Mortgage . A long-term loan obtained by individuals to buy a home, which legally transfers the debtor’s property to the creditor until the debt is paid. It is also the real law that taxes real estate and ships, subjecting them to answer for the fulfillment of an obligation.
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- 1 Historical overview
- 2 Mortgage loan
- 1 Characteristics of a mortgage loan
- 2 Mortgage debt
- 3 Amortization table
- 4 Securitization of mortgages
- 5 Purpose of the securitization
- 6 Types of mortgage
- 7 Related Topics
- 8 Sources
Evolution of securitization. Securitization had its origins in the 1970s , as a consequence of high interest rates in granting loans and the need for financial entities to reduce costs to obtain funds. For this reason, many loans were transformed into negotiable instruments, which were called Securitization of credit .
Thus were born the titles of debts backed, that is to say, guaranteed by a real asset, such as on automotive garments, with the guarantee of conformed invoices, mortgages, etc. The United States government created an agency that launched the securitization market, developing a title guaranteed by home mortgage loans; In this way, financial institutions were encouraged to grant certain types of mortgage loans that are financed with the issuance of securities backed by said mortgages and guaranteed by the government. Subsequently, commercial banks and savings and home loan companies are incorporated into the operation; Currently there are wholesale entities dedicated exclusively to securitization.
In Latin America, the country with the most experience is Mexico, where this phenomenon is known as securitization or securitization. In Cuba, the instrument of securitization has not yet had a boom, since the law 24441 (BO16-01-95) on housing and construction financing has a recent validity, it is already foreseen that through this system the BHN buys the mortgages from the private system and issue titles, to get money to revive the economy. The regulation established by this law gave the necessary framework to capture greater savings from the private sector for the financing and construction of houses, it also established a special regime for the execution of mortgages transferred in trust, allowing a quick and inexpensive execution of the same.
It is the set of a personal loan and a mortgage guarantee on a property . The mortgage is an accessory guarantee, whose validity is subject to that of the loan. The loan is a contract through which the bank or entity delivers an amount of money and the way (term, interest, guarantees, etc.) in which the borrower has to repay it is regulated. The mortgage guarantee includes both the principal amount of the loan, as well as the eventual interest, costs and expenses in case of legal claim in cases of non-payment of installments.
Characteristics of a mortgage loan
The mortgage will remain, even if the loan it guarantees is reduced, even if it is fully paid. Until it is canceled, with the express consent of the financial institution through a cancellation deed presented in the Property Registry , the mortgage does not disappear, although nothing is owed on the loan.
As a contract that is, it must necessarily be constituted in a public deed, always granted before a Notary, and subsequently be registered in the Property Registry for it to be valid. A mortgage does not prevent the home from being sold to another person, but always bearing in mind that, in order for the new buyer to be able to take over the loan , the consent of the financial entity with which it was formalized is required. If the latter (the entity or bank) does not give its consent, in case of non-payment of the loan, the first buyer will personally respond to the debt .
Loan granted with the guarantee of a rural or urban real estate (especially land); it is one of the first forms of credit, and with the establishment of capitalism it is concentrated in special mortgage banks. By mortgaging real property, the debtor retains the property right only formally. Mortgage debt is one of the ways in which the cultivation of land is separated from its possession, and capital penetrates agriculture. It contributes in no small measure to subordinate agriculture to financial capital, to differentiate the peasants, to concentrate the land on large capitalist estates, to expropriate the working peasants. The payment of the interest on the mortgage debt absorbs almost all the income of the peasants, and if the debt is not paid in due time, the mortgaged assets are sold at public auction. These processes have reached enormous proportions in the period of the general crisis of capitalism. In the United States , for example, farmers’ mortgage debt, from January 1 , 1950 to January 1, 1963, went from 5,579 million dollars to 15,500 million, that is, it increased almost three times. Nearly a third of all farmland in the United States was mortgaged to banks, and the mortgage debt for 1 acre of land nearly doubled from 1950 to 1961. The mortgage debt of German peasants increased almost twice between 1950 and 1957 . The same situation occurred in Italy , in Spain and in other countries.
