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Significant Amendments to the Execu

Significant Amendments to the Executive Regulations of the Mortgage Finance Law
Fourteen years ago the Mortgage Finance Law was issued.[1] The primary purpose of this Law was to provide the Egyptian public with a new mean of financing in order to encourage saving and to increase the chance of the middle class in owning their private homes. The Law did in fact succeed in bringing mortgage finance into the Egyptian financial system, leading to the establishment of a Mortgage Finance Authority (which was merged in 2009 into the Egyptian Financial Supervisory Authority, “EFSA”), and in allowing various mortgage finance companies to be established as well as a Mortgage Guarantee and Subsidy Fund and a re-finance company. While the institutional framework was completed, the mortgage finance market did not take off as expected for a number of reasons, including the high cost of funding, the lack of registered properties, and the difficulty of registering properties in the new communities, in addition to the size of the informal economy which makes proof of income by potential buyers difficult. In light of the above, various attempts were made over the years at activating the mortgage finance markets through numerous changes in the Law and its Executive Regulations, some of which yielded some results that were nonetheless insufficient. It is in light of this background that the latest amendments to the Executive Regulations of the Law were issued by the Cabinet of Ministers - on the basis of EFSA's recommendations.[2] This new amendment is an extensive one that attempts to resolve most of the problems related to mortgage finance in one go, in order to have a significant effect. Following are the main changes brought about by the latest amendment to the Executive Regulations.
Scope of Mortgage Finance
Article (1) of the Executive Regulations determines the scope of lending in which mortgage finance companies and banks may engage. Prior to the amendment, Article (1) included financing for the purpose of “buying, constructing, restoring or improving” all kinds of real estate. The new amendment expanded this definition to include – in addition to the above mentioned activities-, buying by way of ijara (the Islamic alternative to conventional mortgage financing), buying usufruct rights to the property, financing by way of muraba’ha or musharaka (which are also Islamic alternatives to financing). The amendment thus paves the way for new forms of financing and for new financing institutions that were previously absent from the market. Furthermore, permitting the financing usufruct (without necessary full ownership) represents a significant step, especially for commercial activities that may want to finance usufruct rights for long periods without owning the relevant property.
Guarantees of Finance
Mortgage financing is generally guaranteed through the property that is the subject of the funding. This means that such property must be registered in the real estate register so that it can be mortgaged. The Mortgage Finance Law, however, takes into consideration the fact that most real estate in Egypt is not registered. To deal with this, the Law allows for other properties to be used as collateral if the specific property being financed is not registered, on the condition that it is at least possible to register such property in the future. The Law refers to the Executive Regulations to specify the details related to using other properties as collateral. In this context, Article (2) of the Executive Regulations which deals with the use of collateral was amended. The new amendment narrows the definition of securities that may be used as collateral and limits it to securities registered at the stock exchange. Furthermore, the amendments now permit the use of usufruct as collateral without mortgaging full ownership. Finally, a new subsection was added allowing both parties to the mortgage finance contract to agree on any other collateral, “bearing in mind the conditions set by [EFSA]”. This means that EFSA may now approve other collateral that the parties agree to and may set standards and conditions related thereto.
The true effect of this amendment is to put EFSA in charge of setting rules and standards. This is in contrast to the previous situation in which these rules were set in the Executive Regulations, which meant that they could only be changed through a decision of the Prime Minister.
Financing Regulations
The most important amendment to the Executive Regulations came in Article (3), which used to stipulate specific regulations for mortgage financing, such as requiring the borrower to sign a statement stating that he/she read the conditions of financing, that such financing may not exceed 90% of the value of the property and that the property must be valued by a valuation expert. Other regulations in Article (3) related to the way of proving the borrower’s income, and the requirement that installments may not exceed 40% of the total income of a low-income borrower. This Article has been replaced in the new amendment by a new rule which requires that mortgage financing be conducted “in accordance with the rules and standards stipulated by EFSA’s Board of Directors in accordance with the nature of each activity”. This does not mean that the previous rules and standards will be abolished, but rather that EFSA will most likely issue similar standards. The true effect of this amendment is to put EFSA in charge of setting rules and standards. This is in contrast to the previous situation in which these rules were set in the Executive Regulations, which meant that they could only be changed through a decision of the Prime Minister. In addition to ensuring more flexibility and efficiency, this amendment rectifies an erroneous situation, since Article (4) of the Mortgage Finance Law mandates EFSA (and not the Cabinet of Ministers) with setting the rules and standards related to mortgage financing.
