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National Law Center for Inter-American Free Trade 440 North Bonita Avenue • Tucson, AZ 85745-2747 tel: (520) 622-1200 • fax: (520) 622-0957 Email: natlaw@natlaw.com - Internet: http://www.natlaw.com ® SECURITIZATION OF REAL ESTATE ASSETS LEGAL FEASIBILITY STUDY 1. 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12. 1.13. 1.14. MORTGAGES General Overview. Which types of mortgages exist in your legal system? Format. Please include, if possible, a sample copy of a format of a mortgage agreement. Set Up. The bank grants a loan to the debtor. What steps does the bank have to follow in order to establish a security right over real property owned by the debtor? Is the entire document registered or only its financial statement (abstract)? Perfection. What is necessary for the purchaser to perfect the security interest after it has been granted? Recording. Is the recording of the security in the land register (or any other register) necessary? What information does the recording need to contain? Internet. Is it possible to speed up the process with the use of the internet? Costs. What are the costs for establishing a typical security for (a) 50,000 USD and (b) 100,000 USD (lawyer/notary fees,registration fees)? Are these fees fixed by law? Taxes. How much is paid in taxes and who collects the taxes? Accessoriness. Let us assume that the loan contract is invalid. How does this affect the mortgage – assuming that all other requirements for creating a mortgage have been complied with? Case. Partial Release/Revolving Guarantee. The bank and the mortgagor have agreed on a mortgage loan for a five-year term. a) Let us assume that 30% of the mortgage loan has been repaid. Can the “free” part of the old mortgage be released to secure a new loan with a higher annual amortization and a different interest rate? What has to be done for this? b) The mortgagee runs a business and is in permanent need for credit. He agrees with his bank on a maximum credit line under a revolving loan. Can this credit line be secured by a mortgage? Mortgage Promissory Note. Can a promissory note be secured by a mortgage? Case. Mortgage Certificate. On May 1, 2004 Juan asks the Registry to record a lien on his house for a particular amount, without any loan being granted. On May 5, 2004 Juan receives from the Registry a Mortgage Certificate for said amount. On Dec. 10, 2004 Juan endorses and delivers the Certificate in favor of Bank B (if in paper form) or records the Certificate in favor of said Bank (if in electronic form), as collateral for a credit. Can this happen in your legal system? Coverage. If there is a business on the mortgaged premises, does the mortgage also extend to its assets such as machinery, cars, raw material, etc.? Change of Priority. What happens to the second ranking mortgage, if the loan of the first mortgage has been completely or partially repaid?: a) the second mortgage gets a better position or even the first rank; b) the owner gets the right on the position for the refunded parts of the first mortgage, and the second mortgage remains at its position; c) other _______ . 1.15. Standardization. Do you think that the local market is ready for the process of standardization of real estate mortgage documentation? Who do you believe should be in charge of the standardization process?: a) banks, b) governmental entities, c) notarial associations, d) a combination of the above, e) other _____ (please elaborate). 1.16. Appraisal 1.16.1. International Standards. In cross-border transactions can the lender choose that the valuation be made in accordance with international standards (e.g., of the International Valuation Standards Committee)? 1.16.2. Conception. What conception does it reflect (market value, mortgage lending value, another value)?Who carries it out (lender, independent practitioners)? 1.16.3. Common Criteria. Is there any common risk profile in use in your country which helps to enhance the quality of valuations by covering what would be of interest to all mortgage lenders (e.g., certain specific market risks, location risks, construction related property risks, fiscal and legal risks)? 1.16.4. Legal Risks. How important is the assessment of the legal risks in the day-to-day valuation of real estate property? 1.16.5. Environmental Issues. Does the valuation include an assessment of environmental issues, e.g., building with energy efficient materials/design? 1.16.6. Appraisal Bureaus. Are there any national valuation bureaus whose information may serve as reference for future and similar real estate transactions? 1.17. The Public Registry 1.17.1. Regulation. What is the statutory basis for the registration of real estate transactions? 1.17.2. Centralization. Is there more than one register which keeps control of different aspects relating to the same piece of real estate? If so, are they interrelated; i.e., is what is recorded in one register reflected in the other(s)? 