A friend in the micro-lending industry once asked –
“Is Real Estate Mortgage worth to look into for microlending?“
Let me share with you our view on the circumstances and benefits of Real Estate Mortgage (REM).
REM is an accessory contract in the form of a collateral security for the availment of the credit facility. As compared to a no collateral loan, REM may prove to be better as the lender would have some property to pursue upon default as compared to an empty hope in a non collateral situation.
To be effective, a REM has to be in a legal document to be executed by the parties. Based on such document, it shall be annotated in the title of the real property (TCT or CCT) with the Registry of Deeds. The purpose of this is for the binding effect of the REM to third parties. Upon default, foreclosure proceedings will follow to take the property – either out-of-court (extra-judicial), or judicial. Foreclosure sale may be had and should the proceeds by insufficient to pay the outstanding loan obligation, the lender may pursue the borrower for the deficiency. Upon successful foreclosure, the buyer or lender will conditionally take the property, subject to the right of redemption by the borrower within one year. Should the borrower fail to redeem the property, the lender shall now proceed to consolidate title and could now freely dispose of the property.
Based on the above, related costs on the process and the viability for resale will surface as the controllable issues. Costs incurred under this may be provided in the REM or Loan Agreement to be chargeable to the borrower, including the documentary stamp tax (DST). Other issues like the time for the redemption is beyond reach. On the other hand, the viability for disposal of the property would be a matter of credit evaluation. Evaluation on the property normally involves the following:
With the above complexity and added works, we suggest to adopt the REM for material loan amounts only. It could just simply single out properties with potential future use, say your real estate operations such as development, construction, leasing, and resale.
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