Strong property rights are crucial to formal housing finance, and most housing lending today relies on clearly defined and documented rights to the residential property. This is not only a preference—it is a rule of most financial regulators. Alternative approaches to securing housing loans that do not rely on strong real property rights—for example, pledges of personal property, personal guarantees and lease-purchase or installment purchase schemes—have often been used, but these all have issues of their own and are widely considered to be second-best when compared to traditional mortgage lending.
Other minor approaches to housing lending used today, such as housing microfinance loans, are in the nature of personal loans; they do not rely on real estate collateral and therefore do not require the same high-quality property rights as mortgage lending.
Frequent Issues with Property Rights
Ownership rights to residential property appear to be widely respected throughout the world today. Problems typically arise not from the absence of rights or challenges to rights, but from ambiguities in legal rights, the inability to properly document rights to the satisfaction of traditional lenders, or legal restrictions on how rights may be used. Two examples encountered today are the problems of owners of housing located on state-owned land and the absence of clearly defined condominium property rights.
Inability to obtain appropriate rights and documentation to housing located on state-owned land is surprisingly widespread. This difficulty may arise even though the occupation and use of the land is perfectly legal, but through bureaucratic indifference or conflicts the rights themselves are poorly documented or not documented at all. Similarly, in some countries in which all land is considered to be owned by the state and subject only to rights of use and occupancy, placing a mortgage on residential property may require complex administrative approvals that can be difficult to obtain.
Another example of poorly specified property rights is the lack of modern condominium regimes for multifamily housing. Failing to adequately define the condominium property has led to difficulties in creating mortgages; failure to define and provide realistic mechanisms for enforcement of the obligations of co-owners can affect property maintenance and values and thereby increase the risk for lenders. See “Type of Tenure” in Europe.
Other familiar property rights issues affecting housing finance include the extended family rights of post-socialist economies (e.g. Russia), which required that all family members, even minors, consent to a mortgage, with the state representing the interests of minors. Similarly, the laws of several countries that permit polygamy (e.g. Tanzania) required that all wives consent to a mortgage, and it was not unusual for previously unidentified wives to appear to thwart enforcement of mortgage rights. These particular issues have been mostly resolved by now, but new ones arise from time to time. Many of these may be mere curiosities in the overall scheme of things, but other issues can have real impact on the ability to lend. On this page we will try to cover how the definition and enforcement of property rights may affect housing lending, tracking developments with longstanding and unresolved problems and new issues that arise from time to time.
Registration of Rights
A topic closely related to property rights—in fact, a significant subtopic—is the development of systems for registering and protecting rights. Long established in developed countries, creation of these systems is a major objective and focus of investment in emerging and transitional countries today. These systems contribute to definition of real property rights (e.g. “an unregistered property right is not a legal right”); just as important, they create the means to protect rights through publicity and legal acknowledgment.
By publicizing the existence of the right to the property and giving it some level of legal recognition and protection, systems for registering rights to real property provide housing lenders with the tools they need to avoid risk. Among other things, a good registration system allows lenders to determine with some level of confidence:
·The ownership right to the property, without which there is no right to pledge.
·Existence of any prior and potentially conflicting rights to the property that may be superior to the right of the mortgage. The extent of this ability may depend on the requirements of the system—which interests are registered and which are not—but where good systems exist, most significant interests in property must be registered to prevail over other rights.
·The priority of the lender’s interest over subsequently created legal interests in the property. With few exceptions, the rule of “first in time, first in right” is almost universal among registration systems today.
In many emerging countries absence of a good or even adequate registration system is the main impediment to increasing the volume of housing lending, causing a shortage of registered housing “product” on which loans can be safely made. Registration systems can also impose significant costs on housing lending, including attorney, notary and registration fees on both the property and the mortgage. These costs can discourage borrowing and/or reduce loan proceeds available for housing needs. Similarly, registration requirements and costs have in some cases been impediments to development of mortgage securities markets, leading to calls for separate and centralized mortgage registries in some places to serve housing markets.
There are many variations in registration systems today as emerging and transitional countries choose from a “menu” of options and appear only occasionally to adopt without modification one of the long-established registration models such as title registration or deeds recordation. Hybrids abound, in many cases with good reasons related to fiscal, political and cultural differences.
In these pages we hope to follow some of the discussion of trends and best practice in current developments of property rights registration systems. Topics could include, for example: ·The long and still ongoing discussion of the relative benefits of state title registration systems and simple deeds recordation systems supported by private-sector title insurance;
·The choice between administrative and judicial systems of registration, and its implications; ·Registration fees and their effects on lending and property market informality; public good or government profit center?
·Indemnification systems and paying for errors;
·What do lenders really need? Registration under difficult conditions—what can and should be registered and on what terms?
·Good recent models and case studies.
As usual, these pages would benefit immensely from advice, materials and other contributions from readers in all countries, and all are encouraged to send comments and materials of interest on developments in their registration systems that can be posted for the benefit of all users of this site.
|June 14, 2016||Closing the Gap in Affordable Housing in the Philippines: Policy Paper for the National Summit On Housing and Urban Developme||World Bank|
|2015||What Will China Do When Land Use Rights Begin to Expire? The Evolution toward Rule of Law in Real Estate||Gregory M. Stein|
|2014||Surveillance of Mortgage Credit The Approach of the Banking Regulator||Eric Parrado|
|2014||On security of collateral in Danish mortgage finance: a formula of property rights,incentives and market mechanisms||Karin Haldrup|
|2013||Land Information as A Key Issue of A Sustainable Development of Housing||Antonio J. Jiménez Clar|
|2012||Tax Composition and Growth: A Broad Cross- Country Perspective||Santiago Acosta-Ormaechea and Jiae Yoo|
|2011||International Property Rights Index - Report 2011||Kyle A. Jackson, Hernando de Soto|
|2011||Housing and Real Estate Finance in the Middle East And North Africa Countries||Oliver Hassler|
|2011||Financial Deepening, Property Rights and Poverty: Evidence from Sub-Saharan Africa||Raju Jan Singh|
|2010||Guyana Property Rights Study||Elena Panaritis, Angelo Kostopoulos|
|2009||HOUSING SUPPLY IN ALGERIA: AFFORDABILITY MATTERS RATHER THAN AVAILABILITY||Tahar Bellal|
|2009||Guidance and Good Practice for the Application of Fees and Charges for Real Property Cadastre and Registration Services||UNECE|
|2007||Housing finance in Estonia: a short note on recent developments||Mari Tamm|
|2005||Land Administration in the UNECE Region: Development trends and main principles||United Nations|
|2005||Social and Economic Benefits of Good Land Administration (Second Edition)||UNECE Working Party on Land Administration by Her Majesty's Land Registry London|
|2004||Review and Analysis of (seven selected) Real Property Registration and Cadastre Systems in Europe||Center of Legal Competence for the World Bank|
|2001||Workshop on Security Mechanisms in the Creation of Real Property Markets: Protecting Rights||United Nations|
|2000||Study on Key Aspects of Land Registration and Cadastral Legislation Part 2 of 2||UNECE Working Party on Land Administration by Her Majesty's Land Registry London|
|2000||Study on Key Aspects of Land Registration and Cadastral Legislation Part 1 of 2||UNECE Working Party on Land Administration by Her Majesty's Land Registry London|
|Fee Simple Obsolete||Lee Anne Fennell|
Stephen B. Butler is a Principal Research Scientist in the International Projects Department of NORC at the University of Chicago.He has advised international donor agencies and ministries, central banks and regulatory commissions in 30 transitional and developing countries in 5 regions, focusing on land reform and administration, housing and housing finance, and mortgage market development.