1.17.3. Qualifications. What (legal) training do the people working at the register possess? 1.17.4. Total Registered. Please indicate the percentage of registered land: a) less than 5%; b) 5-25%; c) 25-50%; d) 50-75%; e) 75-95%; f) more than 95%. 1.17.5. Fields. Which data are registered? Please include a sample copy of a format. 1.17.6. Procedure. Please describe the application procedure:Is there any form required for the application for registration?Is it usually a lawyer or a notary who applies for the registration on behalf of the parties? 1.17.7. Review. What does the registrar control? 1.17.8. Follow Up. How are the applicants informed about the status of the registration? 1.17.9. Format. Is the registration done on paper or electronically? 1.17.10. Access. How can you get access to land registration information? Is it in the public domain or is the access restricted? 1.17.11. In particular, can you get access to the register:a) if you have a ius in rem in the real property;b) if you are negotiating with the owner about the purchase of the property or if you want to find out who owns a property in order to make him an offer for purchasing or renting the property;c) if you have an enforceable title against a debtor and are inquiring about the existence of real property to be seized in an execution procedure;d) if a bank wants to check whether an applicant for a loan owns real property;e) if the press wants to inquire on how much real property a politician owns? 1.17.12. Search. How can you search for information?: a) By address; b) by registration number; c) by holders of rights on it; d) other ______. A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 2 1.17.13. Effects. What are the substantive effects of the registration?: a) creation or transfer of the right (constitutive effect); b) opposability against third parties (declarative effects). 1.17.14. Renewal. Does the registration need to be periodically renewed? 1.17.15. Presumption/Proof. Does the registration confer a presumption or proof for the existence of the right? If this is different for different rights and interests, please specify. 1.17.16. Centralization. Is it necessary to search for additional information apart from the content of the registration to get a full picture? 1.17.17. Good Faith. How are the parties that have relied in good faith on the information from the register protected if this information proves to be wrong? 1.17.18. Case. Good Faith Purchase. On May 10, 2004 Juan, as heir of the Agua-Prieta Ranch according to Pedro’s testament, sells his property to Marianela, who pays the purchase price and has the transfer registered with the land register. On June 10, 2004 Marianela sells to Joaquín, who registers in his favor on June 15. On July 3, 2004 it turns out that Pedro granted the Ranch to José in a more recent testament. Is Joaquín protected as good faith purchaser? Is the testament in favor of José recordable? If so, what happens if José records the testament in his favor before Joaquín records the purchase of the Rancho Agua-Prieta? 1.17.19. Priority. How is the priority of registrations determined? Please quote verbatim the relevant article. 1.17.20. Case. Priority. Othón grants first a mortgage to Juan (A), afterwards another mortgage on the same property to Felipe (B). After that, a creditor from Othón has a third mortgage registered on the same property in an execution procedure (C). The time of registration is as follows: First B, then C, then A. What is the respective rank of the mortgages? 1.17.21. Priority (Preventive) Notice. Is there any possibility to secure (the rank of) a future registration?Please quote the applicable article verbatim.Is the effect of this priority notice limited to a certain period of time? 1.17.22. Hidden Liens. Please mention any “unpublicized securities” which may affect or hinder the rank obtained through registration (e.g., insolvency set-off, retention of title). 1.17.23. Baja and Sonora. In Baja California and Sonora, if all legal requirements are met: a) are the documents presented before the Public Registry recorded within a three-day term?; and b) are the marginal notations recorded by the Public Registry within the 24 hours following the filing of the relevant request? 1.17.24. Backlog. Is there a backlog in the dispatch of requests for the issuance of certificates of freedom of liens and of requests for inscription? 1.17.25. Registry Criteria. w does the Public Registry in your state maintain the homogeneity in the criteria used by the registrars in reviewing or scrutinizing the documentation filed for recording? Are these criteria published or made available to the public/users of the Public Registry? 1.17.26. Rectification of Entries. re there any statistics as to frequency of requests for rectification/cancellation of entries due to mistakes supposedly attributable to the Public Registry? 