Having a look at the popular definitions dealing with the topic real-estate credit, one is confronted with a wide variety of different explanations. One obstacle while searching for a suitable definition of the German termRealkredit(real-estate credit) is the fact that this term is in Germany rather known under the nameHypothekendarlehen(mortgage loan). Though one also finds the word ‘Realkredit’ in the relevant literature as well as in numerous other sources of definitions, it is not known in the vernacular.
In Denmark the situation is completely different. Here, the termrealkreditbelongs to the mortgaging as the house to the property. Moreover, it is also known in the general language use including compound nouns such asrealkreditlån(real-estate loan) orrealkreditlov(real-estate credit act).
Whether one is more cotton on to the term ‘real-estate credit’ or ‘mortgage loan’ or even ‘hypothecary credit’ (in German:Hypothekarkredit)is entirely up to the reader, although we later see that there is a difference between these terms. For the sake of a better comprehension, the words ‘real-estate credit’, ‘credit on real estate’ and sometimes also ‘real-estate loan’ will be used in the further discussion with a few exceptions regarding extracts and quotations. As far as the explicit definition of the real-state credit is concerned, authors in both countries agree upon a more or less identical explanation. In Germany’s major reference book, the Brockhaus-encyclopaedia (1996, vol. 18, p. 109), one speaks about a“credit that is granted for the security of tangible assets (real estate)”.A slightly extended definition can be found on the internet platform of the Duden. Here, one describes the term as a“loan at which the debtor guarantees the repayment with real estate or other assets”.
