MORTGA

GE FIN

ANCING

LAW

TANZAN

IA: LE

GAL RE

FORMS

AND

FINANC

ING A

ND FIS

CAL IS

SUES-

TLS- C

LE-15

MARCH

2013,

KILIMA

NJARO

CRANE

HOTEL,

MOSHI

BY DR.

EVE H

AWA SI

NARE,

REXATT

ORNEYS

1

WHAT IS MORTGAGE FINANCING?Mortgage financing is the lending by a bank to an individual for purchasing, rehabilitating or constructing a housing unit. Mortgage loans are long term loans . Main features:20-30 year term;In Tanzania Mortgage Regulations impose a maximum term of 20 years;

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CONTINUED In practice banks offer a maximum term

of 15 years although some are considering increasing the term to 20-25

Periodic monthly installment payments either fixed or interest rates on reducing balance;

a reducing balance interest means that the interest amount payable per installment reduces with the reduction of the loan while a fixed installment means installment amounts are the same for the whole period

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MORTGAGE LOAN A mortgage loan is a loan secured by

real property . The loan is evidenced by a loan agreement and the security over the real property is evidenced by a mortgage deed which creates a charge in favor of the lender over the real property.The word “mortgage “ is a law French term that means “death contract”

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CONTINUED meaning that the pledge made through the

mortgage ends (dies) when either the obligation under the loan agreement is fulfilled or the property is foreclosed.

“ Mortgage” is defined by the Mortgage Finance Regulations (Regulation 2008) as “ a loan granted to a borrower for the purposes of acquiring, improving or constructing a residential property and is secured by the acquired, improved or constructed residential property”.

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CONTINUED A few banks provide mortgage products

to a limited number of people mainly due to lack of long term funding. Banks depend on deposits which is a short term source of funding, to lend while mortgage products require long term funding. The result is that Tanzania has the lowest mortgage debt to GDP at.0.30%.

Funding mismatch limited the ability of banks to be active in mortgage financing.

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CONTINUED There were other constraints: Unfriendly land laws now largely

reformed Absence of critical mass of real

estate developers High cost of collateral enforcement a court system that tended to favor

borrowers High level of borrower moral hazard.

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CONTINUED To address the short term financing problem,

the Government through the Bank of Tanzania help create a long term mortgage refinancing facility called “Tanzania Mortgage Refinance Company Limited (TMRC) “ established on 29 January 2010 to provide long term liquidity to participating banks in order for them to offer long term mortgage products to individuals.

How successful it will be depends on how TMRC will be managed and how the refinancing will be operated

long term investors can invest in the mortgage finance market when TRMC begins to issue corporate bonds in the capital market

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CONTINUED Conditions for refinancing will help foster

standardized mortgage practice in Tanzania; It is an intermediate step towards a full secondary

mortgage market; Participating banks are also shareholders in TMRC.

There are currently 11 banks members of TMRC. A master loan agreement has been developed which will

be used for lending by TMRC to the mortgage lenders. The agreement require that all mortgage deeds between mortgage lenders and their borrowers using the facility funds must provide for transferability of the mortgage s and disclosure of information by the lenders to the facility and transferees in the mortgage deeds.

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CONTINUED These banks are: CRDB Bank Plc; Azania Bank Limited; Exim Bank Tanzania Limited; TIB Bank Limited; NMB Bank Plc; Bank ABC Limited; DCB Bank Limited; NIC Bank Limited, Peoples Bank of Zanzibar, NBC Bank limited and Bank of Africa.

These banks contribute to the equity of TMRC; and

The World Bank has put into TMRC over USD30million.

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LEGAL REFORMS The first reform is the legal framework for

regulating mortgage financing through the Banking and Financial Institutions Act No. 5 of 2006 . The Act expanded the permitted activities that banks and financial institutions may conduct to include mortgage financing.

Section 24 (1) (o) provides that a licensed bank or financial institution may engage in mortgage financing either directly or through a separately incorporated subsidiary. This limits the type of companies or persons who may be involved in mortgage financing to licensed banks and financial institutions.