1.17.27. Lawsuits. re there any statistics as to the number and value of lawsuits filed against the Public Registry for mistake in the information provided by the Public Registry upon request within the last five years? 1.17.28. Replacement. Please describe the process for replacement of any record, book or entry in case of any loss of information. A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 3 1.17.29. Precautionary Measures. What are the precautionary and/or contingency measures that the Registry contemplates against fire, damage to the database system, theft of information, etc.? 1.17.30. Security. re there any controls in place to avoid any alteration of recordings and certifications issued by the Public Registry of your location? Please elaborate. 1.17.31. Indemnity. Is the Registry bound to indemnify the users for any damage caused due to any omission or misconduct of any registrar? 1.17.32. Urgent Issues. Please identify any material problem in the operation of the Public Registry which in your opinion needs prompt solution. 2. SECURITIZATION OF REAL ESTATE LOANS 2.1. Legal and Regulatory Framework 2.1.1. Overview. Do you think that the legislation in your country on securitization of real estate loans favors the existence and development of the primary (generation of real estate assets) and secondary (securitization) markets of mortgages? Why? 2.1.2. Restrictions. Are foreign buyers subject to any restrictions which may hinder cross-border real estate transactions? 2.1.3. Consent. If the agreement does not prohibit assignment, can a real estate loan be sold without the debtor’s consent? 2.2. Background: Mortgage Loans 2.2.1. Introduction. How would you characterize the legislation of your country on mortgage loans: a) modern; b) in process of modernization; c) outdated? Why? 2.2.2. By Law or Contract. Are the different types of interests in land defined and limited by law or can they be defined and created by contract? 2.2.3. Requirements. What are the requirements for the transfer of ownership? Valid obligation contract (causa),payment of the purchase price,consent,registration with the land register? 2.2.4. Preparatory Agreement. If it is common to use a preparatory agreement for the sale of real estate and the grant of mortgage loans, what legal effects does it have? 2.2.5. Case. Preparatory Agreement.Buyer and seller sign a written agreement which states that the seller will sell and the buyer will buy the house under the usual conditions, based upon a previous commitment by a lender to fund said purchase. The purchase price is also indicated. What, if any, legal effect does this document have? Can it be recorded with the Public Registry? Can the seller force the buyer to pay the purchase price? Can the buyer force the seller to sell and the lender to lend? 2.2.6. Restrictions. Are there any restrictions for foreigners to acquire real property? Please enunciate them. 2.2.7. If so: have these restrictions been challenged under local/international law? 2.3. Vehicles 2.3.1. Regulation. Do the laws in your country provide specifically for the establishment of special purpose entities for securitization? 2.3.2. Please mention the different vehicles available for securitization under local law and their main features. 2.3.3. Cross-Border Structure. What structure do you think would be the most adequate in a cross-border securitization where the assets are located in your country and the rest of the transaction (loan origination, loan assignment, structuring of the special purpose vehicle, A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 4 and/or securitization, placement and sale of the securities issued) occurs in the U.S.? Can you point to some actual transactions? 2.3.4. Services. If the entity you represent provides services regarding one of such vehicles (e.g., the trust), please provide a description of the practice followed in their structuring, set-up and/or administration. 2.4. Transfer 2.4.1. Set Up and Perfection. What is necessary for the seller to sell a mortgage loan and for the sale to be perfected?: a) agreement on the item and on the price; b) registry; c) other ________ . 2.4.2. Of the Credit and the Collateral. Juan has set up a mortgage for the benefit of Bank 1. Bank 1 wants to refinance the loan with Bank 2. Can Bank 1 transfer the mortgage to Bank 2? If so, please describe the necessary steps. 2.4.3. Of the Collateral Only. Can Bank 1 transfer the mortgage without transferring also the secured claim? If not, are there any other options for Bank 1 to use the mortgage as collateral for its debt with Bank 2? 2.4.4. Recording. Does the transfer have to be registered? Is the registration necessary for the transfer to be valid or to be opposable against third parties? What other ways exist to make the transfer insolvency-proof? 2.4.5. Costs. What are the approximate costs for the transfer of a mortgage – and the time required? 