing is found in the deposit of a buyer will be annulled, and his testimony on the property law to the given housing is reset to the seller.

2. A seller does not reset money (seller has lost money, the heirs after the death of a seller have not found the means etc.). In this situation a buyer receives from the Uniform registry a certified abstract about the cease of the procedure of veneering of his property rights for the agreement with the indicating of reasons and files a case in court. If the court decrees for the benefit of the buyer, the latter together with the decree and writ of execution files to the Uniform state registry an application for registration on him of the property right on the plant of deposit, i.e. housing, paid by him. In case, the court decrees for the benefit of the vendor (if the agreement was accomplished under pressure of the third person, etc.) the subject of the agreement will be found in the deposit of the buyer, which has the right to file the cross-action to the counter party about return of the means through the forced sale of plant of the deposit.

3. A buyer does not wish to return the means. In such case he receives from the Uniform registry an abstract about the cease of the property rights termination claims against a seller. Further situation develops as it was described in point 2, depending on the decree of the court.

3. Suggestions on a modification of real property acquisitin with usage of mortgage credit

Let's assume, the parties have agreed, that the repayment of cost of a flat by the buyer happens to importation of the earnest money and postponing of paying before receiving of the bank credit by the buyer (all this is written in the preliminary contract of purchase). In this case the parties file to the Uniform state registry an application for forbidding the committing of any operations with plant of the agreement (sale, exchange, donation, succession, deposit), preliminary contract of purchase, payment documents reconfirming repayment of the earnest money, and also filing of the agreement.

In case the agreement was not concluded (there is no consent of bank to extending a credit, a seller or buyer has refused to conclude an agreement due to new circumstances etc.) a record about the deposit of the given real estate at a rate of the earnest money for the benefit of a buyer is made in the Uniform registry, and a forbidding remains. After filing by a seller of an application and a payment document reconfirming the return of the earnest money by a seller and its receiving by a buyer, a record about the deposit in the Uniform registry is be annulled.

If on expiration of time indicated in the preliminary contract of purchase a document certifying the legality of acquired plant is received, all parties (bank, buyer - loaner and seller) conclude a mixed agreement of hypothecation crediting of sale and purchase of housing. The agreement and documents necessary according to the current legislation are filed to the Uniform registry of the property laws. In the registry a record is made that the housing is found in the deposit at a bank (for the sum of bank money demands) and for the buyer (for the sum of money demands at a rate of the earnest money). A seller, buyer and bank receive an abstract about it. Further, after final registration of the property rights of the buyer a record is made about the deposit of the new holder's housing for the benefit of a bank for the sum of the deposit demands.

If the registration of the property rights has not taken place, a seller resets the sum of the credit to a bank, the earnest money refers - to a buyer and files to the Uniform state registry an application on cancellation of the contract of purchase, with the application of the act on return to him of the rights of possession, payment documents on the return of the money to a bank and earnest money to a buyer. After that all-previous recording is crossed out in the Uniform State registry and his testimony on the property right to the given housing is reset to the vendor.

In a case a seller or his heirs do not reset money, a bank (or a buyer) receives a notification from the Uniform registry about the cease of registration of the property rights with the indicating of reasons and files action in court. In case the court recognizes illegality of operations of the vendor on suspension of registration of the property rights on the new holder, the court decrees for the benefit of the claimant. The writ of execution and decree are referred to the Uniform registry, the registration of the property rights on the buyer takes place, a deposit (in a part of the new pledger) is reregistered on a bank and all previous recordings in the Uniform registry loose their force.

If the court recognizes illegality of operations on sale of housing by a seller (under the claim of a buyer in view of circumstances unknown to him before, under the claim of the heirs or evidence of a seller, that he acted on coercion or claim about the property or money claims of the third person on the asset of a died seller), and fulfils the demand of a bank, demand of a buyer and a third person, a flat by the decree of a court is arrested and the vendue is assigned.

A flat is sold and the demands of parties are satisfied in an order of priority of the rights: first of all - expenses on organization and conducting of a vendue on a court's decision, secondly - rights and demands of a bank, in a third turn - rights of a buyer on the earnest money and other expenses and in a fourth turn- demands of other parties.

4. Suggestions on the procedure of apartment purchase in the house under construction with usage of the mortgage credit.

The buyer concludes a preliminary contract of purchase with a seller on acquiring of a flat in the house, which will be built and deposits the earnest money. A buyer asks a bank for a mortgage credit and a list of documents, necessary to receive this credit. Then he receives from a seller a legally made out guarantee commitment of the bank - sponsor, which in case of failure to respect the contract clauses on the part of a seller (owing to bankruptcy, termination of a house construction etc.) guarantees the return of means to a buyer. It is submitted to a bank together with the remaining documents.

In case of the bank's positive decision about grant of the credit to a buyer, a latter opens a target account, on which the sum of the credit is transferred after signing of the mixed agreement of mortgage crediting of sale and purchase of a built housing, secured on this period of time by a guarantee (guarantee commitment) of other bank. After completion of construction of a house the concluded agreement (together with the notarially certified copy of the guarantee commitment of the bank - sponsor) files on registration. When the registration of the property rights of a buyer on the acquired housing happens, a bank - creditor is registered in the registry of the rights on the real property as the pledgee of the given housing, and a seller receives back a guarantee commitment of the bank - sponsor.

5. Suggestions on crediting a residence real estate construction.

This form of hypothecation crediting is not yet applied in Russia, but it may be a perspective direction, as the incomes of far from all citizens allow to take hypothecation credits, to become the rigorous owners and to bear appropriate encumbrances on complete repayment of housing and public utilities. On the other hand, it is necessary to create for a person the conditions for making a choice - be an owner or to live in worthy hired housing. So, a houseowner (legal entity of a non-state organization-legal pattern of ownership) receives a hypothecation credit in a bank for 10 years for the purpose of construction of a house under the deposit of a site and future general construction. It is necessary to tell, that to receive a credit one should not only file in a bank a project-budget documentation (including the business - plan, the profit calculation etc.), but also its consequent check.

The credit is submitted as opening of the credit line with step repayment, effected according to the business - plan affirmed by both parties. A houseowner involves on competition a general original contractor or (having an appropriate license) leaves this function behind himself and uses services of subcontract building organizations. After the termination of house construction and taking-over of works by the State commission, a houseowner makes out in the Uniform registry the property rights on the built house and hires out flats in it.

The standard price for hiring of one square meter is defined by expert council of local home rule (particularly for the given micro-district and for the given type of a house) and affirmed by a local authority. A houseowner has the right to present to a local authority a justification on a higher cost, but not higher than 20 % over reduced cost of the credit at the rate of 1 sq. m. of the built house on the period of return of the credit.

In case, when in the house privileged categories of the population hire flats, they submit in housing bodies a document about incomes, price of hiring (received from a houseowner) and receive the state subsidy. Money is transferred to a houseowner, who pays the credit to a bank. Optionally, some flats can be sold, and the part hired out with the consequent right of purchase. The fact of bankruptcy of a houseowner and forced sale of plant does not harm the inhabitants, as a house after the sale on vendue is simply transferred to a new holder.

The development of this aspect of mortgage crediting of a housing construction can appreciably facilitate solution of the housing problem and loosen social strength in a sphere of grant of housing to privileged categories of citizens, waiting for the decades in queue. Submitting privileges to the private houseowners, it is possible to shift on them (as an encumbrance) a duty to select securely a percent of flats at a price of social hiring for the privileged citizens registered in housing bodies.