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CONTINUED A subsidiary established by a licensed bank or financial institution must, in terms of section 14 of the Act, use the acronym H.F.C after their commercial names before the term “ Limited”Laws applicable to mortgage financing and related laws most of which have been reformed to facilitate mortgage financing are:

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CONTINUED Bank of Tanzania Act, No 5 of 2006; Banking and Financial Institutions

Act No.5 of 2006; Land Act No. 4 of 1999; Land (Amendment) Act, 2004; Land Regulations published under

GN No. 43 of 12th May 2006;

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CONTINUED Mortgage Financing (Special

Provisions) Act, No. 17 of 2008; Unit Titles Act, No. 16 of

2008; Land Registration Act, CAP 334

R.E 2002; Law of Contract Act R.E 2002;

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CONTINUED the Land ( Mortgages )

Regulations,2005; the Banking and Financial

Institutions ( Mortgage Finance) Regulations, 2011;

the Banking and Financial Institutions( Tanzania Mortgage Refinance Company) Regulations, 2011;

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CONTINUED the Bank of Tanzania ( Credit Reference

Bureau) Regulations, 2010; the Bank of Tanzania (Credit Reference

Data Bank) Regulations, 2010; Civil Procedure Code CAP 33 R.E 2002; Courts ( Land Disputes Settlements) Act

No. 2 of 2002;

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CONTINUED Land Acquisition Act CAP 118 R.E

2002 The Anti-Money Laundering Act 2006; The Anti- Money laundering

( Amendment) Act, 2012; Anti- Money Laundering Regulations

2007; Income Tax Act No. 11 of 2004;

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CONTINUED Value Added Tax Act CAP 148 R.E

2002; Evidence Act CAP 6 R.E 2002 (in

relation to the admission of electronic evidence);

Written Laws ( miscellaneous Amendments) Act No 17 of2007 ( Part X);

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KEY REFORM OF LAND AND OTHER LAWS

The Mortgage Financing (Special Provisions) Act, 2008 and the Unit Titles Act 2008, greatly improved the legal environment surrounding mortgage lending (consolidating on the amendments of 2004). How? As follows:

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CONTINUED permitted transfer of mortgages provided the transfer had the written consent of the Mortgagee, the underlying loan was paid and that the consent was furnished to the Registrar of Titles,

reduced the notice period for a lender announcing intention to sell the mortgaged property from 90days to 60 days;

empowered a mortgagee to realize the security on mortgaged land by way of sale;

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CONTINUED Amended section 118 of the Land Act to permit a mortgagee to make provisions in advance or to give credit to a borrower on a current or continuing account provided that a maximum aggregate amount is therein provided which may be advanced and outstanding at any point in time;

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CONTINUED Distinguished the disbursements within a loan transaction from further advance and that the disbursements would not be taken as further disbursements in respect of the ranking of advances for the affected mortgagor (this is something that lawyers and banks understand the difference, so it is hard to understand why the distinction in the law);

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CONTINUED Shortened the notice period and procedures that were in the old sections 130 and permitted the exercise of power of sale by the Mortgagee in section 130 with respect to a dwelling house or any land in actual use for agricultural purposes without having to resort to the courts ;

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CONTINUEDhowever, where the sale is otherwise than through a public auction then the mortgagee has to give mortgagor 10 days’ notice as well as to any third party holding a registered interest in the property (other third party holding a registered interest in the property could be another secured creditor but it is hard to think of any other person than a fellow creditor);

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CONTINUED Gave statutory effect to a buyer of

a mortgaged property purchased through an exercise of the power of sale of a mortgagee to the right to immediate possession of the mortgaged property upon accepting the bid in a public auction or contract of sale of that mortgaged property.

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CONTINUED Provided more flexible process for summary proceedings under the Civil Procedure, 1966 Act and the Land Act, 1999 by limiting the power of the court to stay or suspend the sale of a mortgaged property and by proscribing the grounds that a borrower may use to be permitted to defend himself in summary proceedings. The court may stay a sale only:

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CONTINUEDa) if the court has a high degree of certainty that the mortgagor is likely to be able to pay the sums due within a reasonable period and that there is sufficient value in the mortgaged property such that despite the delay, in the event of further mortgagor’s inability to pay, the mortgagee would be able to recapture the amounts of its entire claim from the sale of the mortgaged property; and

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CONTINUEDb) by limiting the exercise of that power of the court with respect to the same debt and same mortgagor to only once;

by requiring that any action except for an action on customary mortgage, brought in a forum other than the High Court to contest, stay, suspend, terminate or seek relief from, demand for payment of a debt secured by a mortgage of a real property

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CONTINUED

or an action for possession of mortgaged property or exercise of power of sale under the Land Act to have to be transferred to the Land Division of the High Court. However, Land Division has no exclusive jurisdiction of these matters anymore under the Courts (Land Disputes Settlements) Act No. 2 of 2002 but the transfer of matters to the High Court remains valid.

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CONTINUED By requiring that the mortgagor

be responsible for providing the information about his spouse and obtain spouse consent to mortgage matrimonial property. Previously the main responsibility was placed on the Mortgagee who would not have the information needed.