Content
Foreword
Table of Abbreviations
Table of Figures
1. Placement of the Credit on Real Estate
1.1. General Disambiguation
1.2. The Term ‘Realkredit’ in Germany
1.3. The Term ‘Realkredit’ in Denmark
2. The Granting of Real-estate Loans
2.1. Real-estate Credit Institutions in Germany
2.1.1. Realkreditinstitut or Hypothekenbank ?
2.1.2. The Importance of Real-estate Credit Institutions as Specialised Commercial Banks
2.1.3. Private Mortgage Banks
2.1.4. The Legal Restrictions of Mortgage Banks
2.1.5. The 21 Members of the Association of German Mortgage Bank
2.1.6. Historical Development
2.1.7. The German Pfandbrief
2.1.8. The German Mortgage Bank Act (HBG)
2.1.9. Pfandbrief-Rating of the German Mortgage Banks
2.2. Real-estate Credit Institutions in Denmark
2.2.1. The Real-estate Credit of the Danish ‘realkreditinstitutter’
2.2.2. The 8 Danish Mortgage Banks
2.2.3. Historical Development
2.2.4. The Danish Mortgage Credit Act
2.2.5. The Rating of Danish Mortgage Bonds
3. Importance of the German and Danish Credit on Real Estate and its Advantages over other Forms of Financing
3.1. Alternatives in the Field of Construction Financing in Germany
3.1.1. The Mortgage Loan as the Non plus ultra in Construction Financing?
3.1.2. Loans from Building Societies
3.1.3. Endowment Mortgage
3.1.4. Two-way Financing via Investment Funds
3.1.5. Summary
3.2. Alternatives in the Field of Construction Financing in Denmark
3.2.1. The Unrivalled Mortgage Credit?
3.2.2. Loans from Danish Saving Banks
3.2.3. Additional Loaners
3.3. Summary of the Importance of the German and Danish Real-estate Credit
4. The Real-estate Credit in Practice
4.1. General Considerations as to the German and Danish Construction Financing
4.1.1. Business Environment
4.1.2. Reasons for the Different Proportion of Proprietary
4.2. Real-estate Credit Financing in Germany
4.2.1. The Annuity Loan in Practice
4.3. Real-estate Credit Financing in Denmark
4.3.1. Danish Loan Types in Practice
5. The Future of the Real-estate Credit as an important Instrument in the Field of Construction Financing
5.1. The Future of the Real-estate Credit in Germany
5.1.1. Standardisation as to the Granting of Real-estate Loans
5.1.2. The German Pfandbrief as an Export Hit
5.1.3. New Ways of Real-estate Financing – Vision or Reality?
5.2. The Future of the Real-estate Credit in Denmark
5.2.1. Standardisation – No foreign Word in Denmark
5.2.2. The Saturated Danish Market
5.2.3. The Danish Credit on Real Estate becomes international
6. Summary
Bibliography
Financial Glossary
Appendix
Foreword
“ Eigener Herd ist Goldes Wert. ”
(German Proverb)
In times of unusually low interest rates appears a commonly shared vision: the desire for a house of one’s own. Whether an own house or a flat takes centre stage is virtually circumstantial. What really matters is the following: those who want to fulfil their desire for own property do not only need to carefully scrutinise the real estate itself but primarily consider the financing.
Every future owner of a house or freehold flat should realise that the acquisition of real estate involves a high degree of financial strains that normally have to be borne for a long period. Scarcely anybody is able to cover the entire volume of funding by means of his or her own personal capital. Therefore, most of the purchases of real estate are financed trough loans.
In the course of the capital procurement one is faced with a wide variety of different types of financing. And as a matter of fact, it is not easy to choose the appropriate form of financing. As this selection significantly influences the buyer’s future financial position one needs to act with caution. By choosing the wrong instrument of property funding, one can easily get into financial difficulties. And way too many house owners of a few hours’ standing will shortly find their names on the local county court’s public notice where the well beloved home is being up for compulsory auction.
To avoid the above-mentioned scenario some effort is required leading to an accurate scrutiny of the offered methods of financing. In fact, no bank loan can guarantee that the borrower will eventually fall into a financial trap, but still: most of the prospective home owners go in the credit business’ clutter of ‘loans from building societies’, ‘property-linked life insurance’ and ‘two-way financing via investment funds’ for a fairly particular loan – the so-called credit on real estate.
The real-estate credit – sometimes rather known as mortgage loan (on real estate) – represents the most-favoured form of financing due to two special characteristics. On the one hand, the real-estate credit features a long mortgage term (normally 25 to 30 years). And on the other hand, it exhibits comparatively high lending limits.
Furthermore, the real-estate credit is also of extreme importance as far as the international context is concerned. Several criteria like the method of repayment may country-specifically vary but the ‘skeletal structure’ is to the greatest possible extent identical. Strong distinctions can only be found in terms of the significance or local value of the real-estate credit within the individual countries. Oftentimes, these particular differences have its seeds in apparently minor variations. Insignificant national differences concerning the granting of credits on real property thus lead to considerable cross-national disparities.
To carefully examine and analyse the mentioned discrepancy, if existing, is the objective of the present paper. On the basis of Germany and Denmark – two countries being situated in the heart of Europe – the author calls attention to any inequalities that are closely connected with the granting of real-estate loans in both countries.
Against this background, one can raise the question to what extent real-estate credits actually differ in the two neighbouring countries. Loans on real estate do pursue the same aim in Germany and Denmark, i.e. the provision of funds the borrower cannot raise, don’t they? Can we therefore not act on the assumption that they have to be equal? And what do the differences in the process of credit granting look like and how large are they in reality? Do the inequalities influence people’s acceptance and thus the national importance of the real-estate loans in a lasting manner?
Considering these questions as examples, the author tries to examine the financing instrument real-estate credit in the given European countries. In this context, it is not only crucial to concentrate on the national banking sectors but also to consider historic developments as well as the respective legal foundation.
The quintessence of this paper’s consideration is not only the credit on real estate itself, but also the institutions granting this special loan – the so-called real-estate credit institutions. These specialised commercial banks of the long-term credit could be found in Germany as well as in Denmark. Especially their position in the total market of financial institutions should be in the centre of the present discussion. In this context, this paper is not only aiming at the real-estate credit’s significance but on the importance of the respective institutions, as well.
Hence, the present discourse can be considered as a detailed comparison between the granting of real-estate credits in Germany and Denmark including the associated institutions. In addition, it is also a guide examining other kinds of mortgaging. Readers occupying themselves with the German and Danish methods of financing are equally addressed as all other people caring about the general credit business.