Real estate purchases of certain types of equipment are frequently financed by issuing long-term documents that require a series of installment payments. These payments (called “debt service”) can be due, semi-annually, monthly or quarterly or at any other interval.
If these installments continue until the debt has been fully paid, it is said that the loan is being fully amortized. Frequently, however, fee documents contain an “due date” on which the remaining unpaid balance must be paid in a single “balloon payment”. Some documents require the payment of fees that correspond to periodic interest charges (an “interest only” document). Under these terms, the principal of the loan is payable on a specific maturity date. More often, however, installment payments are greater than the amount of interest that accrues during the period. Thus, only a portion of each payment of each installment payment represents an interest expense and the remaining amount of the payment reduces the principal of the liability. As the amount owed decreases with each payment, the portion of subsequent payments that represents the interest expense will decrease and the portion directed to the principal payment will increase.
- Preparation of the amortization table
In order to analyze the content of a table, the payment method must first be taken into account, with which it will be amortized, either monthly, quarterly or semi-annually. Consequently, the values of the payments (column A), the interest expense (Column B), and the reduction in the unpaid balance (Column C) will be calculated according to time.
The data in the table are:
- Interest periods (Date of issue).
- Payment date.
- Payment (either monthly, semi-annually or quarterly) (Column A)
- Interest expense (Column B)
- Reduction in unpaid balance (Column C)
- Unpaid balance (Column D).
The interest rate used in the table is of special importance; This rate must coincide with the period between payment dates. Therefore, if payments are made on a monthly basis (for example) column B of interest expense should be based on the monthly interest rate and so on. An amortization table is made with the original amount of the liability that heads the column of unpaid balances. The values of the monthly payments shown in column A are specified by means of an installment contract.
Monthly interest expense, shown in column B, is calculated for each month by applying the monthly interest rate to the unpaid balance at the beginning of that month. The portion of each payment that reduces the value of the liability (Column C) is simply the remaining amount of the payment (Column A – Column B). Finally, the unpaid balance of the liability (Column D) is reduced each month by the amount indicated in column C. The preparation of each horizontal line in an amortization table represents the preparation of the same calculations based on a new balance. not payed.
- Record with the data in the table. Once an amortization table has been prepared, the entries to record each payment will be taken directly from the values that appear in it.
Over time, the economy and the economic system have developed and evolve into new types of business and transactions. This development is further accentuated in the financial market, where new variants and innovations continually emerge, both in the aspect of granting financing and in that of new proposals for investors.
The word securitization derives from security, whose English meaning is title-value. The concept of securitization could be defined as a financial mechanism that enables relatively illiquid loan portfolios to be mobilized, through a legal vehicle, through the creation, issuance and placement on the Capital Market of securities, backed by the group itself. of assets that gave rise to it; basically it is the affectation of a credit to a title. Different types of assets can be securitized, the most widespread and well-known example being that of mortgage securitization.
In order to understand this particular contract, it is convenient to make a brief explanation of the concept of mortgage, since law 24,441 establishes in article 44 that: The real mortgage right incorporated into the title is governed by the provisions of the Civil Code in mortgage. The mortgage can be defined as a real right that is granted in the security of a money credit on a property, which will continue to be held by the debtor. It is the guarantee given to the creditor of the loan that if the debtor does not comply, he can execute the property on which the mortgage was established; This does not mean that the creditor takes possession of the property but that it is auctioned off and the credit is collected from what is obtained. The mortgage is above all a real right, that is, a legal power that a person has over a thing, (in this case the creditor on the mortgaged property) but with the characteristic that it is accessory to a personal right, which is the true credit and determined in money. Therefore, when the principal (credit) is extinguished, the accessory (mortgage) is extinguished.