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CONTINUED Amendments to the Land Act included deletion of sections 26, 27, and 28 of the Land Act which negatively affected offers of right of occupancy issued prior to 1st December 2008. This anomaly has been rectified by a 2009 amendment that added a section 30A that provided for offers of right of occupancy issued before the above date to continue being valid as if the repealed sections had not been repealed.

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CONTINUED In 2010, the Courts (Land Disputes Settlements) Act No. 2 of 2002 was amended by the Written Laws (Miscellaneous Amendments ) Act No. 2 of 2010 by which the definition of the term “ High Court (Land Division)” appearing in section 2 was amended to provide for “ High Court” only without the “ Land Division” in every section where the term appear.

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CONTINUED Now that the provisions of the Courts (Land Disputes Settlements) Act No. 2 of 2002 have been amended to remove the “Land Division” it is better for amendments to be effected in the MPSA and in section 167 of the Land Act and section 62 of the Village Act, 1999 to conform to the amendments to the Courts (Land Disputes Settlements) Act No. 2 of 2002.

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UNIT TITLE ACT 2008 the reforms introduced for the first time, sectional property ownership including the right of unit owner to mortgage his unit in accordance with the provisions of the Land Act.;

A unit is transferable making them attractive to lenders;

Initially the units may be owned by the association of unit-holders but individual unit owners may apply for registration of their units.

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MORTGAGE FINANCE REGULATIONS The Regulations, issued in 2011, give guidance

to mortgage financing in Tanzania and goes a long way to avoiding the financial chaos of several years ago in the USA and Europe;

Limited long term mortgage financing to 20 years

Provides prudential lending guidelines for mortgage lenders

Provides safeguards against money laundering, corrupt activities and stetting standards for mortgage granting and risk management

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CONTINUED set the capital adequacy ratios of a

minimum core capital and total equivalent to 10% and 12% of its risk-weighted assets and off balance exposures.;

The debt to equity ratio at all times must not exceed 15:1;

Loan to value ration must not exceed 80%;

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CONTINUED The aggregate debt servicing to income

ratio per borrower must not exceed 40%; Maximum tenure of any mortgage loan

must not exceed 20 years ( still 20 years is not long enough given average salary levels);

The value of the mortgage property has to be Forced Sale Value as determined by a registered valuer;

Single borrower limit to 25% of bank’s core capital

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CONTINUEDprohibits any Housing Company from :attracting, accepting any deposit or any account that is similar to a current account that can be debited by the customer by writing a cheque or requesting a payment order;attracting or accepting any savings deposits or time or fixed deposit with a maturity of less than 24 months; or grant any person any type of credit or loan other than mortgage finance.

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CREDIT REFERENCE BUREAU Other reforms included the legal framework

for banks to share information on customers and their affairs. Section 48 of the Banking and Financial Institutions Act, No. 5 of 2006 permits a licensed credit reference bureau to provide any person upon a legitimate business request, a credit report in which case a copy may be given to the customer concerned in accordance with regulations issued by the Bank of Tanzania.

The Act also permits banking or financial institutions to release information to credit reference bureau, in accordance with regulations made by the Bank of Tanzania

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CONTINUED

In 2010 the Bank of Tanzania issued the Credit Reference Bureau Regulations and the Credit Reference Databank Regulations to promote development of sound credit business. The data bank regulations provide for use of the data to determine the total indebtedness of clients of banks,

Determine payment behavior of clients of banks

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CONTINUED they help the Bank of Tanzania to

monitor credit activities of the reporting institutions,

Both regulations help solve the long standing problem of borrower lender shopping but also provides for a regulated legal framework for disclosure of information relating to customers or their affairs.

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ANTI- MONEY LAUNDERING. Anti- money laundering is widely defined as a

process by which proceeds of crime are concealed or disguised so that they may be made to appear to be of legitimate origin.

It is a real problem facing us especially from proceeds of crimes of pirates, drug trafficking, corruption . If money laundering is left unchecked, it will undermine domestic capital formation, depress growth diverting capital away from development, undermine the credibility of the banking system and most seriously, undermine the rule of law.

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CONTINUED opportunities for investing in un-surveyed plots

give room to money laundering into real estate un-detected especially that there are no standards for real estate agents,

Professionals such as lawyers and valuers have a role to play to help fight money-laundering without breaching client confidentiality. Guidelines on what should be disclosed and what not and suitable amendments of the anti- money laundering as currently formulated are urgently needed.

There is a need for law society to work with authorities in order to prepare guidelines and amendments to enable lawyers help fight money laundering without breaching client confidentiality.

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LONG TERM DEVELOPMENT FINANCE a long term development policy has been

passed and that the Bank of Tanzania has issued a Development Finance Regulations.

this will be essential for the development and regulation of long term finance because economic development depends on long term development finance and will play a key role in facilitating real estate development for growth of housing financing.