Albeit the author tries to expound the special position of the German and Danish system of real-estate credits in a substantial manner and to highlight possible disparities, an all-embracing and highly detailed description would certainly go beyond the scope of this paper. Consequently, the present paper primarily concentrates on significant differences regarding the financing of real estate with individuals.
Should you, dear readers, have helpful suggestions, criticism or questions, you are very welcome to get in contact with me. Contact details can be found at the end of the appendix.
Rostock, November 2004 Stephan Dannehl
Table of Abbreviations
illustration not visible in this excerpt
Table of Figures
Fig. 1 Land charge or mortgage?
Fig. 2 Subdivision of Germany’s real-estate credit institutions
Fig. 3 Overview of the German system of commercial banks
Fig. 4 Relative importance of the two groups of head banks
Fig. 5 Central business of private mortgage banks on the asset and debit side
Fig. 6 The differentiation of German bonds
Fig. 7 Pfandbrief privilege not only for real-estate credit institutions
Fig. 8 The member institutes of the Association of German Mortgage Banks (VDH)
and their business areas
Fig. 9 The German system of the real-estate credit (mortgage business)
Fig. 10 Outstanding articles of the HBG and their central idea
Fig. 11 The fundamental principle of mortgage credits (Denmark)
Fig. 12 The 8 Danish mortgage banks and their business segments
Fig. 13 Outstanding articles of the Danish Realkreditlov and their central idea
Fig. 14 Lending limits of selected credit industries in Germany
Fig. 15 The annuity loan over the entire duration (example)
Fig. 16 The credit with redemption by instalments over the entire duration (example)
Fig. 17 Advantages and disadvantages of mortgage loans
Fig. 18 Major aspects in terms of the saving trough a building society
Fig. 19 Advantages and disadvantages of a savings contract with a building society
Fig. 20 Major aspects in terms of an endowment mortgage
Fig. 21 Advantages and disadvantages of endowment mortgages
Fig. 22 Major aspects in terms of the two-way financing via investment funds
Fig. 23 Advantages and disadvantages of the two-way financing via investment funds
Fig. 24 Maximum lending limits and lending periods for selected real estate
Fig. 25 Special characteristics in terms of bond loans
Fig. 26 Example of a conversion with regard to bond loans
Fig. 27 Special characteristics of cash loans
Fig. 28 Special characteristics of variable loans
Fig. 29 Basic indicators in comparison
Fig. 30 Interest expense- and redemption plan (annuity loan)
Fig. 31 Dangerous discount
Fig. 32 Risk and restraints of real-estate credit institutions in terms of their foreign operations
1. Placement of the Credit on Real Estate
1.1. General Disambiguation
Having a look at the popular definitions dealing with the topic real-estate credit, one is confronted with a wide variety of different explanations. One obstacle while searching for a suitable definition of the German term Realkredit (real-estate credit) is the fact that this term is in Germany rather known under the name Hypothekendarlehen (mortgage loan). Though one also finds the word ‘Realkredit’ in the relevant literature as well as in numerous other sources of definitions, it is not known in the vernacular.
In Denmark the situation is completely different. Here, the term realkredit belongs to the mortgaging as the house to the property. Moreover, it is also known in the general language use including compound nouns such as realkreditlån (real-estate loan) or realkreditlov (real-estate credit act).
Whether one is more cotton on to the term ‘real-estate credit’ or ‘mortgage loan’ or even ‘hypothecary credit’ (in German: Hypothekarkredit) is entirely up to the reader, although we later see that there is a difference between these terms. For the sake of a better comprehension, the words ‘real-estate credit’, ‘credit on real estate’ and sometimes also ‘real-estate loan’ will be used in the further discussion with a few exceptions regarding extracts and quotations.
As far as the explicit definition of the real-state credit is concerned, authors in both countries agree upon a more or less identical explanation. In Germany’s major reference book, the Brockhaus-encyclopaedia (1996, vol. 18, p. 109), one speaks about a “credit that is granted for the security of tangible assets (real estate)”. A slightly extended definition can be found on the internet platform of the Duden. Here, one describes the term as a “loan at which the debtor guarantees the repayment with real estate or other assets”.