Financing Low-income Borrowers
Ever since its enactment, the Mortgage Finance Law has included several rules that regulate the role of the State in supporting low-income individuals in owning their residences. This support may take several forms, most importantly providing land for free in the case of real estate projects intended to serve low-income individuals, bearing a part or the total cost of utilities and establishing the Mortgage Guarantee and Subsidy Fund for low-income borrowers. Nonetheless, the assignment of roles and tasks and the mechanisms related to such support were previously unclear. The new amendments clarify this situation in Article (5), which stipulates that the state delivers the land allocated to low-income borrowers to the Mortgage Guarantee and Subsidy Fund so that it executes the projects. Furthermore, the state will now compensate the fund in full or in part for the cost of utilities. The amendment thus notably places all responsibility in one entity, namely the Mortgage Guarantee and Subsidy Fund.
Before the recent amendments, the Executive Regulations gave the foreclosure agent the authority to appoint two valuation experts to perform a valuation prior to public auction. According to the recent amendments, this authority now rests with the judge supervising foreclosure.
Assignment of Contracts and Securitization
The Law and Executive Regulations set the rules relating to the assignment of receivables emanating from financing contracts – i.e. the assignment of future proceeds by the securitization company. This assignment is considered a condition of the securitization of mortgage finance portfolios. The new Executive Regulations include a number of information and details, which facilitate such transfer and simplify the process of securitization, which is an important development that is expected to boost the mortgage finance market.
Valuation of Property at Execution
No mortgage finance legislation is complete without including clear rules and relatively efficient procedures for foreclosure in case the borrower defaults on the payments. Without this, the concept of mortgage finance loses credibility and ceases to be a recognized method of financing. Thus, ever since its enactment –thirteen years ago- the Mortgage Finance Law imposed swift procedures for foreclosure and for the sale of the property in question in a public auction, notwithstanding the regular process for foreclosure in the Code of Civil Procedures. Nonetheless, this system has been in need of some changes, especially insofar as property valuation before an auction is concerned. Before the recent amendments, the Executive Regulations gave the foreclosure agent the authority to appoint two valuation experts to perform a valuation prior to public auction. According to the recent amendments, this authority now rests with the judge supervising foreclosure. Furthermore, the new Executive Regulations stipulate that EFSA will set the valuation standards, which used to be set in the Executive Regulations, which in turn made it more difficult to amend and rectify.
The Mortgage Finance Companies
The new regulations kept the minimum capital requirement for mortgage companies unchanged. It remains 50 million pounds, 25% of which is paid at incorporation, and the rest is completed within one year from the registration with the Commercial Registry. However, the regulations have included a new type of companies, mortgage re-finance companies, and stated that their minimum capital shall be 200 million pounds, 50% of which is paid at incorporation, and the rest shall be completed within three years. In addition, at least 50% of their capital must be owned by financial institutions. The most important change in the regulations concerning mortgage finance companies is in Article (28), which now allows them to undertake non-banking financial activities related to their purpose, whereas in the past they were not allowed to undertake any activity other than mortgage finance. As regards their credit worthiness, the most important change in the Executive Regulations is that the determination of the minimum capital adequacy is now within the hands of the board of directors of EFSA, whereas in the past it was determined in the Executive Regulations. Moreover, the ratio of liquid cash and securities allowed to be held by the company to current liabilities has been reduced from 25% to 10%. Finally, with regard to companies, the regulations have introduced new and important requirements in keeping their company books, internal regulations, appointment of members to the board, and confidentiality. This all helps improve the standards of supervision and governance.
