Evgeny Zverev’s comments in the article “Rules of the game”.
17 January 2013
The mortgage noose
Buying a flat, a person usually does not think about what is going to happen if he or she loses his or her earnings and comes unable to repay a loan. All the worst, the accommodation would be forcefully put up to auction. Moreover, it is possible that the owners could not return their investment. However,
most of the borrowers try to avoid litigation.
A large part of flats in new buildings is conducted per mortgage (in some cases it is more than a half). According to Tatyana Hobotova, the head of mortgage department of the VTB24 (Saint Petersburg branch), the amount of mortgages grew up to 1.5 times in the current year. Solely the VTB24 had provided 5300 loans to the amount of 10bln rubles. Herewith primary market loans amount to 46% of the whole amount thereof.
Still, many people are deterred by high rates. According to experts, the rates would rise up to 12.5% per year in the beginning of 2013. However, mortgage is the only way to improve dwelling conditions for lots of people who accept that they will pay for it up to half of their income for years. It is, thus, obvious, that such loans are appropriable only for people with sustainable (and usually official) income.
The problem is that during the repay period the life of the borrower can be changed dramatically. For instance, the one could lose a high paid job. It is almost impossible to insure this type of risk. To be more precise, some of the banks (in cooperation with insurance companies) provide job-lost insurance as an option, but this insurance covers only the risk of liquidation of a company and reduction. However, it seems that in Russia the people are usually forced to quit. Besides, bank clerks say this option is unpopular.
Let us examine a case in point. A person has chosen a flat in a building under construction which cost amounts to 4mln rubles. He or she was able to pay 1mln rubles by himself and took out 3mln rubles mortgage of this flat. He or she agreed with the bank upon all conditions and settled a mortgage contract. Then, he or she had paid the rent for some years and redeemed 1.5mln rubles. In the meantime, the construction had been over and the person had registered the ownership with a mortgage encumbrance. Thereupon, he had lost steady income and understood that he or she will not be able to redeem the loan in time.
In this case, there are some scenarios possible. Sofya Sokolova, a real estate and investment practice lawyer of the “Kachkin and Partners”, says “It is possible to try to solve this problem by the least painful methods, e.g. by restructuring of the debt (if the bank is ready to cooperation). It should be mentioned, that a restructuring constitutes introduction of amendments to the initial conditions of the mortgage contract. These are: prolongation of a loan, change of loan currency, establishing of a grace period, decreasing of penalty, etc. However, if a borrower is not completely confident of his possibilities (i.e. whether he will be able to maintain redeem after the end of the grace period) and he does not clearly understand his perspectives, it is unreasonable to conduct restructuring. In this case, one of the possibilities to pay off the loan is to sell the mortgaged property”. In addition, the lawyer says that it is impossible to sell a mortgaged flat without bank permission. First of all, the borrower should ask the mortgagee to specify the legal procedure of execution of the transaction described. Evgeny Zverev, Senior Lawyer, Head of Real Estate/Construction/Land Practice in the S&K Vertical, says, “If the mortgagee bank does not provide the mortgager with the permission for sale of the flat, it is impossible to force it. But you may try to negotiate”.
Sofya Sokolova says, “Until recently moratorium on loan prepayment have been a common reason of refusal. However, the banks are deprived of the right to establish this moratorium since last autumn. That is why such a refusal would be illegal. However, a bank can find another reason and it would be nearly impossible to challenge. It is connected with the absence of law regulation of mortgagee actions in case of requesting a permission to sell the property mortgaged. Therefore an analysis of mortgage contract is needed in every particular case, as it may contain sale endorsement conditions. Nevertheless, the banks are not interested in incurring of losses in case of delay in payment and surely in litigation. That is why the cases of bank’s refusal are frequent”.
The question is how to sell a mortgaged flat. Generally, the bank should be a third party to a contract. For instance, a person has to redeem 1.5mln rubles to a bank and he or she goes to sell a flat for 4.2mln rubles. In this case, parties state in a contract of sale which part of payment goes to the bank and which goes to the seller. Money is transferred to different deposit boxes and the bank discharges mortgage simultaneously with the state registration of the contract of sale. Then, the buyer registers ownership.