In a renowned Danish encyclopaedia, the Politikens Nudansk Leksikon (2002, p. 997), the reader finds out that the real-state credit is a “loan, which is being granted by a real-estate credit institution against the security of real estate”.[1] Also Nielsen (2000, p. 11) follows suit by speaking of a loan that is being awarded “against the direct collateral (pledge) of immovable property”.[2]
By comparing the German and Danish definitions, it becomes clear that the given explanations are congruent in the direct translation. In both countries one speaks about a credit or a loan that is granted on the basis of a security in real estate or immoveable property. Thus, it seems that there are no visible distinctions between the German and Danish credit on real estate.
1.2. The Term ‘Realkredit’ in Germany
To get a more precise idea of the characteristics of the credit on real estate and to go beyond the fundamental features of this special loan, there is the need for further detailed definitions. In fact, the aforementioned ones do convey a first impression to the reader. Yet, they are not adequate for an in-depth judgement of existing correspondences and possible discrepancies. For this reason, it is not only necessary to make use of the general definitions of German and Danish encyclopaedias but to fall back upon the relevant technical literature.
In the dictionary for the stock exchange of the German broadcasting corporation ARD, the term ‘Realkredit’ is described as a “long-term loan that is secured by a mortgage lien (in German: Grundpfandrecht) ”. At first glance, the reader does not get new information, for the expression ‘mortgage lien’ generally indicates the pledge of real estate against debtors may obtain a loan. In particular, however, the mortgage lien is the fundamental basis of the real-estate credit system and needs to be especially highlighted in this place.
The background of the mortgage lien is the fact that the debtor’s property, i.e. the piece of real estate, is encumbered with a lien when the debtor applies for a real-estate credit. This means that the borrower’s property serves as security for the loan. The respective creditor of the lien – i.e. the lender such as the bank or the real-estate credit institution – has now collateral against the debtor, which is mostly also the property owner. The lien with whom the real estate is encumbered, is hereby the arising mortgage (Hypothek) or land charge (Grundschuld).
As this lien is the basis for the claim of the bank against the debtor, it needs to be legally protected in a special way. This protection is ensured through the registration of the mortgage or the land charge in the so-called land register (Grundbuch) that exists for every piece of real estate as well as for every other property.
This special book is being administered and managed at the local county court and particularly provides information about the actual owner of a piece of real estate and whether or to what extent the respective property is encumbered with additional liens.
As the piece of real estate can be encumbered with a mortgage or a land charge, the term ‘mortgage lien’ can be considered as a collective name for the protection of claims with respect to real estate property rights.
illustration not visible in this excerpt
Coming back to this chapter’s headline, i.e. the precise definition of the word Realkredit, one can find a more detailed explanation of this term in the mortgage encyclopaedia of a large German mortgage bank – the HSH Nordbank. Here the reader learns that a Realkredit was originally the name for a credit that is secured by the pledging of a thing. According to today’s definition, however, Realkredite can rather be described as “medium- or long term credits that are only granted against the collateral security upon real estate“.[4]
At this position the encyclopaedia reveals one of the main criteria of the real-estate credit, i.e. the credit’s characteristic of being granted on a medium- and long-term basis. Especially the criterion of a long-term loan makes the real-estate credit to a fairly unique product; for the credit’s term of duration usually averages between 25 to 30 years. Thus, the credit on real estate is not only matchless concerning the outside financing; it is also unprecedented and offers unequalled opportunities among other ways of credit financing.
Finally, I want to call attention to one more thing: you as the reader have so far gained a rough overview of the term ‘Realkredit’. Yet, a Realkredit contains much more than previously stated. But as this chapter merely aims at imparting a first and general definition, I want to refer to the second chapter where the reader will get a more precise and all-embracing definition.
