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 But also after legalization of the mortgage as civilized legal institution, in 1992, contradictions between the out-of-date branch laws did not give lawyers practical possibility to defend effectively rights, but this time not of a borrower, but of the bank-creditor.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 “socialist” housing legislation and new Russian right.
Unfortunately, recent laws have only partly corrected this intolerant situation. For example, before acceptance of the law “On mortgage” 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 “on buy off”. 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 “on buy off” could be recognized invalid.
According to the new act “On mortgage” contractual selling of real estate is possible.
The most important novelty of this law was emerging “mortgage bond”-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 “simple” 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 “On
principles of mortgage crediting in Moscow”.
** Chapter 3 of the Federal law N102-FL of July 16, 1998 “On Mortgage”.
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
| Obligation Secured by Mortgage | A credit agreement |
| Loan agreement | |
| Any other financial obligation, including an obligation resulting from purchase and sale, lease, contact or other agreement, or infliction damages, unless otherwise provided by the federal law | |
| Obligations secured by Mortgage shall be accounted by the creditor and the debtor, if they are legal entities, in the procedure stipulated by the legislation of the Russian federation on accounting | |
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 other’s money resources, foreseen by obligations, backed by the mortgage, or by federal act.* The problems of possibility to collect percents for usage of other’s 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 subject of mortgage | ||
| defined by giving its name, location and a description sufficient to identify the subject. | state the right under which the property being the subject of mortgage belongs to the mortgagor and name of a state agency for registration of real estate rights, which has registered this mortgagor's right. | If the subject of mortgage if the lease right held by the mortgagor, then the leased property shall be described in the mortgage agreement as if it were the subject of mortgage; the term of lease shall also be indicated. |
| * Article 76 of the law “On Mortgage” ** Article 78 of the law “On Mortgage” | ||
| The appraisal of subject of mortgage | ||
| accordance with the legislation of the Russian Federation upon agreement of the mortgagor and the mortgagee (observing the provisions of Article 67 of the present Federal Law in the event of mortgage of a land plot); the appraised value shall be stated in the mortgage agreement in monetary form. | mortgage of state and municipal real estate its value shall be appraised in accordance with the requirements of the federal law or in the procedure stipulated therein. | The parties to the mortgage agreement may entrust appraisal of the subject of mortgage to an independent professional organisation. |
| The obligation secured by mortgage | ||
| state its amount, grounds for its origination and its term of execution. In case when this obligation is based on an agreement, parties to such an agreement, its date and place of its conclusion shall be stated. If the amount of obligation secured by mortgage is to be determined at a later date, the mortgage agreement shall indicate the procedure and other necessary conditions of its determination | If the obligation secured by mortgage is to be fulfilled in parts, the mortgage agreement shall indicate the terms (frequency) of appropriate payments and the amount of instalments, or conditions that would help define this amount. | |
| Certified by encumbrance | ||
| If rights of mortgage under Article 13 of the present Federal Law are to be certified by encumbrance, this shall be stated in 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 “On Mortgage”.
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 July16,1998“On Mortgage”.
*** Article 42 of the law “On Mortgage”
**** Item 2 of the Article 50 of the law “On Mortgage”
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 year’s 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 “buy off”), 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 “register” a relative and it suddenly becomes “the only house of a farmer”. The agreement on mortgage of housing accommodation can not be concluded by representative (“by proxy”), 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 “On mortgage”). 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 bank’s 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 “On mortgage”.
To my regret, the problem of “members of the family” 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 month’s 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