2.4.6. Invalidity and Good Faith. If Bank 1 does not have a valid claim with respect to a mortgage, can Bank 2 acquire the mortgage from Bank 1 in good faith? 2.4.7. Invalid Guarantee and Good Faith. If Bank 1 has a valid claim with respect to the mortgage, but the setting up of the mortgage is invalid, can Bank 2 still acquire the mortgage from Bank 1 in good faith? 2.4.8. Transfer without Register. If Bank 1 has transferred the mortgage to Bank 2, but the mortgage is still registered in favor of Bank 1, can Bank 2 enforce the mortgage? Whose consent is necessary for any changes in the registration, the consent of Bank 1 or of Bank 2? 2.4.9. Divisibility. Can the loan and the mortgage be split up and portions be transferred to different banks? 2.4.10. Bankruptcy of the Administrator. If the mortgage can be transferred for its administration to a trustee or fiduciary, in case of insolvency of said administrator would the mortgage fall in the insolvency estate? 2.4.11. Abstract Mortgage Guarantees. Would you consider valid the transfer of ownership of a piece of real estate once said transfer has been registered, irrespective of the validity of the sales contract? I.e., does your legal system contemplate the possibility of abstract real estate liens? 2.4.12. Case. Difference Between Causal and Abstract Systems. A has sold real property to B. B registers the transfer in his favor. B wants to sell it to C. C finds out that the sales contract concluded between A and B was invalid, a) before entering into the agreement with B; b) once the agreement with B has been entered into. Is C protected? 2.4.13. Validity of Transfer Entered Abroad. Is the obligation valid if the form prescribed by domestic law has not been respected, but only that prescribed by the law of the place where the contract has been celebrated? Is this so even when the law of the place where the contract has been celebrated allows the contract to be done in writing without any other formal requirements? A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 5 2.4.14. Registry of Transfer Entered Abroad. Is it possible to register the transfer of real property in your land register if the act of transfer has been celebrated in another country? If not, what are the reasons given for the exclusive jurisdiction of the national system? 2.4.15. Case. Transfer of Real Estate among Foreigners. A national of another country, owner of a vacation home in your country, wants to transfer the ownership to a couple of nationals of the same foreign country. If possible, the parties want to conclude all necessary contracts in their country of origin. If their lawyer asks you for advice, what would you recommend?: a) that the parties conclude the contract abroad, and then have the registration done by a local notary or lawyer; b) that the contract be signed in the place where the real estate is located; c) other _______ . 2.5. Conflict of Laws 2.5.1. Choice of Applicable Law. Does your legal system allow the choice of the applicable law also for contracts on real property or is the lex rei sitae applicable (law where the real estate is located)? 2.5.2. If the lex rei sitae governs the real property rights, can the parties choose a different applicable law which is however related to other parts of the transaction, e.g., for the loan contract or the construction contract? 2.5.3. Validity of a Guarantee Entered into in a Foreign Country. John Smith, a resident of a foreign country, purchases a piece of real estate in your country and grants a security interest in the real estate under the laws of his country. If that security interest is valid and perfected under the laws of said foreign country, will it be treated as valid and perfected in your country? 2.5.4. Foreign Law Applicable to the Credit Agreement. Banca Forte, a fully licensed bank incorporated and operating in your country, and a subsidiary of a foreign bank, grants loans to residents in your country. If the place of payment is your country, can the parties choose the law of the parent bank to govern the real estate loans? 2.5.5. Foreign Law Applicable to the Assignment Agreement. If your country’s law governs the secured loan, and Bank A sells the loan to Bank B in another country, can both Banks choose the law of Bank B’s country or a third country to govern their sale agreement? 2.5.6. License. Bank Z, a foreign bank, purchases real estate loans in your country and keeps them in its books, collecting on the loans and enforcing its rights. Bank Z, otherwise, does not conduct any business in your country. Is Bank Z required to obtain a license or subject to regulation as a financial institution? 2.5.7. Case. Choice of Applicable Law. The real estate is situated on national territory whereas the debtor (who is also the owner of the real estate) resides in another country.Which law is applicable (to the loan contract, the security contract and the mortgage) when the debtor: (i) receives a loan from a bank in the host country where the real estate is situated?; (ii) receives a loan from a bank in his country of residence?; ; or (iii) receives a loan from a bank in a third country? (2) In the three previous cases, could a law different from the law governing the property be chosen for the loan contract? 