However, practice highlights that not every bank is ready to be a party in such kind of contracts (as it is an additional burden for lawyers). The banks require advance redeem and encumbrance discharge for the owner. Then the owner is allowed to conclude a contract of sale. A clerk of a major bank confidentially told us that the bank he is working for offers the following scheme to the borrowers. The owner of a flat should find a buyer and settle a preliminary contract with an obligation to sign the main contract after the discharge of mortgage. Herewith, he or she demonstrates bank’s agreement for advanced redeem of a mortgage and asks the buyer to make a first payment that would be transferred to the bank as a repayment of mortgage (e.g. 1.5mln rubles). Parties are obliged to settle the contract of sale and the buyer is obliged to pay the rest. However, this scheme is very risky for the buyer. Preliminary contract does not cause a right of ownership of the buyer. In case if the seller refuses to conclude a contract of sale the buyer can only claim for money he paid (even if with an interest). Experts say, “People are compelled to give a great discount to sell a flat under this scheme. As a rule, it is not less than 10%. But even in this case it does not guarantee that the buyer will take a risk”.
If you failed to sell the flat with discount and stopped to redeem the mortgage, the bank may claim for collecting of debt and punitive damages. Sofya Sokolova says, “If the court held a judgment in favor of the bank, the bank as the creditor receives an enforcement writ after the decision comes into effect.
Then, the bank should apply to the Bailiff Service to start enforcement proceedings. The bailiff arrests pledged assets and puts it up first for bailment and second for a public sale. According to the Federal Law N229-FZ “Ob ispolnitelnom proizvodstve” [Enforcement proceeding statute], the bailiff must define
the market value of exacted property. If a sum of money gained from the sale of property does not cover the borrower’s claim he has a right to claim for this difference (if there is no counter provision in the contract). If the sum is more than then the claim of the borrower, the difference is transferred to
Pledge with a discount.
There are a lot of advertisements for sale of mortgaged flats in media. For instance, a lot of them are sold on the internet site of “Elektronnie torgi i bezopasnost’’” Federal State Unitary Enterprise. We failed to ask representatives of this organization how many flats are sold from the first time. Some
experts say that there are a few. One should not forget that you should register and make a deposit to participate in this auction. A few people are ready to do this to obtain a so-called “problematic” flat for a market-value price However, the situation changes drastic if the property is sold with discount.
If the auction has failed (e.g. there were no applications or the winner did not pay for the lot) the mortgagee bank has a right to purchase this property for initial price by setting-off of its claims secured by the mortgage in 10 days. Otherwise not later than in 1 month there should be organized a second
auction generally with a 10% discount. If this auction has failed too the mortgagee has the right purchase this property for initial price with a 25% discount. In this case mortgager possibly would not get compensation at all. Let us examine specific situation. A certain N bought a mortgaged flat for 4mln rubles. He paid 1nln rubles by himself and took 3mln rubles mortgage. N could redeem only about 200 000 rubles. The bank initiated litigation. As a result mortgaged property should be put up for auction. The initial price of lot was 4mln rubles. First and second auctions had failed. So the bank has a right to purchase the flat for initial price with 25% discount, i.e. for 3mln rubles. This sum is equal to the amount N should pay to the bank (including punitive damages). In other words, the bank takes a flat and N gets nothing. If the auction turned out well and flat was sold for 4mln rubles N could recover a large part of his investment. Evgeny Zverev reminds that during litigation the parties could settle an amicable agreement under which the mortgaged property could be transferred to a mortgagee as a redeem of the whole debt or a part of it.
Afterwards, the bank registers the flat as its ownership (or its affiliate’s ownership) and tries to sell it on the secondary market. For instance, there is a special mortgaged property selling section on the site of the VTB24. Nevertheless, there is a nuance. Sometimes mortgagee has difficulties with eviction of dishonest mortgagers. Quite often mortgagee should initiate litigation for this purpose. If it turns out that this flat was the only dwelling of the borrower the eviction becomes more complicated. There were cases in which the court held that the bank must provide the mortgagers with another dwelling (with
the minimal possible one according to the dwelling regulation). However, this is another story altogether. Eventually, the bank will find a way to vacate the flat.
One should think about all this issues already by choosing of a credit organization. For instance, he or she should get more specific information whether the bank supports the client with the sale of flats in case if the borrower loses his earnings, The borrower should also obtain information on the scheme of realization of real property.