Mutuo Fondiaro is a special form of mortgage loans which confers some extra protections and prerogatives to the creditors -that are primarily banks or other Financial Institutions- compared to the traditional ordinary loans. Due to these protections, Mutuo Fondiario has become the preferential instrument of credit issuers (banks and FIs).
The counterparts to a loan contract, creditors and debtors, have the liberty to opt for ‘finanziamento fondiario’ form, in lieu of the ordinary mortgage loans.
Article 38 of the Consolidated Banking Act regulates the fondiario form of loans, while the ordinary and more conventional mortgage loans are covered by common rules of the Italian Civil Code.
Italian Banking law grants some advantages and rights to the Mutuo (or Credito) Fondiario loan issuers. One of these advantageous features, which is of the utmost importance, is in regards to the clawback regulations.
Article 2901 of the Civil Code stipulates that during an insolvency proceeding, under some specific conditions “a creditor can demand that acts by which the debtor disposes of his assets the o the prejudice of such creditor’s rights be declared ineffective as to the creditor”.
The fondiario form of loans protects the fondiario creditor against the prospects of these actions by ordinary creditors and the pledged asset being clawed back.
Therefore, even if the debtor files for bankruptcy, his creditor with fondiario loan has the right to separate the mortgaged asset and restore his claim on it, and the other (ordinary) creditors cannot use the ‘clawback actions’ (revocatoria ordinaria) in order to prevent this from transpiring.
Whilst, in case of ordinary loans, after the initiation of bankruptcy procedures, an ordinary creditor (lender of an ordinary loan) cannot discretely attack and assign the debtor’s assets to satisfy his credit, and in the detriment of other ordinary creditors.
Thus, the assignation and transfer of the pledged property to the creditor with a fondiario loan contract, is a quite valuable advantage.
Another one of Mutuo Fondiario’s prominent features is the speed in which it can be officially registered. The ability of the banks or other Financial Institutions to immediately register the loan (compared to ordinary loans which take some time even up to six months to get registered at the notary), gives the creditor an advantage with regards to other creditors.
When there’s a time gap between the issuance of credit and the registration of that mortgage at a public notary, it creates much uncertainty and incremental risk. But, with Mutuo Fondiario mechanism and the velocity with which it becomes registered, there level of uncertainty decreases exponentially. In addition, the creditors (banks or any FI) can rest assured that as secured creditors, the collateral will be immediately assigned to them as ‘security’ and no other creditor can simply get a hold of that collateralized property in order to restore its owed debt. Hence, this elimination of time gap is a great asset to the fondiario creditors.
According to article 1418 of Italian Civil Code, “a contract is null and void if contrary to a mandatory provision”. Article 1424 c.c. states that a void contract can be converted to a form of contract that would be rendered acceptable in accordance with the established laws of the land.
However, Art. 1424 also stipulates that in order for this transformation to take place, it should be demonstrated and proved that the parties would have opted for the converted version of that contract, if they knew their initial contract would be declared void.
Therefore, it needs to be expressed that the parties would have been willing to enter into contract ex ante, even with the provisions of the new contract; which is a rather speculative argument and hard to prove.
The judge in this case, can merely rely on the hearsay evidence and must determine ex post whether the parties would have really forgone the advantageous provisions and beneficial clauses in the initial contract, and would have opted for a different one; a potentially less optimal one, which they did not envisage at first.
According to the Italian Banking Law, creditors cannot issue loans that exceed 80 percent of the value of the pledged property asset. Therefore, the so-called “Loan-to-Value” axiom prohibits overcredit by the lenders to the borrowers.
(It should be noted that the aforementioned value is not the commercial value of the property in the market; rather the value that would be assigned to the asset in a public auction. So, the value is determined by the experts on the assumption of how much would it be worth in a hypothetical public auction).
The Loan-to-value (or LTV) statute is considered an imperative rule that cannot be overcome; and in case of breach of this rule, the contract would be considered null.
As a matter of fact, the Italian Supreme Court has confirmed their stance on this rule, in their decision no. 6586/2018 in which they clearly stated: “The breach of the limit of 80% for loans pursuant to the article 38 of Banking Law, causes the nullity of credito fondiario loan, and given that such limit is of essential importance in qualifying the mortgage loan as fondiario, its breach leads to the automatic nullity of the whole contract, save for the possibility of its conversion in another type of mortgage loan contract, in case the relevant requirements are met.”
Another article that though is not explicitly related to this issue, but can be interpreted in a way to be so, is the article 2911 of civil code. This article establishes that in case of existence of a collateral, the secured creditor must at first try to arrest that collateralized immoveable property that has been pledged to him, and cannot attack other properties of the debtor prior to that.
This article also stipulates that in case of the absence of a specified collateral, the creditor has the full freedom to decide which of the debtor’s properties to claim, in order to recover its debt.
What can be worth contemplating is whether the interpretation of article 2911 c.c. would in some cases interfere with implementation of Mutuo Fondiario.
We must take into account that this article had been established in the 1940s and at that era the prevalent (and most likely the only) form of loan, was the ordinary conventional loan. Mutuo Fondiario is a rather new and unorthodox instrument; one that drafters of the civil code did not envision.
Another issue worth asking is, how much protection is too much protection? Does Mutuo Fondiario provide too high level of advantage and privilege for the creditors (especially the banks); and would this result in more risk-taking and cavalier behavior?
The fondiario creditors are in a stronger position with regards to the debtor’s ordinary creditors.
In other words, if the creditors (banks or FIs) are poised to restore all their mortgages from all their debtors, without hardly incurring any loss or repercussions by their over-tolerance of risks associated with their activities and credit supplying, would it create incentives for higher risk-taking and thus, more moral hazards?
