Legal Issues for Development of the Mortgage Market In Armenia

1
Legal Issues for Development of the Mortgage
Market In Armenia

• Carol Rabenhorst
• The Urban Institute, Washington, DC
• AIPRG Workshop on
• Financial Sector Development
• Tsakhkadzor, Armenia - 29 May 2005

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Highlights

• Strong interest in residential mortgage lending
  among banks and credit organizations
• Primary market legal framework is strong
• Basic enabling laws are in place
• Enforcement laws are market-oriented
• Credit bureau activity is underway (but no
  separate mortgage reporting to CBA)
• Good credit culture
• But Lack of preparation for secondary market

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Basic Enabling Laws In Place

• No Mortgage Law per se mortgage provisions in
  comprehensive Civil Code
• Clear ownership and other property rights
• Immovable property transactions well described
• Use of property as collateral well defined
• Titling and lien registration working effectively

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Market Oriented Enforcement Laws

• Non-judicial foreclosure
• Non-judicial auction sales after foreclosure
• Secured lender has first priority claim to sale
  proceeds
• No individual bankruptcy
• Mortgaged property not exempt in bankruptcy of
  legal entity
• Debtor must vacate property within 30 days (some
  exceptions)
• High degree of lender confidence in laws
• But procedures are largely untested

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Fine Tuning of Laws Needed

• Registration
• Apartment building land plots not registered
• Mortgage on future interests not covered
• Incomplete construction not covered
• Statutory use or succession rights may impede
  eviction
• Excessive discretion in enforcement of judgments
• Sales other than by auction not permitted

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Relevance to Secondary Market

• Past performance of loans and success of loan
  recovery procedures help determine quality and
  pricing of bonds or securities
• Rating agencies review primary legal framework
• Due diligence includes evaluation of legal
  framework
• Bottom line without strong deterrent to default
  and predictable access to collateral, locked out
  of secondary market

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Taxation and Fees

• Low loan origination fees
• Reasonable transaction, registration and notary
  fees
• No deduction or credit for interest paid on loans
• Interest on savings and dividends taxed
• In general, good fiscal policy, but carefully
  targeted incentives might be considered to
  encourage long term deposits, investment in
  bonds, or to increase financial intermediation
  among underserved sectors of population

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Status of Auxiliary Activities

• Real estate profession well developed
• Appraisal industry developing, low cost (but no
  law)
• Deposit insurance
• Notaries private, regulated by MoJ
• Execution officers employed regulated by MOJ
• Credit bureau CBA and private

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Insurance

• Insurance sector inadequately developed
• None required by law
• Banks generally do not require property insurance
  (structure or liability)
• Life or disability insurance not readily
  available, not required by banks for mortgages
  (CO requires life)
• No mortgage default insurance
• No insurance against construction delays
• Should be required as business practice and by
  regulation

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Preparation for the Secondary Market

• No push from banks for secondary market - strong
  deposit base, large spreads, low l-t-v
• But - banks have limited access to long-term
  funding
• No mortgage bond issuances, but market probably
  there
• No Law on Mortgage Bonds or Securities

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Regulatory Framework Required

• Standardization of underwriting, servicing,
  documentation requirements
• To insure quality of loans
• Specialized regulations of issuers for bonds
• Cover, balance, reserve and capital treatment,
  insolvency of issuer
• Regulations on operation, supervision, taxation,
  registration of secondary market transactions