2.6. “True Sale” 2.6.1. Requirements. What is necessary for a sale of assets without recourse to be considered a true sale, i.e., to be upheld even if the originator were subsequently to go bankrupt, and to avoid being recharacterized as a mortgage or secured loan? May the seller retain control of collections, credit risk or interest rate risk on assigned loans and the sale still be considered a true sale? A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 6 2.6.2. Safe Harbour. If there is a framework established by a regulatory body in your country with minimal regulatory requirements, setting out circumstances under which a sale will be treated as a true sale, what is required for this purpose? 2.6.3. Future Credits. Can a sale of future credits be treated as a true sale? 2.7. Insolvency and Transferred Assets 2.7.1. Automatic Stay. After the sale of the loans, the seller becomes subject to insolvency proceedings. Can the purchaser Bank P collect, transfer or exercise ownership rights over the loans?: a) yes, provided the sale is considered a true sale; b) no, provided the sale is considered fraudulent conveyance; c) other _____. 2.7.2. Consolidation and Preference Period. If possible, what enables a receiver or insolvency official to a) consolidate assets and liabilities of purchaser and seller (or its affiliates); b) invalidate or reverse transactions occurring during the preference period? 2.7.3. Injunction and Rejection of Obligations. Can the receiver or insolvency official a) request the issuance of an injunction or similar action prohibiting the exercise of rights by the purchaser; b) invalidate seller’s obligations under the loan agreements previously transferred? 2.7.4. Trustee’s Bankruptcies. May the insolvency of the trustee affect the sale or transfer of the assets?  2.8. Bank Secrecy 2.8.1. Regulation. Does your country have laws restricting the use or dissemination of data about or provided by debtors? If so, do these laws apply only to consumer debtors or also to enterprises? 2.8.2. Consumer Protection. If the debtors are consumers, will the bank acting as purchaser be required to comply with any consumer protection laws of your country? Briefly, what is required? 2.9. Waivers 2.9.1. A special purpose entity is created under the laws of your country. a) Is the parties’ agreement to waive legal action or commencement of insolvency proceedings against the special purpose entity or against its assets valid and enforceable? b) Is a section in its bylaws providing that the directors will not commence insolvency proceedings regarding the entity unless required under applicable law valid and enforceable? 2.10. Securities 2.10.1. Instruments. Briefly, what are the securities or instruments available under your country’s laws for real estate securitizations and the main features? 2.10.2. Case Study. Mention any local case study which can be used as a model for the creation and/or enhancement of secondary real estate markets. 2.10.3. Reforms. Please include any suggestions for reform to the laws of your country that you consider would benefit the secondary real estate market. 2.11. Tax Related Aspects 2.11.1. Taxes. Seller S, located in your country, sells a portfolio of real estate loans to foreign Buyer B. Payments on the credits are collected by Seller S as collection agent for Buyer B, and then credited to B’s account outside your country: a) is the sale of credits subject to stamp duties or any documentary taxes?; b) will the payments be subject to A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 7 withholding taxes?; c) are there any value added tax, sales tax or similar taxes imposed on the sales of loans or on the fees of the collection agent? 2.11.2. Unpaid Taxes. If taxes on the sale of the loans are not paid by the seller, can the fiscal authorities collect against the purchaser, or the loans and their collections? 2.11.3. Jurisdiction. Bank Y, a foreign bank, purchases credits in your country keeping them in its books, appoints the seller as servicer and collection agent and enforces its rights when necessary. Otherwise, Bank Y does not conduct any other business in your country. Is Bank Y liable for the payment of taxes in your country? 2.11.4. Case. Securitization. Alicia grants Bank B (lender or originator) a security over Rancho El Girasol as collateral for a credit. Some time after the secured loan was granted, Bank B transfers hundreds of secured loans, including Alicia’s, to the special purpose vehicle called SANEO. Some time thereafter, the holders of the bonds issued by SANEO are forced to go to court to enforce their rights against the SANEO, against the pool itself, against the originator and against the security givers. Alicia brings an action to avoid enforcement against Rancho El Girasol on the ground that she has never defaulted on repayment of the installments on her loan. Does Alicia stand a chance?  