Are mortgage mandates under Belgian law eligible as immovable property collateral? Is there a difference between the SA and IRB approach?
A mortgage mandate is a common type of immovable property security, as foreseen in Article I.9,53° of the Belgian Code of Economic Law, as replaced by the law of 22 April 2016 transposing into Belgian law the provisions of Directive 2014/17/EU of 4 February 2014 on credit agreements for consumers relating to residential immovable property Belgian law.
A mortgage mandate is an agreement by which the owner of one or more immovable assets irrevocably grants to one or more parties the power to establish, to the benefit and at first request of a creditor, a mortgage on one or more determined or determinable, currently existing or future immovable assets, for the amount agreed in the mandate and to cover his own determined or determinable, current or future obligations or those of a third party debtor.
Contrary to mortgages, mortgage mandates may be granted with respect to future assets (so that on the basis of the (broadly stipulated) mortgage mandate deed a mortgage can be established not only on the assets of which the mortgage mandate giving party was the owner when granting the mortgage mandate, but also on every other immovable asset of which he in the meantime became the owner).
The mortgage mandate is established authentically by means of notary deed (Article 76 Mortgage Law) and should be filed within 15 days as from the execution of the mortgage mandate deed (Articles 19, 1° and 32 of the Code of registration, mortgage and clerk’s office duties). This filing will ascertain the deed of a fixed date and will render the authenticity of the document (including its irrevocability) indisputable.
A mortgage mandate grants the beneficiary thereof the right to convert the mandate into a mortgage and, consequently, to proceed to the establishment of a mortgage as agreed upon in the mortgage mandate deed, whenever he deems appropriate to do so, without condition and without having to motivate such decision or even inform the debtor thereof. The thus established mortgage will take rank at the moment of its entry in the mortgage register.
Since the established mortgage only takes rank at the moment of its entry in the mortgage register, there are certain events and acts related to or committed by (i) the mortgage mandate giving party (bankruptcy, judicial reorganisation, dissolution, decease or wrongful alienation or encumbrance of the concerned assets) or (ii) the beneficiary of the mortgage (abuse of rights) that could, as the case may be, impede the establishment or useful ranking of a mortgage on the basis of a mortgage mandate and therefore negatively impact the economic efficiency of mortgage mandates. However, the risks such incidents and/or acts entail for an economically useful conversion of the mortgage mandate are in practice however:
- mitigated by contractual clauses inserted in the mortgage mandate deed (the wrongful subsequent alienation or encumbrance, the decease or dissolution of the mandate giving party),
- neutralised or in any case strongly mitigated by the (in practice quasi-standard) simultaneous establishment of a “control mortgage” (the wrongful subsequent alienation or encumbrance, the dissolution of the mandate giving party), and/or
- de minimis (the judicial reorganisation or decease of the mandate giving party, the application of the theory of abuse of rights) and/or limited in scope (bankruptcy of the mandate giving party).
As Q&A 2376 sets out, not only mortgages in the strict sense can apply as immovable property collateral. But, in order to be eligible as immovable property collateral under the SA and IRB approach without own estimates of LGD (F-IRB approach), a security needs to fulfil the conditions stipulated in Article 208, paragraphs (2) to (5) of Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876 (CRR2). Under the IRB approach with own estimates of LGD (A-IRB approach), Article 181(1)(f) CRR requires that institutions have internal requirements for legal certainty, which are generally consistent with those set out in Chapter 4, Section 3 for the SA/F-IRB approaches. Therefore, to the extent that under Belgian law mortgage mandates - which are widely diffused in the Belgian market and are also largely standardised - are enforceable and need to be registered with a notary within 15 days, they are considered to meet the essential legal certainty criteria to be considered as eligible immovable property collateral.
However, Article 229(1) CRR, which – as highlighted in paragraph (28) of the EBA Report on the Credit Risk Mitigation (CRM) framework - applies to the SA/F-IRB approaches, and paragraph 19(b)(iii) of the Guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGDs, which apply to the A-IRB approach, also require that the value of the property takes into account any prior claims on the immovable property. Since the mortgage mandate only takes rank when the conversion into a mortgage is entered into the mortgage register, there could be prior liens established before the converted mortgage mandate takes rank. Under the A-IRB approach, as required by Article 181(1)(e) CRR, institutions should take into account in their LGD estimates the potential inability to gain control of the collateral and liquidate it. (e.g. by means of an appropriate haircut based on past observations). The SA/F-IRB approach, however, neither foresees an appropriate haircut nor allows institutions to model this. It should therefore be assumed that under these approaches, the value of the property is fully reduced by a prior lien, and consequently the value of the protection offered by a mortgage mandate is reduced to zero.
It is additionally noted that the answer should not be construed to apply outside the narrow remit of the question.