The securities issue on the housing finance systeme and their guaranties

Many studies have been conducted in Turkey related to housing finance and on the 26th of September 2005, the ?Draft Legislation Paper Concerning the Housing Finance System? has been adopted as a draft law by the Cabinet. This draft was submitted to the Presidency of the National Assembly on the 1st of December 2005 titled as the ?Draft Law Related to Modification in Diverse Laws Concerning The Housing Finance System?. On the 22nd of February 2007 this text passed through the National Assembly, becoming a law and thus importing the ?long term housing finance system?, or mortgage, within our legal system. The housing finance system, which consists of on the one side providing the necessary financial assets to consumers who wish to procure housing and on the other hand enabling credit institutions with means to encash claims born from agreements as fast as possible in order to provide new funds, was not taken as a whole by the legislature, but instead was incorporated in to modifications to diverse laws via the Law No. 5582. Thus, with this law certain changes were brought to the Bankruptcy and Enforcement Code, to the Protection of Consumers Code, to the Capital Markets Code and to diverse Tax Codes. Not establishing the necessary details in its totality, the system brought gives competence to specific institutions such as the Capital Markets Board, The Banking Regulation and Supervision Agency and the Ministry of Industry and Trade the possibility to regulate on these issues. At this point we can criticize this rational both concerning the flaws in the law making techniques and also concerning the legal questions left unanswered in the system. We can also underline the fact that it is natural to witness loopholes and inconsistencies when diverse independent institutions have the competence to regulate on the same matter. It seems that the legislature has preferred to solve the many possible future problems by means of circulars. It would have been preferable for the system to be regulated as a whole in a single code, leaving competence to institutions on the base of how the law should be applied. But instead, today we can also witness certain communiqués which regulate issues not foreseen by the law No. 5582.With this law a system has been brought both providing the necessary financial assets to consumers who wish to procure housing and enabling credit institutions with means to encash claims born from agreements as fast as possible in order to provide new funds. There are specific reasons why such a system is a necessity in the context of Turkey. First of all because of diverse elements such as the high population increase, the low level of income, the rural immigration towards urban areas, the inequalities in wealth distribution, the technological deficiencies, the non provision of a true institutional framework, regional differences and irregular urbanization, procurement of housing is a increasingly big problematic. Secondly, there are major problems that institutions providing housing finance experience. The main pillar in the solution of these problems is the provision of an effective long term housing finance.When we use the expression housing finance, two sectors stick out: Those who make homes and those who purchase them. The finance of both these groups are called ?housing finance? and they are tied closely to each other. It is natural for consumers to witness the projection of distress in the market if those who produce housing cannot obtain the necessary finance and thus cause difficulties in general housing production. The same will be valid for the case in which consumers cannot obtain the necessary funds to purchase houses, which will affect producers negatively. Our work will only deal with the finance of housing purchase.The provision of long term credits by financial institutions from funds obtained from short term deposits will damage these institutions. This is especially true in cases which the credit provided has a fixed interest, in which case institutions come face to face with the risk of maturity mismatch interest rate risk. To be able to pay back these deposits the institution has to find higher interest deposits, which in itself creates a vicious circle. In the end, the institution by providing credit instead of achieving profit receives costs. Especially in countries with a high inflation rate and a non stable economy such as Turkey, financial institutions naturally hesitate to provide long term credits, and in the cases they do provide such credits, high interest rates are applied.This why that in many countries, in order to achieve long term housing finance in a way more efficient and cost effective then deposit accumulation, stock exchange export resulting from claim rights deriving from housing finance agreements are applied. The long term funds necessary for the housing finance is provided by the ?Lettre de gage? in Switzerland, by the ?Obligation Fonciere? or the ?Fonds commun de créance? in France, by the ?Pfandbrief? in Germany and by the ?mortgage backed securities? export in the United States. The safety mechanism in the system is the guarantee of the credit claims by means of mortgage. This system which can be called the ?long term housing finance system? provides long term credits on a fixed or variable rate to the consumer, the consumer places mortgage on the property to counter the claim and the finance institution either relying on this credit claim issues bonds to accumulate funds or conveys these claims to another finance institution thus deducting it from the balance sheet and thus neutralizing the risks. In this case the conveyed financial institution exports shares deriving from these claims. In both cases the accumulated funds are used as a basis for new credits. Originally taking into consideration the difference between the Anglo American Legal System and the Civil Law system, these have to be taken into consideration distinctively. But due to effects of globalization, certain continental European countries such as France have started to benefit from institutions initially based on the Anglo American system.What ever system may be brought, the major aim of all the systems brought in these countries is to provide the necessary financial assets to consumers who wish to procure housing and enable credit institutions with means to encash