3. ENFORCEMENT AND OTHER RIGHTS OF THE BANK 3.1. Judicial. Please describe briefly the main steps of the enforcement procedure and the main available legal remedies. Please include any limitation of remedies, e.g., public auction only (vs. private sale), compulsory grace periods on enforcement rights, sale only to nationals or in local currency, etc. 3.2. Extrajudicial. If your legal system recognizes any extrajudicial procedure for the enforcement and execution of the real estate collateral, please provide a brief description and comment as to its validity in practice: i.e., is the extrajudicial procedure recognized by the courts in case of any dispute, or in case of dispute the proceedings have to be initiated on a de novo basis before a judge, regardless of what has been heard in the extrajudicial proceeding? 3.3. Duration. How long does the enforcement procedure regularly take before the bank receives the proceeds of the mortgage: a) in the case of an extrajudicial procedure where no legal remedies are exercised by the debtor; b) in the case of an extrajudicial procedure where all available legal remedies are exercised by the debtor; c) in the case of a judicial procedure where no legal remedies are exercised by the debtor, and d) in the case of a judicial procedure where the debtor exhausts all available legal remedies? 3.4. Costs. Considering (a)-(d) above in 3.3, what is the average cost for an enforcement procedure for the satisfaction of a claim for 100,000 USD? 3.5. Agreement. Can the bank sell the real estate without foreclosure, i.e., without a court decision and a compulsory auction? Can the owner grant the bank the right to purchase or the power to sell the property by means of a normal real estate sales contract? 3.6. Case. Agreement. Daniel granted Bank B a security over his house for a loan. Five years later Daniel defaults on the loan. Bank B wants to enforce its security by availing itself of a clause of the security agreement whereby, if Daniel defaults, Bank B automatically becomes absolute owner of the house. Daniel claims that such a clause is invalid and unenforceable. Does it make a difference if Daniel transfers the property to Bank B subject to condition precedent of default of the loan payment? 3.7. Public Law. Are there any instruments for public administration or courts to stop or suspend foreclosure for social or economic reasons? A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 8 3.8. And Insolvency Procedures. What happens in the event that insolvency procedures over the debtor’s estate are initiated? Will the foreclosure procedure be stopped? How are the mortgagee’s rights protected in an insolvency procedure? 3.9. Distribution. How are the proceeds from the enforcement procedure distributed among the creditors? Is the distribution different in case of judicial, extrajudicial foreclosure or of insolvency of the owner or the debtor? 3.10.Privileges. Are there any fiscal or other charges – imposed by statute in favor of privileged creditors such as the state or local authorities – that take preference over the mortgage without being registered? 3.11.Percentage. Can you indicate a percentage of how much of the value of the real estate these charges usually amount to? 3.12.Projects. Regarding the sale, set up of liens, transfer, and securitization of real estate assets referred to in this questionnaire, are you aware of any project of legislative/judicial reform that would substantially modify the framework previously drawn, or of any project which analyzes the legal framework, participants, documentation and respective practices? 4. STANDARDS 4.1. Regulation. Are there any regulations for the building industry regarding environment, cultural aspects (respect for the native culture, knowledge and/or respect of local construction practices, sacred territories), sustainable development, building codes and safety practices in your country? 4.2. Model Law. Are you aware of any model law/standards being developed by the housing industry or any public agency in your country regarding building, safety codes, cultural aspects as they apply to the building or housing industry and the environment? 4.3. Policies and Procedures. Does your entity have any policies or procedures in place regarding ecological, cultural or architectural standards in relation to the approval of real estate loans and securitizations, like the grant of better terms if the developments are energy efficient, environmentally or culturally friendly? 4.4. Applied Anthropology. Do you know of any study on applied anthropology regarding the building industry in any region of your country? In any country? A NON-PROFIT 501(C)(3) RESEARCH AND EDUCATIONAL CORPORATION 9