Activities that are Complementary to Mortgage Finance
Mortgage finance is not just funding granted by the company to borrowers, it is the set of legal and intertwined relationships where many parties are involved. And whereas both the law and the regulations since their enactment have mentioned these activities, the new regulations have gone a step further by defining and determining the responsibility of valuation experts, mortgage brokers, and real-estate brokers, and how they are registered in the authority. This is a positive step and it helps build the institutional structure and the supervision framework for mortgage finance in Egypt.
The Mortgage Guarantee and Subsidy Fund
As previously said, one of the corners of a mortgage finance market in Egypt is the establishment of the Mortgage Guarantee and Subsidy Fund, which helps low income borrowers own their private homes. The new regulations confirmed this role, and added the new provision which allows the fund to establish subsidiary companies and funds as well as outsource services. The new regulations have also introduced a prohibition on low-income borrowers who buy subsidized housing units from using such units for a purpose other than housing for themselves and their families, or from disposing of such units prior to the lapse of seven yeas from ownership.
Conclusion
The latest amendment to the Executive Regulations of the Mortgage Finance Law is an important amendment with many impacts. It is also the biggest such amendment since the enactment of the Law in 2001. In general, this amendment is greatly welcome, especially since it gives EFSA wider authority and more flexibility in setting standards and rules for mortgage finance. The amendment also adds new types of financing to its ambit, such as re-financing, usufruct, and Islamic alternatives to traditional modes of financing (ijarah, musharaka and muraba’ha). Furthermore, the amendment also introduces helpful regulations of activities associated with mortgage finance, as well as regulations related to the supervision of companies working in areas related to mortgage financing and the improvement of their governance standards. Finally, the amendment introduces many important details related to the Mortgage Guarantee and Subsidy Fund. The amendment is largely positive and deserves high regard. What is missing is for the State to engage in the application of a program for registering unlisted real estate properties so that mortgage finance in Egypt may grow and fulfill current expectations.   [1] Law No. 148/2001 on Mortgage Finance, Official Gazette, Issue No. 25 (bis), 24 June 2001. [2] Cabinet of Ministers' Decree No. 2/2015 amending certain provisions of the Executive Regulations of the Mortgage Finance Law, Official Gazette, Issue No. 13 (bis) (b), 1 April 2015.
Fourteen years ago the Mortgage Finance Law was issued.[1] The primary purpose of this Law was to provide the Egyptian public with a new mean of financing in order to encourage saving and to increase the chance of the middle class in owning their private homes. The Law did in fact succeed in bringing mortgage finance into the Egyptian financial system, leading to the establishment of a Mortgage Finance Authority (which was merged in 2009 into the Egyptian Financial Supervisory Authority, “EFSA”), and in allowing various mortgage finance companies to be established as well as a Mortgage Guarantee and Subsidy Fund and a re-finance company. While the institutional framework was completed, the mortgage finance market did not take off as expected for a number of reasons, including the high cost of funding, the lack of registered properties, and the difficulty of registering properties in the new communities, in addition to the size of the informal economy which makes proof of income by potential buyers difficult. In light of the above, various attempts were made over the years at activating the mortgage finance markets through numerous changes in the Law and its Executive Regulations, some of which yielded some results that were nonetheless insufficient. It is in light of this background that the latest amendments to the Executive Regulations of the Law were issued by the Cabinet of Ministers - on the basis of EFSA's recommendations.[2] This new amendment is an extensive one that attempts to resolve most of the problems related to mortgage finance in one go, in order to have a significant effect. Following are the main changes brought about by the latest amendment to the Executive Regulations.
Scope of Mortgage Finance
Article (1) of the Executive Regulations determines the scope of lending in which mortgage finance companies and banks may engage. Prior to the amendment, Article (1) included financing for the purpose of “buying, constructing, restoring or improving” all kinds of real estate. The new amendment expanded this definition to include – in addition to the above mentioned activities-, buying by way of ijara (the Islamic alternative to conventional mortgage financing), buying usufruct rights to the property, financing by way of muraba’ha or musharaka (which are also Islamic alternatives to financing). The amendment thus paves the way for new forms of financing and for new financing institutions that were previously absent from the market. Furthermore, permitting the financing usufruct (without necessary full ownership) represents a significant step, especially for commercial activities that may want to finance usufruct rights for long periods without owning the relevant property.