To recapitulate the things that were said, the following list highlights the essential points mentioned in this chapter. As we have seen up to now, the German Realkredit or real-estate credit is characterised by the following features and is thus:
- granted against the collateral of real estate,
- awarded on a medium- or long-term basis and
- secured by a mortgage lien.
1.3. The Term ‘Realkredit’ in Denmark
Without stating any further definitions or quotations concerning the Danish name of the real-estate credit, it can be said that the just-mentioned characteristics of the German term Realkredit also apply to the Danish one. In this respect, the above-stated assumption of a comparable or even congruent term proves to be true. Yet, to draw a final conclusion, numerous other aspects need to be included that were not mentioned so far. Especially the general terms at the granting of mortgage loans by the real-estate credit institutions plays a major or even decisive role. Moreover, it is obvious that these institutions grant loans to the credit-seeking average consumer but it is not evident at first sight how these mostly tidy sums of money can be raised and wherefrom those funds originate.
The answers to these questions are closely connected with the terms of the credit granting as well as with the historic development of the credit institutions and should therefore take centre stage in the subsequent chapter.
2. The Granting of Real-estate Loans
2.1. Real-estate Credit Institutions in Germany
Real-estate credits are granted by institutions that bear the name of the credit itself – real-estate credit institutions (in German: Realkreditinstitute). In fact, the term ‘Realkreditinstitut’ is not common in the vernacular. Much more common, however, is the term ‘Hypothekenbank’ (mortgage bank) and before causing any confusion, the following should be pointed out: the terms real-estate credit institution and mortgage bank are used interchangeably. Yet, this does not apply to the words real-estate credit (Realkredit) and mortgage loan (Hypothekendarlehen); for the real-estate credit features special characteristics in order to bear the name ‘real-estate credit’ (e.g. underlying cover principle, lending limit of 60 per cent).
Hence, a credit on real estate can only be obtained at real-estate credit institutions (private mortgage banks). But a mortgage loan, however, is also available at other German banks and institutions.
A reason for the aforementioned fact that the term ‘Realkredit’ is not so common is the factor that collateral loans have always been granted against the pledge of the property, which needs to be financed. While doing this, the creditor normally insists on a registration of a mortgage (or land charge). And even if people nowadays prefer the land charge as hedging instrument, one continues to speak about a ‘Hypothekendarlehen’ (mortgage loan).
On the other hand, the term ‘Hypothekenbank’ has consolidated its position in the German language in the course of time, because the institutes granting the credit on real estate are called “private Hypothekenbanken” (private mortgage banks) in German. In addition, only insiders know that there are also other real-estate credit institutions except private mortgage banks. To reduce these facts to a simple formula one can say: in Germany a Hypothekenbank is a Realkreditinstitut but a Realkreditinstitut is not exclusively a Hypothekenbank.
2.1.1. Realkreditinstitut or Hypothekenbank ?
To examine the raised issue of a hierarchical division between a Realkreditinstitut and a Hypothekenbank it is important to know that this hierarchy originates from a different legal basis contributing to fact that the German banking system can be divided into various groups or segments. The segment ‘Realkreditinstitute’ is thereby only one out of many; i.e. there are real-estate credit institutions under private law (in German: privatrechtliche Realkreditinstitute) and on the other hand the so-called land credit institutions under public law ( öffentlich-rechtliche Grundkreditanstalten ). Yet, both institutions go by the name of ‘Realkreditinstitute’ (fig. 2).
Fig. 2: Subdivision of Germany’s real-estate credit institutions
illustration not visible in this excerpt
The above illustration carries the subdivision to the excess; for the strict breakdown of Realkreditinstitute into institutions under private and public law as well as from the latter into private mortgage banks (private Hypothekenbanken) and ship mortgage banks (Schiffspfandbriefbanken) is too accurate for the purpose of this paper. As the banks for the ship mortgage bond are of little importance, anyway, one just groups the real-estate credit institutions into private mortgage banks and land credit institutions under public law. Hereby both arms of institutions differ with regard to their legal basis (see also chapter 2.1.4.).
