| The Law on Mortgage Bonds and Mortgage Banks of August 26, 1997 (the "Mortgage Bank Law") contains several new concepts which should be of interest to real estate investors in Poland. Foremost among these concepts are the establishment of mortgage banks and their function of issuing mortgage bonds. Although limited in their scope of activity in comparison to universal banks, mortgage banks perform specific functions, such as securing credits with mortgages, that should prove relevant to investors and help expand the residential housing market in Poland. Mortgage Bank Functions The Mortgage Bank Law introduces the mortgage bank as an institution designated for mortgage lending and authorized to issue mortgage bonds. Mortgage banks differ from universal banks in that they are prohibited from performing all universal banking activities enumerated in the Polish Banking Law. However, Polish mortgage banks' permitted scope of activities cover operations such as issuing mortgage secured credit loans, issuing loans secured by guarantees of accredited institutions (the Polish State Treasury, National Bank of Poland, European Union and its member states, European Bank for Reconstruction and Development, European Investment Bank, and the World Bank), purchasing debts held by other banks that are secured by mortgages or the above accredited institution, and issuing mortgage-backed securities. In addition, Polish mortgage banks are able to accept and take loans, although funds thus acquired cannot exceed twice the value of the bank's capital. If necessary, in the course of its operations, a Polish mortgage bank may also make capital investments worth up to 10% of the amount of its equity. Mortgage Bonds As mentioned above, the major activity of Polish mortgage banks will consist of issuing two types of mortgage backed securities (mortgage bonds, "hipoteczny list zastawny" and public mortgage bonds, "publiczny list zastawny"), which are new financial instruments introduced under the Mortgage Bank Law. The mortgage bond is a registered or bearer security, issued on the basis of the receivables of a mortgage bank and secured by mortgage liens, upon which a mortgage bank undertakes to deliver specific financial benefits to the authorized holder of the mortgage bond. The public mortgage bond is a registered or bearer security, the issue of which is based upon (i) credit guaranteed up to its full value plus interest, with a guarantee or surety of the State Treasury, the National Bank of Poland, European Union, European Union member states, European Bank for Reconstruction and Development, European Investment Bank or International Bank for Reconstruction and Development (the World Bank); or (ii) receivables due to a mortgage bank on credits issued to such accredited institutions. Mortgage bonds may be established in a foreign currency, provided that such establishment complies with the provisions of the Polish Foreign Exchange Law. Limits on Activities In limiting mortgage banks' scope of activities, the Mortgage Bank Law places limits on the volume of loans and bonds which a mortgage bank can grant in relation to its total equity, volume of receivables, and the real estate for which it is granting a loan. A basic principle of the Mortgage Bank Law is that a mortgage bank's obligations resulting from taking term deposits, borrowing and lending, and issuing bonds, cannot equal more than twice the total equity of the mortgage bank. Likewise, as the main activity of Polish mortgage banks consists of issuing mortgage secured loans, investors should be aware that mortgage banks cannot issue individual loans exceeding 80% of the mortgage lending value of the real estate for which a given loan is issued. Thus, the Mortgage Bank Law requires that detailed regulations for mortgage lending valuation methods be defined in guidelines issued by each mortgage bank, subject to the approval of Poland's Banking Supervisory Commission. Moreover, receivables established d uring construction cannot exceed 10% of the overall value of a mortgage bank's secured receivables that underlie the issuance of mortgage bonds. Security and Supervision One major advantage in dealing with mortgage banks is the security that they afford their borrowers. Each mortgage bank has its own mortgage bond register, and all mortgages securing receivables which are entered in this register enjoy first priority in any foreclosure proceedings over all other mortgages, including those recorded earlier. In cases where a mortgage bank itself goes bankrupt, the bank's receivables securing mortgage bonds registered in the mortgage bond register are set aside for the exclusive purpose of satisfying the claims of holders of mortgage bonds. Any funds exceeding those necessary to satisfy such claims are included in the bank's bankruptcy estate. According to the Mortgage Bank Law, the supervision of Polish mortgage banks is entrusted to a trustee and deputy appointed for each bank by the Banking Supervisory Commission upon consultation with each bank's board. This governing structure differs significantly from the supervisory boards of universal banks, which answer to their banks' shareholders. In mortgage banks, the trustee and deputy operate independently of the Banking Supervisory Commission and, in order to maintain their autonomy of action, cannot be employees of the mortgage bank which they supervise. In the scope of his or her duties, the trustee will exercise control over the compliance of the mortgage bank's operations with applicable regulations and will have full access to the bank's books and all other documents. Conclusion The Mortgage Bank Law represents a significant step forward for real estate investors in Poland and gives reason for optimism that the residential housing market for investors will soon expand substantially. |
Trends in Polish Mortgage Banking Law
This article was edited and reviewed by FindLaw Attorney Writers | Last reviewed March 26, 2008
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