Real Property Security (Eurohypothec)
1. The practical need for a eurohypothec
The establishment of an internal market (European internal market) for credit, secured against real property, is made significantly more difficult by differences in the real property laws of the Member States, including the systems for land registration and for executions levied on real property. The transaction costs for cross-border securities, in which the secured property lies outside the state in which the creditor is based, are restrictively high. The share of cross-border secured transactions inside Europe, as part of the total mortgage market in 2005, was less than 1 per cent. As a rule, real property abroad is considered for finance only where the secured amount is at least in the range of €3 to 5 million.
If the legal obstacles to cross-border loans secured against real property were eliminated, advantages for the consumer would emerge through increased competition, which could lead to reduced interest rates and improved loan conditions. Studies show a potential increased utility of up to 0.7 per cent of the total European gross domestic product (EU White Paper ‘The Integration of the EU Mortgage Credit Markets’ of 18 December 2007, COM(2007) 807 final, 3). In contrast to mortgages on individual properties, where cross-border lending is still rare, cross-border credit consortiums financing high volume development projects are now already a reality. In 2005 the total sum of foreign commercial mortgages of members of the German Association of Mortgage Lenders (Verband deutscher Pfandbriefbanken) amounted to €58 billion. That was 35.5 per cent of total lending.
The possibility for the creation of a pan-European securitization market seems even more important in practical terms. A highly simplified business model would involve lenders assigning their claims for repayment together with the security interests created in the collateral property to so-called special purpose vehicles, which could then be refinanced on the capital markets through the issue of mortgage backed securities. These kinds of transactions have received a considerable amount of bad publicity, unsurprisingly given the collapse in 2007 and 2008 of the American subprime-mortgage market. In the EU White Paper on the Integration of European Mortgage Markets (see above), the European Commission highlighted the advantages of such refinancing techniques in terms of risk diversification and reduction of costs, but they noted, however, the dangers it could bring for the stability of the financial system as a whole if the complexity of the financial instruments sold was so high that buyers were unable to assess their potential risk exposure.
Today, the issue of cross-border loans secured against real property and the subsequent legal transactions, such as replacement of the collateral property or creditors as well as the assignment of debts secured against real estate, suffer from differences between the real property laws as well as the inflexibility of the legal systems of many Member States. In particular, the rigid adherence to the principle of accessoriness impedes the use of mortgages for new or changing financial purposes. Private international law is unable to address this problem because, according to the universally accepted lex rei sitae rule, the law of the state where the real property is located is applicable for the creation, assignment and enforcement of security interests. Generally, freedom of choice of law, if allowed at all, only applies to the relationship inter partes, but not to the relationship with third parties which is crucial for property law related issues.
2. Scientific groundwork
As early as 1966 the Segré Report (Report of a Group of Experts, ‘The Development of a European Capital Market’), characterized the harmonization of Member States’ laws on mortgages as an urgent task. As harmonization of national laws has seemed unrealistic, discussion over the past 20 years has focused on the introduction of a ‘Eurohypothec’ (European mortgage) which would be added to the national legal regimes. With respect to the legal design of a Eurohypothec, both accessory as well as non-accessory models have been discussed.
a) Non-accessory model
Although for this project generally the term hypothèque or mortgage is used, and although the majority of Member States’ mortgage systems embrace the accessoriness principle, the supranational legal instrument would be modelled on the non-accessory German mortgage or the similarly non-accessory Swiss mortgage (cédule hypothécaire). In 1987, the Union Internationale du Notariat Latin made a concrete proposal to the Council of Ministers, entitled La Cédule hypothécaire suisse et la dette foncière allemande. Etude comparative base d’une future eurohypthèque/Der Schweizer Schuldbrief und die deutsche Briefgrundschuld. Ein Rechtsvergleich als Basis für eine zukünftige Eurohypothek (1988) (available at <http://uinl.net/documentos/caue/lacedule hypothecaire suisse.pdf>). In both legal systems the connection between the debt and the real right only exists at the level of the security agreement which can be structured by the parties according to the needs of the transaction.
Non-accessoriness was also regarded as one of the characteristics of the Eurohypothec in Annex VI of the 2004 report prepared for the European Commission, DG Internal Market, by the Forum Group on Mortgage Credit, entitled ‘The Integration of the EU Mortgage Credit Markets’ (see <http://ec.europe.eu/internal_market/fin services-retail/docs/home-loans/2004-report-integration-en.pdf>). According to this study, a security interest should be created which is independent of the secured debt, which is tradable and which is not subject to bankruptcy claims. Furthermore, it should create a uniform security law capable of application if necessary to transactions in real property located in various EU Member States.
Advantages of a future non-accessory Eurohypothec would include high tradeability and freedom of action by the owner of the property. The abstract security right would be sufficiently defined and therefore legally secure at the level of property law. Giving independence to the obligations contained in the security agreement opens up the possibility of drafting sophisticated security contracts adapted precisely to the respective needs of the parties to the transaction.