Nonetheless, private and public institutions feature one similarity: they both grant long-term loans that are secured in a special way. The kind of security results from the different purposes of the credits as well as from the disparity of the respective interested parties (clients, investors). The little but subtle difference between institutions under private and public law becomes especially apparent in the online encyclopaedia of the German television station ARD. Here, it is said:
“A mortgage bank is a financial institution that
a) operated under private law mainly deals with the granting of hypothecary credits (in German: Hypothekarkredite) and local authority loans (in German: Kommunalkredite) and
b) operated under public law is engaged in the financing of house building as well as public capital investments”.
Hence, it is becoming apparent that private mortgage banks do not merely deal with the granting of mortgage credits. They also grant loans to the local authority, i.e. loans to municipalities or federal states.
To make it clear again: when speaking about a Realkreditinstitut in Germany, people ought to think of the collective term for all mortgage banks and credit institutions under public law. The strict division of real-estate credit institutions in (a) private mortgage banks and (b) land credit institutions under public law was moreover cancelled at the end of the year 1992 (Brockhaus, 1996, p. 109).
At this point, however, one needs to underline again that borrowers looking for long-term loans are not only bound to the German Realkreditinstitute. They can also get these special loans at common banks and savings banks.[5]
Yet, as the present paper predominantly deals with the real-estate credit of ‘pure’ real-estate credit institutions and hereby particularly with the loans of private mortgage bank, the collaterally secured loans of other non-real-estate credit institutions are just mentioned to complete the picture.
2.1.2. The Importance of Real-estate Credit Institutions as Specialised Commercial Banks
As already mentioned, the segment ‘Realkreditinstitute’ just represents a selected field of the entire system of banks. To give the reader the general idea of the position of the German real-estate credit institutions in Germany’s extensive system of banks, one can refer to the subsequent illustration.
Fig. 3: Overview of the German system of commercial banks
illustration not visible in this excerpt
Source: Süchting (1998), p. 32.
As can be seen in the illustration, the real-estate credit institutions – in the legal scheme of things – belong to the specialised commercial banks that all offer only highly specialised services. And: long-term and collaterally secured loans are the service in which the institutions of the real-estate credit are primarily specialising in.
Yet, the illustration above gives no evidences as far as the significance of the respective commercial bank is concerned. Hence, one needs to add that the real-estate credit institutions account for approximately 14 per cent (2002) of Germany’s total market of banks. At first glance, this number may seem to be small but considering the specialised banks’ market share of 24 per cent, the relative importance of real-estate credit institutions becomes even more apparent.
Fig. 4: Relative importance of the two groups of head banks [6]
illustration not visible in this excerpt
2.1.3. Private Mortgage Banks
As a matter of fact, particularly real-credit institutions under private law, i.e. private mortgage banks, distinguish themselves as proven and safe partners when it comes to the construction financing.[7] However, this is not of coincidental nature. By looking at the institutes’ special area of responsibility as well as the distinctive features that are connected with the granting of loans, one easily recognises why real-estate credit institutions occupy an exceptional position. At this point, one can fall back on selected definitions regarding the general term ‘real-estate credit institution’ that is of guiding importance for this paper’s progress.
According to a Brockhaus-definition (1996, vol. 10, p. 376) real-estate credit institutions under private law are “mortgage banks that carry out the hypothecary mortgaging of real estate (hypothecary credit, mortgage loan) and issue debenture bonds on the basis of the acquired mortgages (mortgage business)”. Moreover, mortgage banks grant “non-hypothecary loans to public corporations[8] (local authority loan business)”. Also Übelhör/Warns (2003, p. 116) follow this example and consider these institutes as “special credit institutions mobilising long-term loans for the real estate-, ship- and local authority financing by the issue of debenture bonds”.
Now, the reader might think: ‘nothing new so far’; but: appearances are deceptive! The latter definition namely contains a characteristic that is a vital element in the field of the credit business – the refinancing of loans.
So far, the reader just got to know the details of the so-called lending business (in German: Aktivgeschäft), i.e. the granting of real-estate credits. In this context, the mortgage banks’ borrowing or deposit business (Passivgeschäft) has been neglected. This other side of the banks’ operation can be described as the acceptance of deposits and other repayable funds, constituting the foundation of the issued mortgage loans (fig. 5).
