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The Warsaw Voice » Real Estate » October 28, 2009
The Real Estate Voice
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Revolution in Mortgages-Boosting Finance Raising
October 28, 2009   
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In Europe, only Poland recorded positive economic growth in the second quarter of 2009. It is like a green island surrounded by an ocean of countries in recession, which is reflected by a 5-percent GDP contraction in euro-zone countries.

According to data published by Eurostat, the European Union's statistics office, Poland's GDP grew 1.4 percent in the second quarter of this year, which constitutes a better result than anticipated by Poland's Central Statistical Office (GUS). Experts expect further economic growth in the coming months as a result of growing export sales.

Not only does the anticipated economic growth attract investors' attention, but also the most recent changes in legislation modeled after certain Swiss, French and English solutions are intended to support project financing processes in the commercial and residential real estate sectors.

Institutional investors, developers and individual investors should pay attention to new legal regulations that will take effect in February 2011 making project financing and refinancing processes far more flexible.

Unifying mortgages
The existing division into ordinary and capped mortgages will disappear. In practice, ordinary mortgages secured claims with a fixed amount, and capped mortgages used to secure claims with an amount that is not yet determined. Such a division led to situations in which banks forced investors to establish two mortgages: an ordinary mortgage to secure the loan (principal amount) and a capped mortgage to secure interest. The new regulations will bring about a situation in which it will no longer be necessary to change the entry concerning interest in the Land and Mortgage Register only because their amount or interest rate has changed. The risk of refusal to register a capped mortgage securing interest, which happened in some courts due to a diversified interpretation of the regulations, will be eliminated. Finally, the new regulations will result in a reduction of costs related to the registration of a mortgage.

Jump in, jump out-the debtor will make the decision
Let us imagine a situation in which one property is encumbered with several mortgages. Obviously, today mortgages that have been established the earliest enjoy priority. A lower-ranking mortgage replaces an expired mortgage, and a new mortgage is last in line.

In the future, following the example set by Swiss lawmakers, debtors will be able to establish a new mortgage for any entity of its choice in the place of the expired mortgage or to move any mortgage already encumbering the real estate to replace the expired mortgage upon the consent of the eligible creditor, for example in exchange for the creditor's consent to more advantageous financing terms.

It is important to note that the right to enter a new mortgage in the place of an expired one is not limited in time, provided that simultaneously with the deletion of the mortgage the right to enter the new mortgage will be entered in the Land and Mortgage Register. Further, no compulsory mortgage used to secure tax receivables and receivables enforced through court procedures may be entered in the place of an expired mortgage. Most importantly, creditors may reserve a place in line, and in any such case a new mortgage obtains the promised place as soon as it becomes available.

Making room for the security trustee-one project, many lenders
In a situation in which one project is financed by several entities (banks), creditors may appoint a mortgage administrator. Such a role may be played by one of the creditors or any third party. In any such case one mortgage secures the claims of several entities financing the same project.

The administrator (very often the leading bank in the financing bank consortium) will exercise the rights and perform the obligations of a mortgage creditor on its own behalf but on the account of the creditors whose claims are secured by the mortgage.

If an agreement appointing a mortgage administrator expires and a new administrator is not appointed, each of the creditors whose claims are secured may demand division of the mortgage.

The proposed solution will reduce the security costs and will be used when financing large commercial and residential projects, e.g. a developer obtains loans from several banks to construct a shopping center and may establish one mortgage for them.

One mortgage security, different claims
The new regulations also introduce the possibility of establishing one mortgage to secure several claims arising from various legal relationships/based on various grounds but vested in one creditor.
The costs will also be reduced here since the banks will be able to use one mortgage to secure various forms of funding granted to one entity without the need to establish further mortgages.

Swapping claims, more flexibility
A change that makes it possible to replace a claim secured by a mortgage with another claim of the same creditor is very important. In practice, it will be used by entities planning to change the loan currency.

Heading in the right direction
All the proposed solutions are intended to adapt security instruments to the needs and growing requirements of the market to effectively secure financial institutions. Furthermore, the changes are in line with the strategy for fighting the economic slowdown.

Bartosz Miszkurka, Advocate, Partner Associate, KPMG D. Dobkowski
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