Mortgage Financed Construction

By: Dr. Sam Vaknin


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THE BUYERS

  1. The Buyers of residential property form an Association.
  1. The Buyers’ Association signs a contract with a construction company chosen by open and public tender.
  1. The contract with the construction company is for the construction of residential property to be owned by the Buyers.
  1. The Buyers secure financing from the Bank (see below).
  1. The Buyers then pay the construction company 25% of the final value of the property to be constructed in advance (=Buyer’s Equity). This money is the Buyers’ own funds, out of pocket – NOT received from the Banks.
  1. The Buyers Association together with the Banks appoints supervisors to oversee the work done by the construction company: its quality and adherence to schedule.

THE BANKS

  1. The government provides a last resort guarantee to the commercial banks. This guarantee can be used ONLY AFTER the banks have exhausted all other legal means of materializing a collateral or seizing the assets of a delinquent debtor in default.
  1. Against this guarantee, the commercial banks issue 10 years mortgages (=lend money with a repayment period of 120 months) to the private Buyers of residential property.
  1. The money lent to the Buyers (=the mortgages) REMAINS in the bank. It is NOT be given to the Buyers.
  1. The mortgage loan covers a maximum of 75% of the final value of the property to be constructed according to appraisals by experts.
  1. A lien in favour of the bank is placed on the land and property on it – to be built using the Bank’s money and the Buyers’ equity. Each Buyer pledges only HIS part of the property (for instance, ONLY the apartment being constructed for HIM). This lien is an inseparable part of the mortgage (loan) contract each and every buyer signs. It is registered in the Registrar of Mortgages and the Courts.

THE CONSTRUCTION COMPANY

  1. The construction companies use the advance of 25% to start the construction of the residential property – to buy the land, lay the foundations and start the skeleton. All the property belongs to the BUYERS and is registered solely to their names. The Banks have a lien of the property, as per above.
  1. When the advance-money is finished, the construction company notifies the BUYERS.
  1. The Buyers then approach the Bank for additional money to be taken from the mortgage loans deposited at the Bank (=the money that the Bank lent the Buyers).
  1. The Bank verifies that the construction is progressing according to schedule and according to quality standards set in the construction contract.
  1. If everything is according to contract, the Bank releases the next tranche (lot) of financing to the Buyers, who then forward it to the construction firm.
  1. The funds that the Buyers borrowed from the Banks are released in a few tranches according to the progress of the construction work. When the construction is finished – the funds should be completely exhausted (=used).

WHEN THE CONSTRUCTION IS FINISHED

  1. The construction company will have received 100% of the price agreed in the contract.
  1. The Buyers can move into the apartments.
  1. The Buyers go on repaying the mortgage loans to the Banks.
  1. As long as the mortgage loan is not fully paid – the lien on the property in favour of the Bank remains. It is lifted (=cancelled) once the mortgage loan and the interest and charges thereof has been fully repaid by the Buyers.

WHILE THE MORTGAGE LOAN IS BEING REPAID…

  1. The Buyers can rent the apartment.
  1. The Buyers can live in the apartment.
  1. The Buyers can sell the apartment only with the agreement of the Bank – or if they pre-pay the remaining balance of the mortgage loan to the Bank.
  1. The Banks can securitize the mortgage pool and sell units or mortgage backed bonds to the public. This means that the Banks can sell to the public passthrough certificates - securities backed by an underlying pool of mortgages of various maturities and interest rates. This way the Banks can replenish their capital stock and re-enter the mortgage market.

 

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