Fig. 5: Central business of private mortgage banks on the asset and debit side
illustration not visible in this excerpt
Coming back to Übelhör/Warns, the mentioned acceptance of deposits takes place via the issue of debenture bonds. Debenture bonds are securities or commercial papers with fixed interest. The buyers of such securities have a claim for money against the respective issuer – in our case against the mortgage bank. Due to the chartered or securitised debenture bond (in German: verbriefte Schuldverschreibung) the bond holder has – besides repayment – also a right to an interest return.
The special debenture bonds of the mortgage banks are the mentioned German covered or mortgage-backed bonds (mortgage Pfandbriefe, public-sector Pfandbriefe).[9] Yet, when it comes to the issue of Pfandbriefe, one has to clearly distinguish between the mortgage business and the local authority loan business. The public-sector Pfandbriefe within the local authority loan business are also called municipal or public-sector bonds (in German : Kommunalobligationen) and are not secured by a mortgage lien but by municipal cover (Kommunaldeckung). But as far as the purpose-securitised claim of the holder is concerned, public-sector Pfandbriefe do not differ from their equivalent – the mortgage Pfandbrief. The reason for this is the fact that both kinds of Pfandbriefe issued by mortgage banks are debenture bonds belonging to the enormous group of German bonds (Anleihen) and every buyer of every type of bond has a claim for money against the issuer.
illustration not visible in this excerpt
Source: www.capital.de (2003).
2.1.4. The Legal Restrictions of Mortgage Banks
As previously discussed, private mortgage banks raise funds for the granting of credits by the issue of Pfandbriefe and in this context one might ask if this is the only way mortgage banks finance their business, or if they can engage in other activities that are known from ordinary commercial banks.
Without going into the particulars of this issue, i.e. without mentioning the respective legal regulations, it can be said that only the first part of the mentioned question is true, i.e. that the extent of the mortgage banks’ permissible business is restricted, indeed. Ergo: mortgage banks – like all other real-estate credit institutions – exclusively finance themselves by the issue of Pfandbriefe.
Basis for this restriction is the mortgage banks’ legal foundation; for mortgage banks only obtain the privilege to issue Pfandbriefe in return for the renunciation of other ways of refinancing. This privilege to issue Pfandbriefe – commonly known as Pfandbrief privilege – is governed by the Mortgage Bank Act (in German: Hypothekenbankgesetz, abbreviated HBG) and the Ship Mortgage Bank Act (Schiffsbankgesetz, SchBG) regarding all private mortgage banks. On the other hand, however, the privilege is governed by the Act on Pfandbriefe and related debenture bonds of credit institutions under public law (Gesetz über die Pfandbriefe und verwandten Schuldverschreibungen öffentlich-rechtlicher Kreditanstalten, ÖPG).
Fig. 7: Pfandbrief privilege not only for real-estate credit institutions [10]
illustration not visible in this excerpt
Background of this regulation is the fact that loans within the mortgage business are very safe because they are just granted on the basis of secured mortgages, viz. real estate. This means – supposing that the borrower is unable to repay the loan (inability to pay, insolvency) – the mortgage bank still possess the securitised mortgage lien on the borrower’s real estate. After all, the resultant claim gives the bank the right to put the debtor’s real estate up for an auction so that the bank can redeem its claim for money and get back the erstwhile granted credit.
Hence, mortgage banks just take a relatively modest risk by granting real-estate credits, because the banks still keep the security of the debtor’s material property (piece of real estate, house, flat) – even if the debtor gets into financial difficulties. The same security also exists in the local authority loan business where credits are secured by municipal cover.
For the sake of completeness, it also essential to mention the private ship mortgage banks as well as the land credit institutions under public law[11] ; for they finance themselves by Pfandbriefe, too. However, as the present paper mainly deals with the private construction financing at private mortgage banks, the mentioned two other types of real-estate credit institutions are only of marginal importance in the further course of this paper.
