Views on Real Estate Mortgage for Microlending

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:

1. Location of the property;
2. Valuation of the property (zonal & market value)
3. Physical condition of the property;
4. Accessibility of the property;
5. Title of the property and related annotations and encumbrances, if any; and,
6. Assessment on the viability for resale of the property;

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.

Our Related Services:

In collaboration with our Legal Team, we could assist you in a number of ways in relation to the Real Estate Mortgage as follows:

• Real Estate Mortgage contract preparation,
• Securing annotation with the Registry of Deeds,
• Foreclosure proceedings – judicial or out-of-court

Please contact us at info@taxacctgcenter.org.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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