Guarantees of Finance
Mortgage financing is generally guaranteed through the property that is the subject of the funding. This means that such property must be registered in the real estate register so that it can be mortgaged. The Mortgage Finance Law, however, takes into consideration the fact that most real estate in Egypt is not registered. To deal with this, the Law allows for other properties to be used as collateral if the specific property being financed is not registered, on the condition that it is at least possible to register such property in the future. The Law refers to the Executive Regulations to specify the details related to using other properties as collateral. In this context, Article (2) of the Executive Regulations which deals with the use of collateral was amended. The new amendment narrows the definition of securities that may be used as collateral and limits it to securities registered at the stock exchange. Furthermore, the amendments now permit the use of usufruct as collateral without mortgaging full ownership. Finally, a new subsection was added allowing both parties to the mortgage finance contract to agree on any other collateral, “bearing in mind the conditions set by [EFSA]”. This means that EFSA may now approve other collateral that the parties agree to and may set standards and conditions related thereto.
The true effect of this amendment is to put EFSA in charge of setting rules and standards. This is in contrast to the previous situation in which these rules were set in the Executive Regulations, which meant that they could only be changed through a decision of the Prime Minister.
Financing Regulations
The most important amendment to the Executive Regulations came in Article (3), which used to stipulate specific regulations for mortgage financing, such as requiring the borrower to sign a statement stating that he/she read the conditions of financing, that such financing may not exceed 90% of the value of the property and that the property must be valued by a valuation expert. Other regulations in Article (3) related to the way of proving the borrower’s income, and the requirement that installments may not exceed 40% of the total income of a low-income borrower. This Article has been replaced in the new amendment by a new rule which requires that mortgage financing be conducted “in accordance with the rules and standards stipulated by EFSA’s Board of Directors in accordance with the nature of each activity”. This does not mean that the previous rules and standards will be abolished, but rather that EFSA will most likely issue similar standards. The true effect of this amendment is to put EFSA in charge of setting rules and standards. This is in contrast to the previous situation in which these rules were set in the Executive Regulations, which meant that they could only be changed through a decision of the Prime Minister. In addition to ensuring more flexibility and efficiency, this amendment rectifies an erroneous situation, since Article (4) of the Mortgage Finance Law mandates EFSA (and not the Cabinet of Ministers) with setting the rules and standards related to mortgage financing.
Financing Low-income Borrowers
Ever since its enactment, the Mortgage Finance Law has included several rules that regulate the role of the State in supporting low-income individuals in owning their residences. This support may take several forms, most importantly providing land for free in the case of real estate projects intended to serve low-income individuals, bearing a part or the total cost of utilities and establishing the Mortgage Guarantee and Subsidy Fund for low-income borrowers. Nonetheless, the assignment of roles and tasks and the mechanisms related to such support were previously unclear. The new amendments clarify this situation in Article (5), which stipulates that the state delivers the land allocated to low-income borrowers to the Mortgage Guarantee and Subsidy Fund so that it executes the projects. Furthermore, the state will now compensate the fund in full or in part for the cost of utilities. The amendment thus notably places all responsibility in one entity, namely the Mortgage Guarantee and Subsidy Fund.
Before the recent amendments, the Executive Regulations gave the foreclosure agent the authority to appoint two valuation experts to perform a valuation prior to public auction. According to the recent amendments, this authority now rests with the judge supervising foreclosure.
Assignment of Contracts and Securitization
The Law and Executive Regulations set the rules relating to the assignment of receivables emanating from financing contracts – i.e. the assignment of future proceeds by the securitization company. This assignment is considered a condition of the securitization of mortgage finance portfolios. The new Executive Regulations include a number of information and details, which facilitate such transfer and simplify the process of securitization, which is an important development that is expected to boost the mortgage finance market.