Some may argue that the incentives for inappropriate levels of risky behavior would specially be in detriment of other individual, non-institutionalized and less-protected ordinary creditors, and would put them in great disadvantage.
On the other hand, if we institute too rigid of laws and regulations, stifling banks, and other financial institutions and credit suppliers, and limit their creativity in coming up with new beneficial mechanisms and instruments of funding, then it might create discouraging disincentives for further activities of these institutions in the credit market; and thus, the society as a whole.
There might be some possible ways that can be imagined in order to generate a balance and compromise between banks and FIs on one hand, and ordinary creditors on the other.
For instance, let’s envision this scenario: a debtor with 3 creditors, and a pool of assets consisting of 4 properties.
One creditor is a bank with Mutuo Fondiario mortgage, the other 2, ordinary lenders.
Let’s suppose one of assets is designated to the bank as the collateral, and out of reach of other 2 creditors. The other 3 assets are floating liens.
If the collateralized asset pledged to the bank decreases in value to such a degree that it would not restore the bank’s credit, can the bank arrest other 3 unpledged, un-assigned assets?
If we take into account Art. 2911 c.c., we can devise a plan in which the bank takes the collateralized asset, and for its remaining outstanding credit owed by the debtor, the bank can be treated as an ordinary creditor and compete with other 2 creditors in a level-field and in the same precise manner.
For instance, if the bank recovers 60% of its credit by that collateralized, and now-devalued pledged property (as the extra-ordinary holder of Mutuo Fondiario loan), for the 40% remaining credit, it can attack the reminder of the pool of assets, but only as an ordinary creditor and on that capacity, alongside other creditors.
Meaning that these 3 residual assets would then be divided (either equally or proportionally) among the 3 creditors (the bank + other 2), without any of them having any priority or privilege over others; or having any previously-specified asset assigned to them.
Consequently, the 3 reaming assets can be divided basically in 2 different ways. One course of action is dividing them all equally among the 3 creditors. The aggregate value divided by 3.
The other way that can be proposed, is the proportional allocation of assets. Proportional to the amount of credit and of course each allocation would be curbed and managed by the amount of debt itself.
If the value of the 3 assets combined is 120 euros, dividing them equally would lead to 40 euros per each creditor.
If the three creditors are owed 20, 50, and 60 euros respectively, then the first creditor would get his 20 completely covered. The second and third ones would get the 40 euros plus the 10 euros they each acquire by those 20 euros remaining from first creditor’s 40 – 20 = 20.
As we can see, it doesn’t matter which creditor is the bank. It is divided equally (but maybe not necessarily justly!).
If the bank is in fact the creditor with 60 euros owed (which as it was mentioned previously, is the 40% residue of its whole credit that it couldn’t completely recover from the collateralized asset); then the bank nevertheless loses 10 euros. (40 + 10 = 50 < 60)
However, if the bank is the creditor with 20 or 50 euros credit remaining, then it would succeed to restore all its credit with no or little risk. (Needless to say that it is in reality minus the legal fees and the opportunity costs incurred and also the trouble of going to the court and spending on human capital such as legal teams, which we would disregard and neglect in this example due to the fact that these issues effect not just the bank, all the parties and all the creditors involved).
So, the bank gets triumph in the case of being the second or third creditor, and it would restore its credit; but to the detriment of other creditor (the one with 60 euros owed).
The other way of assigning assets is allocating them proportionally that would require other method and mathematical formulas. Such as using a portion as the base and assigning number 1 to its weight; then assigning other credits in proportion with respect to that base weight.
Therefore, if 20 euros is weighted as 1 , 50 euros is weighted 3/2 , and 60 would be 3 . Then it would essentially be up to the judgment of the court and their experts to allocate the 120 euros worth of remaining pool of assets, based on this proportional system among the creditors, done in a just and fair way.
In evaluating the pros and cons of this path we would see one of its negative aspects is that it could be considered a more complex and arbitrary way compared to the previous ‘equally dividing’ way.
However, one the positive sides of applying this method is the existence of loss for every creditor, but a proportional loss. So, basically the risk and the losses are distributed; as opposed to the previous method in which the value was distributed and it led to a win-lose situation. Equally dividing leads to a complete recoup of funds of one or more creditors, and a partial loss for the other(s).
However, with the second method of proportionality and weighted funds, the 10 euros loss is distributed.
One hypothetical final distribution could be this: 19, 46, 55.
19 + 46 + 55 = 120 –> The value of the whole assets
20 + 50 + 60 = 130 –> All the debtors’ owed credit.
Some may argue that if faced with some special circumstances, such as a pandemic, maybe the best option is for the lenders of fondiario loans to lose their status as fondiario creditors and be deprived of the rights and protections bestowed upon them by the nature of the loan they opted for, and be considered ordinary creditors.
The countervailing argument in response to this idea is that the very nature of a contract is that it is a solemn promise which is immune from the changes in the circumstances.
Pandemics, fluctuations in the stock market, economic crises, natural disasters, and myriad of other unforeseen events can potentially disrupt many areas of life. But the contract that the parties have entered into cannot and should not be unilaterally changed ex post.
Does not matter how thorough and excruciatingly detailed a contract seems; there will most likely be details that may get overlooked and not be accounted for. It should not be a cause and a permission for the parties to walk back on their obligations and go against the Sanctity of a contract.
Another issue is that these unforeseen events, for instance a pandemic hitting a country, effect all the sectors and all the players participating in the market -i.e., all people- and not just banks and FIs acting as fondiario creditors. So, the idea that the nature of their loans should be changed in order to compensate negative effects on an economy hit by a pandemic, is not logical and does not hold merit.