The subjects and types of mortgage and mortgage crediting

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 “On Mortgage”

** 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

Name of Property	Restrictions
Land plots	Except for land plots listed in Art. 63 FL “ ON Mortgage”
Enterprises, buildings, structures and other real estate	Used in the course of business activity
Residential houses, apartments and parts of residential houses and apartments	Consisting of one or several isolated rooms
Summer cottage houses, garden cottages, garages and other structures	For consumer use
Common restrictions: Buildings, including residential houses and other structures and facilities directly connected with land may be the subject of mortgage, provided that the rules fixed by art. 69 FL “On Mortgage”
Unfinished construction of real estate	Being erected on a land plot allotted for construction in the procedure established by the legislation of the RF
A thing with accessories	Regarded as mortgaged in complex with its accessories, unless otherwise follows from the mortgage agreement ( art. 135 of the Civil Code of the RF)
Indivisible thing	Part of property, which cannot be divided in kind than through impairing its main purpose cannot be an independent subject of mortgage
Lease rights	Rules on mortgage of real estate shall consequently be applied to rights of a lessee under an agreement on lease of such property, because the opposite is not stipulated by the federal law and this is not at variance with the nature of lese relation
Aircraft, sea ships, inland vessels and space objects	Subjects of state registrations

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 – 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 “On Mortgage”

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 – 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 – 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 “the instrument with regulated delay of payments” (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 – the stability – 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 – 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 “the financial face” 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 – 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 – 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 – 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

Indices and their content	Formula of calculation
1	Payment solvency (Пл) – shows the difference between current assets (Ат) of the enterprise and its obligations (О)	Пл.=Ат-О
2	General liquidity (Ло)- reflects the degree of cover by current assets short-term obligations (Ок)	Ло= Ат-Ок
3	Intermediate index of liquidity(Лп)-permits to establish to what degree the obligations can be covered for account of monetary means and future expected earnings (Ад)	Лп=Ад-Ок
4	Net circulating capital (Кч)- shows the exceed of current assets over short-term debts	Кч=Ат – Ок
5	Coefficient of financial manoeuvrability (Км)- shows which size of own capital (Кс) is invested into current assets	Км=Кч/Кс
6	Coefficient of independence(Кн)- certifies specific gravity ofown capital in the currency of balance (В)	Кн=Кс/В
7	Coefficient of financial stability(Ку)-reflects specific gravity those sources of financing, which have long-term character of using (Од)	Ку=(Кс+Од)/В
8	Coefficient of financing (Кф)- shows which part of property is financed for account of own means	Кф=Кс/О
9	Profitability of enterprises(Рп)- shows the share of net profit (Пч), which falls on one rouble of active currency of balance (А)	Рп=Пч/А
10	Turnover of assets(Оа) or current assets (Оат)-characterizes the speed of turnover of all or current assets	Оат=Р/Ат P-earnings without special tax
11	Profitability of realized production, works, services(Рпр)reflects net profit from each rouble of realized production, works, services	Рпр=Пч/Р
12	Profitability of own capital(Рк)- shows the result of financial economic activity, the profit received on invested capital	Рк=Пч/Кс
13	Investments profitability(Ри)- certifies effectiveness of means using, invested into enterprise.	Ри=Пб/(В-Ок)

The presented range of indices is sufficient for estimation of financial economic activity of the enterprise. It is naturally, that for answering the question better or worse the enterprise works in the reported period the dynamics of the presented indices are necessary.