claims born from agreements as fast as possible in order to provide new funds. But we have to express that the regulation of consumer credits does not lie in the essence of the long term housing finance system. The main goal of the system is to establish the necessary funds and conditions for long term credit providing institutions. The possibility to export shares will create funds for housing finance as well as enabling the extension of credit terms and, under the light of economic conditions, lower interest rates. Thus, on the long term, the conditions will be for the benefit of the consumer, by providing housing credit on a long term, with low charges and low interest proportions.Article 38/A of the Capital Markets Code defines housing finance. According to the text, housing finance is providing of credits to consumers for housing purchases, with purchased housing as the guarantee, or the rental of housing to consumers via leasing. Credits provided in order finance existing credits issued under these conditions also enter in the framework of housing finance. Beyond claims based on housing credits, the issue of housing via leasing is also within the scope of this law. In addition, there exists no condition of share export for claims deriving from these credits or leasing agreements in order for it to be taken into consideration within the scope of this law. Agreements concerning housing credits with mortgage provisions signed before the entry into force of the law are also, under this law, within the housing finance system. The only exception to this is if a consumer objects to the application of this law to himself (Prov. Article 11, Law No. 5582) within three months after the text has entered into force (until 6 June 2007). If the consumer does not object then the agreement will be taken into the scope of this law and in case of share export the claims will constitute the guarantee.The first part of our work consists of the analysis of shares deriving from mortgages and mortgage guaranteed shares issued from claims deriving from housing credits. During this analysis the legal nature of these commercial papers, the exporters of these papers and the governors of the assets within the funds that constitute the guarantee for these papers have been explained. Within this analysis, the difference of these papers from mutual funds, debenture certificates, annuity charge bonds and bonded debts regulated by article 930 et seq. of the Civil Code has been taken into consideration. In the second part of our work the guarantees provided the holders of these papers and the legal nature of these guarantees has been underlined.We have tried to conclude our work with the differentiation of the adopted system within Turkish law from its inspiration within the Anglo American legal system. In fact, it was observed that the housing finance fund which lacks legal personality has been able to complete transactions that normally only a legal personality has to capacity to complete. This legal paradox has tried to be explained by the ?fiducie? institution. Yet, it was not possible to articulate the legal relationships between the actors in the systems while this regulation was formed. The legal relationship between the fund board, the fund founder and the investor does not exist within the law. This issue has also been ignored in later ciculars. We believe that this system will become clearer with work conducted by the doctrine and by the relevant jurisprudence. This is a necessary step. Most of the legal provisions to be interpreted are stipulated in single articles, with each article occupies more then one page. It would have been preferable if the legislature had organized these provisions in a much clearer way, with each article under numerous titles and subtitles.Another issue within the system that needs attention is that although in some laws the housing credit guarantee is only foreseen as mortgage, the modification brought to the Bankruptcy and Execution Code also foresees mortgage. The different provisions in diverse legal texts cause inconsistencies. We can conclude that, providing a regulation which encourages mortgage, which is more cost effective and advantageous in contrast to mortgage, instead of pushing mortgage bonds out of the system due to lacking application is preferable.Besides, when analyzing regulations concerning mortgage guaranteed shares and shares deriving from mortgage, the legal character of the guarantee that these papers bring to the holders could not be understood. The legal nature of the guarantees provided by these papers has not been defined. It has been only expressed that they have been exported with the fund and the guarantee pool as their counterparts. While in truth the main character of the system itself is the guarantee provided to the holder of these papers. When the application in other countries is taken into consideration with the provisions of the Civil Code and specific regulations concerning these papers, it can be seen that these papers establish a claimant right directly and without the necessity of any other transaction, over the assets within the security pool and funds. Thus, even though there is no clear provision, we have come to the conclusion that these papers form a type of bonded debt foreseen by the Civil Code. The mortgage which is the guarantee of the assets in the security pool or the fond guaranteeing these papers constitutes also and indirect guarantee for the investors. In case the claims within the security pool or the fund cannot be refunded, these claims will be satisfied by the liquidation of the mortgage. In the case that they are not refunded, the claims of the investors will be satisfied by the liquidation of the security pool. In cases in which investors cannot be satisfied by the liquidation of mortgage guaranteed shares, they will be able to apply to the other assets of the share exporters. But in cases of shares deriving from mortgage, the investors accept this risk, and as long as the fund founder does not provide such a guarantee, they possess no claim to it. Issues relating to the liquidation of pledges have not been regulated within the Capital Markets Code. Only measures that the Capital Markets Board will take in such cases have been stipulated.How this newly introduced system will operate and how the problems observed will be addressed by the legislature shall be, we believe, clarified in time.