Other suggestions are based on the idea of ‘sophisticated non-accessoriness’. Here the advantages of accessoriness are combined with those of abstractness, so that a Eurohypothec would be designed to be non-accessory because of the needs of flexibility and tradeability. However, in order to protect the owner of the property against unjustified demands, it nevertheless would in some respects be connected to the original claim. This approach is obviously not a counter-proposal to an accessory mortgage, but rather can be seen as the application of practically necessary facilities employed in creating modern security interests. These facilities should be stipulated by a security instrument based not on agreement of the parties, but fixed by legislation. This is the main difference with the strictly non-accessory model discussed above, which advocates the use of a security agreement but nevertheless leaves the obligations contained therein to be determined by the agreement of the parties themselves.
Sophisticated non-accessoriness has been reflected in various proposals put forward over the last few years for a supranational European mortgage law. Particularly worth mentioning are the Basic Guidelines for a Eurohypothec published in 2005 by the (Polish) Mortgage Credit Foundation (<www.pfandbrief.org/d/internet.nsf>), building upon research conducted in Spain by a group of experts named The Eurohypothec (<www.eurohypothec.com>) as well as studies of the European University Institute in Florence (<www.iue.it/LAW//ResearchTeaching/EuropeanPrivateLaw/ProjectRealPropertyLaw.shtml>). Also included were the guidelines for a non-accessory mortgage law for central Europe, developed under the auspices of the German Mortgage Association which similarly advocated the concept of a sophisticated non-accessory mortgage.
As only accessory mortgages exist within the majority of legal systems of Member States, calls have also been made in the literature for the development of a Eurohypothec which is strictly tied to the underlying claim (Habersack (1997) JZ 857; Wachter (1999) WM 49). Nevertheless, no concrete proposals have been made in this direction to date.
3. Prospects for realization
In 2005, the European Commission discussed the Eurohypothec in its green paper on Mortgage Credit as a possible area for future legislation, inviting comments from interested parties (see COM(2005) 327 final, para 48). As the comments submitted were not very supportive of the idea, the project was not included in the White Paper on the Integration of the EU Mortgage Credit Market. The consumer organizations and the Member States themselves, expressed misgivings about the idea. Doubts were expressed as to how a Eurohypothec could be integrated into existing national consumer protection laws as well as into Member State laws in general (particularly in terms of general property law, land registration law, compulsory execution of judgments and insolvency law). According to commentators, the supranational need for legal reform ought to be supported and confirmed by further economic studies. Finally, the recent American mortgage crisis and its worldwide consequences on financial markets negatively affected the chances to realize a Eurohypothec in the meantime. This is because the crisis was said to be caused by the massive assignment of mortgage debts and their sale as mortgage backed securities to private customers, and it was exactly these kinds of transactions which the Eurohypothec was supposed to promote.
An important contribution to the future realization of practical proposals for a Eurohypothec is being made by the EULIS Project (see <www. eulis.org>). At present (2011) 20 Member States are participating in this project (5 being already connected, 15 more pending connection), which has the goal of providing Europe-wide electronic access to the information contained in their property registers.
Otmar Stöcker, Die Eurohypothek (1992); Mathias Habersack, ‘Die Akzessorietät—Strukturprinzip der europäischen Zivilrechte und eines künftigen europäischen Grundpfandrechts’ (1997) JZ 857; Bénédict Foëx, ‘L’Eurohypothèque’ in Franz Werro (ed), L’Européanisation du Droit privé (1998) 481; Hans Wolfsteiner, ‘Otmar Stöcker, Diskussionspapier: Nicht akzessorisches Grundpfand für Mitteleuropa’  ZBB 264; Thomas Wachter, ‘Die Eurohypothek —Grenzüberschreitende Kreditsicherung an Grundstücken im Europäischen Binnenmarkt’ (1999) WM 49; Christof Kiesgen, Ein Binnenmarkt für den Hypothekarkredit (2004); Hans Wehrens, ‘Real Security Regarding Immovable Objects’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (3rd edn, 2004) 769; Hendrik Ploeger and Bastiaan van Loenen, ‘EULIS—At the beginning of the Road to Harmonization of Land Registry in Europe’ (2004) 12 ERPL 379; Steffen Kircher, Grundpfandrechte in Europa (2004); Johannes Köndgen and Otmar Stöcker, ‘Die Eurohypothek—Akzessorietät als Gretchenfrage?’  ZBB 112; Sergio Nasarre-Aznar, ‘The Eurohypothec: A Common Mortgage for Europe’  The Conveyancer and the Property Lawyer 32; Otmar Stöcker, ‘Die grundpfandrechtliche Sicherung grenzüberschreitender Immobilienfinanzierungen’ (2006) WM 1941; Gary Watt, ‘The Eurohypothec and the English Mortgage’ (2006) 13 MJ 173; Tatjana Josipović, ‘Die Harmonisierung der Immobiliarsicherheiten: Die Eurohypothek. Modell zur Integration des Hypothekarkreditmarkts der EU, in Jürgen Basedow, Oliver Remien and Manfred Wenckstern (eds) Europäisches Kreditsicherungsrecht (2010) 71-127.