IMF Course on Making Mortgages Work

On an annual basis, the IMF’s Legal Department conducted a workshop on legal aspects of the enforcement of creditor claims. This is an area where weak enforcement can reduce the banking sector’s willingness to extend credit, which in turn can hold back private investment, thereby dampening economic growth.  In the recent past, the workshop focused on specific enforcement techniques such as garnishment and orders of payment.  This year, the IMF targeted the housing sector and delivered a workshop on “Making Mortgages Work” in March 2016 at JVI.  Improving the effectiveness of mortgage enforcement is critical because it encourages banks to lend at better conditions, is a critical tool to resolve non-performing loans, and in so doing, may generate economic demand.

The workshop brought together judges, lawyers, bankers, and government officials from Cyprus, France, Germany, Ireland, Italy, Kosovo, Latvia, Portugal, and Spain.  In addition, the workshop benefitted from interventions by experts from the EC, the ECB, the EBRD, and specialists in housing finance and mortgage auctions from Austria and the Netherlands.  Staff from the IMF Legal Department and European Department, who are working on complementary technical assistance activities on reform of enforcement and insolvency regimes, facilitated the workshop.

The main conclusion of the workshop was that the key attributes of efficient mortgage foreclosure are speed, high recovery values, and low transaction costs.  With regard to speed, there were differing regimes among the countries represented, ranging from ordinary court procedures that could take several years, to more efficient summary procedures.  One concern with overly expeditious proceedings is that they can run afoul of consumer protection laws, as discussed in the European Court of Justice decisions on Spain’s property repossession laws which the Court considered unduly harsh.  Consumer protection is also a motivating factor in the recent EU mortgage credit directive, which not only seeks to ensure that consumers are adequately informed prior to taking on a mortgage, but requires creditors to exercise reasonable forbearance before initiating foreclosure proceedings.  Views were mixed as to whether forbearance led to quicker resolution of claims prior to engaging in a formal process, or whether it merely created further delay.  

With respect to obtaining high recovery values and low transaction costs, the workshop focused on techniques for the sale of real estate, including electronic and court-managed auctions, and private or “amicable” sales.  Participants from countries with electronic auctions highlighted that when well-designed, e-auctions can minimize collusion, widen the pool of bidders, and where bidders are anonymous, produce a higher sales price.  For any sales procedure, participants agreed that it was critical to have a sound appraisal of the fair market value of the property, ideally by an independent appraiser.  It is also key that the various actors in the process, including notaries, appraisers, bailiffs, are regulated by law or codes of conduct in order to ensure the integrity of the process.

As evidenced by the foregoing summary, the Workshop facilitated a free flow exchange of ideas and experiences among countries with divergent practices and backgrounds. Participants welcomed the specialized focus on mortgage enforcement and there was a consensus that in addition to sharing lessons learned, it would be beneficial to have more data collection on mortgage enforcement, including recovery values and duration of proceedings, and quantity and value of non-performing residential and commercial mortgage loans.