2.1.5. The 21 Members of the Association of German Mortgage Banks
Although, the total number of all German real-estate credit institutions (under private and public law) is respectable – at present there are 48 institutions possessing the Pfandbrief privilege – the number of private real-estate credit institutions corresponds to just 17[12].
Because of the aforementioned reason of specialisation of this paper and due to the different, sometimes also overlapping legal foundations, this paper will further only concentrates on the private issuer of Pfandbriefe organised in the Verband deutscher Hypothekenbanken (VDH). The member institutes – presently 21 – in this common association must direct their business according to the German Mortgage Bank Act (HBG). In fact, the members of the VDH are not purely institutes under private law, because there are also the so-called mixed mortgage banks[13] and the mentioned ship mortgage banks that belong to the interest group, too (see also appendix I + II).
The subsequent illustration gives the reader an overview of the existing 21 private mortgage banks in Germany that are organised in the VDH. In addition, the reader is being given information about the business areas of the banks and whether the mortgage banks’ core activities rather encompass the mortgage business (MB) or the local authority loan business (LAB).
Fig. 8: The member institutes of the Association of German Mortgage Banks (VDH) and
their business areas
illustration not visible in this excerpt
Note: Two private mortgage banks – Aareal Hyp AG and DePfa Deutsche Pfandbriefbank AG – do not belong to the VDH.
Source: VDH, Homepage, November 2004.
As could be seen in the illustration, nearly all member institutes of the VDH feature the legal form of a joint-stock company (AG). Moreover, the members are – besides three mixed mortgage banks and one ship mortgage bank – exclusively private banks. The banks with a mixed range of tasks are also able to conduct banking activities of all kinds. This, however, is an exception, for mortgage banks are only allowed to exist in the legal form of a joint-stock company or association limited by shares (KGaG) and are obliged to refinance their activities by issuing Pfandbriefe only. Furthermore, according to the Brockhaus definition (1996, vol. 10, p. 376) the mentioned exception is legally only allowed if the respective mortgage bank did exist before May 1, 1898.
2.1.6. Historical Development
The German real-credit institutions – or in other words the system of real-estate credits – can look back on a long tradition. There are not only mortgage banks having a company history of more than 130 years (e.g. Württembergische Hypothekenbank AG, year of formation 1867). Also the foundation of today’s borrowing business – the refinancing of the issued loans via Pfandbriefe – can be traced back to the time of the King of Prussia, Frederick the Great and is thus even older one more century.
[...]
[1] Danish: … et lån som ydes af et realkreditinstitut mod sikkerhed i fast ejendom … .
[2] Danish: … lån mod direkte pant (underpant) i fast ejendom … .
[3] Gaulke (2001), p. 87.
[4] German: … nur gegen dingliche Sicherheit an Grundstücken gewährte mittel- und langfristige Kredite.
[5] German banks and savings banks normally grant credits that are being secured by a lien (real estate credits) only on a
short- or medium-term basis.
[6] Neus (2003).
[7] Here, one should factor out private ship mortgage banks (Schiffspfandbriefbanken) though they belong to the real-
estate credit institutions under private law, too.
[8] Corporations under public law
[9] As the German term for bonds ‘Pfandbriefe’ is a registered trademark, which is nowadays known all
over the world, mortgage banks use the German name in their foreign business, too.
[10] Cf. Deutsche Bundesbank (2004).
[11] Main business of the land credit institutions is the financing of house building and public investments.
[12] Cf. Verzeichnis der privilegierten Schuldverschreibungen deutscher Kreditinstitute (Deutsche Bundesbank,
November 2004).
[13] Mixed mortgage banks conduct the business of an ordinary credit bank and a mortgage bank. Mixed mortgage banks
are not subject to the legal limitations of the German Mortgage Bank Act.
- Quote paper
- Stephan Dannehl (Author), 2004, The Credit on Real Estate - Local Value and Relevance for the Construction Financing in Germany and Denmark, Munich, GRIN Verlag, https://www.grin.com/document/48254
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