Other characters that the mortgage has, and that as a consequence, are transmitted to the securitization process are:
- Conventionality: Since it can only be given by agreement of the parties. Advertising: Registration in the National Registry of Real Property is necessary, in order to be opposable to third parties.
- Specialty: Regarding the mortgaged property, it must be individualized at the time of the mortgage constitution. As for the credit, it must be true and determined, and the amount must be stated in the constitutive act. These characters are essential for the validity of the mortgage, since the lack of any of them makes the mortgage contract void. Regarding the object of the mortgage, this must be a property (it must always be identified), as well as all accessory things, such as an improvement in some type of installation.
Being clear about the definition and characters of the mortgage, we can define the securitization of mortgages: as the issuance of securities through a vehicle, which are placed in the Capital Market, whose support is made up of a loan portfolio with mortgage guarantee of similar characteristics. This new contract, with marked financial characteristics, has a wide range of advantages, such as:
- Increase the liquidity of credit issuers, since they allow the transformation of less liquid assets, such as receivables, into availabilities. As a consequence of the foregoing, the loanable capacity of financial institutions is enhanced, that is, they have a greater amount of funds to apply to the granting of new loans.
- Financial mismatches, produced by short-term fundraising, such as fixed-term deposits (which usually have a term of less than one year), and the outflow of funds through credits (which are the vast majority for periods longer than one year, depending on the amount).
Purpose of the securitization
Securitization involves modifying the traditional financing mechanism for a more complex one that leads to disintermediation of the process and the mobilization of low-turnover assets. This allows new resources to be injected into the system and, consequently, the procedure can be restarted. SUBJECTS .
- ORIGINANT: companies that originate the assets to be securitized, such as banks, finance companies, special purpose companies, generally maintain portfolio management (servicer).
- SERVICER: It may be the originator itself or an independent third party. It is dedicated to pursuing the collection of the flow of funds from the portfolio, and making its transfer to the vehicle for payment to investors. Provides periodic reports to the issuer and to the beneficiaries.
- VEHICLE: name given to the legal entity that acquires the assets to separate them from the risk of the originator, and issues certificates of participation in income from the pool of assets, or debt securities guaranteed therein.
- POLICYHOLDER – FUNDS PLACER: It may be an investment bank, a financial institution, or a stockbroker, who will be responsible for the placement of the securities among investors.
- INVESTORS: whether individual or institutional, it is the one who acquires and eventually trades the securities in the capital market.
- RISK RATINGS: These are specialized institutions in the analysis of credit risk, based on three perspectives: a) Asset quality: evaluation of the selection criteria, credit origination methods, analysis of the characteristics of the administrator and vehicle of securitization. ) Cash flow: risk of bad debt or default, risk of prepayment, asynchronies in terms. c) Legal security: vehicle structure, rights and obligations of the parties, legal and economic support of credit risk coverage. The risk rating is a very useful element for savers, because it provides you with a specialized and consistent study regarding the conditions of your investment
Types of mortgage
- Fixed-rate mortgages: In this modality, a fixed rate is established for the entire term of the loan (generally up to 15 years), not changing the amount of the installment. Therefore, the final maturity is also invariable. Variable Mortgages (Variable Fee). The fee is adjusted on each interest rate revision date (generally once a year), it is modified according to the reference index agreed in the contract, adding a differential, varying the amount of the fee depending on the evolution of the type of review. Term up to 30 years, keeping the final maturity unchanged.
- Mixed type mortgages: A fixed rate is defined for the first years (to be specified) and later, the interest is set in the same way as for the variable installment modality. Term up to 30 years, keeping the final maturity unchanged. Its main advantage is that the quota is fixed in the first years.
- Mortgages fixed (or constant) fee: Modality in which a fee is established that will always be the same throughout the life of the loan. Interest is set in the same way as for the variable installment modality. Because the installments are fixed and the interest rate is variable, the final term varies depending on the variations in the interest rate (it is lengthened if the interest rises and it is shortened if the interest falls)