Valuation of Property at Execution
No mortgage finance legislation is complete without including clear rules and relatively efficient procedures for foreclosure in case the borrower defaults on the payments. Without this, the concept of mortgage finance loses credibility and ceases to be a recognized method of financing. Thus, ever since its enactment –thirteen years ago- the Mortgage Finance Law imposed swift procedures for foreclosure and for the sale of the property in question in a public auction, notwithstanding the regular process for foreclosure in the Code of Civil Procedures. Nonetheless, this system has been in need of some changes, especially insofar as property valuation before an auction is concerned. Before the recent amendments, the Executive Regulations gave the foreclosure agent the authority to appoint two valuation experts to perform a valuation prior to public auction. According to the recent amendments, this authority now rests with the judge supervising foreclosure. Furthermore, the new Executive Regulations stipulate that EFSA will set the valuation standards, which used to be set in the Executive Regulations, which in turn made it more difficult to amend and rectify.
The Mortgage Finance Companies
The new regulations kept the minimum capital requirement for mortgage companies unchanged. It remains 50 million pounds, 25% of which is paid at incorporation, and the rest is completed within one year from the registration with the Commercial Registry. However, the regulations have included a new type of companies, mortgage re-finance companies, and stated that their minimum capital shall be 200 million pounds, 50% of which is paid at incorporation, and the rest shall be completed within three years. In addition, at least 50% of their capital must be owned by financial institutions. The most important change in the regulations concerning mortgage finance companies is in Article (28), which now allows them to undertake non-banking financial activities related to their purpose, whereas in the past they were not allowed to undertake any activity other than mortgage finance. As regards their credit worthiness, the most important change in the Executive Regulations is that the determination of the minimum capital adequacy is now within the hands of the board of directors of EFSA, whereas in the past it was determined in the Executive Regulations. Moreover, the ratio of liquid cash and securities allowed to be held by the company to current liabilities has been reduced from 25% to 10%. Finally, with regard to companies, the regulations have introduced new and important requirements in keeping their company books, internal regulations, appointment of members to the board, and confidentiality. This all helps improve the standards of supervision and governance.
Activities that are Complementary to Mortgage Finance
Mortgage finance is not just funding granted by the company to borrowers, it is the set of legal and intertwined relationships where many parties are involved. And whereas both the law and the regulations since their enactment have mentioned these activities, the new regulations have gone a step further by defining and determining the responsibility of valuation experts, mortgage brokers, and real-estate brokers, and how they are registered in the authority. This is a positive step and it helps build the institutional structure and the supervision framework for mortgage finance in Egypt.
The Mortgage Guarantee and Subsidy Fund
As previously said, one of the corners of a mortgage finance market in Egypt is the establishment of the Mortgage Guarantee and Subsidy Fund, which helps low income borrowers own their private homes. The new regulations confirmed this role, and added the new provision which allows the fund to establish subsidiary companies and funds as well as outsource services. The new regulations have also introduced a prohibition on low-income borrowers who buy subsidized housing units from using such units for a purpose other than housing for themselves and their families, or from disposing of such units prior to the lapse of seven yeas from ownership.
Conclusion
The latest amendment to the Executive Regulations of the Mortgage Finance Law is an important amendment with many impacts. It is also the biggest such amendment since the enactment of the Law in 2001. In general, this amendment is greatly welcome, especially since it gives EFSA wider authority and more flexibility in setting standards and rules for mortgage finance. The amendment also adds new types of financing to its ambit, such as re-financing, usufruct, and Islamic alternatives to traditional modes of financing (ijarah, musharaka and muraba’ha). Furthermore, the amendment also introduces helpful regulations of activities associated with mortgage finance, as well as regulations related to the supervision of companies working in areas related to mortgage financing and the improvement of their governance standards. Finally, the amendment introduces many important details related to the Mortgage Guarantee and Subsidy Fund. The amendment is largely positive and deserves high regard. What is missing is for the State to engage in the application of a program for registering unlisted real estate properties so that mortgage finance in Egypt may grow and fulfill current expectations.   [1] Law No. 148/2001 on Mortgage Finance, Official Gazette, Issue No. 25 (bis), 24 June 2001. [2] Cabinet of Ministers' Decree No. 2/2015 amending certain provisions of the Executive Regulations of the Mortgage Finance Law, Official Gazette, Issue No. 13 (bis) (b), 1 April 2015.