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Lack of a critical mass of internationally competitive real estate developers will hamper the growth of mortgage financing unless favorable conditions are created to encourage large scale investment into real estate and to make transfer of mortgages legally possible and the costs lower so as not to increase the end price of housing units. Tax consideration will be crucial. Pending obstacles are:VAT on sale of properties unduly increase the price of houses. Comparing that EPZ and Special Zones get more than 10 years tax free including local taxes, it is a reasonable proposition for VAT on first time purchase of properties to be dropped.

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OBSTACLES AND SOLUTIONS

CONTINUED Provide for legal framework for mortgage transfers.

Rexattorneys suggested the use of deed of novation because it allows for the transfer of the underlying loan and the charge prior to the releases of the outgoing mortgagee. The current transfer provisions in the Land Act do not provide for transfer of mortgages;

Remove 100% preferential payments to tax authorities in preference to the secured creditors in times of receivership. In practice a secured creditor is not secured to the extent there are VAT and other taxes imposed on realizations;

Permit real estate developers to own right of occupancy over the properties so that they can transfer them to individual home owners. Currently a real estate developer has to obtain a derived title from Tanzania Investment center.

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CONTINUED Better still, remove the restrictions to ownership of property to foreigners. Restrictions undermine the potential for growth of the housing market as a healthy market has to grow in all sizes the upmarket, middle and lower markets

Foreigners will usually participate in the up- market. Not that permitting will see flooding of foreigners into Tanzania. Why? Tourism environment not yet attractive to high net worth market. Planning and land use unattractive to high net worth market

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CONTINUED The growth of the housing market is undermined by the

hypocrisy of derivative title because it serves no other purpose than for revenue collection. Land is owned by the President for Tanzanians. No body else owns land.

Amend the definition of “ public interest“ in the Land Acquisition Act, R.E 2002. Currently the definition completely erodes the right to property. Property can be acquired to be given to another person and no provision for recognition of a bank’s interest in such property. This is the greatest danger to mortgage financing in Tanzania.

Amend the Evidence Act to provide for electronic evidence admissibility which is necessary for secondary mortgage market.

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MORTGAGE TRANSFERABILITY IN THE DOCUMENTS

Start with the loan agreement and make sure that there is provision for:prior consent of the borrower to the transfer of the loan to a third party;prior consent of the borrower to the transfer of the mortgage to a third party;Prior consent to the mortgagee to disclose information about the borrower and his affairs to the third party;Prior consent of the borrower to the mortgagee furnishing TMRC (if the mortgagee is a participating bank in TMRC) documents to TRMC if lender sourced money from TMRC;Prior consent of the borrower to the mortgagee furnishing TMRC (if the mortgagee is a participating bank in TMRC) information about the borrower and the borrowers affairs including the performance of the mortgage loan;

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PAY SPECIAL ATTENTION TO THE SECURITY CLAUSEThe basic security is the mortgage property but the content of the security clause will depend on what the purpose of the loan is:If the loan is to acquire a house or a unit already in place or to renovate a house, then the security should simply be the property if its value is adequate subject to prudential lending;If the value of the property is considered not sufficient, then additional security should be required;Additional security could be a property owned by the same borrower or by a third party ;

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CONTINUED If the loan is to construct a house, then there will be no property to

mortgage initially. It will be necessary to take another security with provision that when the house is constructed it will be mortgaged to secure the loan. At no point should the loan stand unsecured.

other security pending completion of a house could be another property from borrower or third party or a combination of property and any other acceptable security including guarantee from third party;

Make sure that the disbursement of the loan is conditional to execution and registration of the mortgage in favour of the mortgagee;

Ensure that there is an obligation on the borrower to insure the house and for the mortgagee to be endorsed in the policy as loss payee;

Be very particular when listing events of default and make sure there is a generally enabling provision that allows the mortgagee to act if in his opinion the security is in jeopardy; and

Cross reference of events of default in the loan agreement so that you have similarity in description of events of default. Mortgage is ancillary to the loan agreement.

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CONCLUSIONThe mortgage financing sector is set to grow especially after the major finds of oil and gas and other major minerals, demand in infrastructure investment, and the growth of other sectors of the economy but how fast will depend on whether Tanzania takes every bit of the environment touching on mortgage finance and

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CONTINUEDremoves any remaining obstacles to mortgage financing.I have no doubt that in the coming years Tanzania will find it necessary to embrace commercial but prudential promotion of the housing market to play its role in economic development. After all there is no better way of ending poverty than economic growth at the right rates for the right period of sustained time.

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THANK YOUEVE HAWA SINARE

REXATTORNEYS

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