Mortgage credit in Germany
(By Verbraucher - Zentrale Hamburg e.V.)

Mortgage Loan:
Necessity and Obstacles for a European Legislative Harmonisation

1. Introduction

The possibility of collateral security provided by a lien on real estate prop-erty (“mortgage”) is principally acknowledged in all European legal sys-tems. However, the detailed arrangements in the single European coun-tries of what is called “Grundpfandrechte” in the Germany legal terminology show considerable peculiarities, that hinder international business in this field. In the following overview it shall be described to what extent a har-monisation of law in this area within a European domestic market is desir-able and possible, considered from the point of view of the Germany con-sumers. Following that purpose first of all an introduction to the system of Germany “Grundpfandrechte” will be given (2.), which will serve as a basis to clarify important differences between Germany and the arrangements in other members states of the European Union (3.). Subsequently typical consumer problems which frequently arise in connection with lien on real estate property in Germany will be pointed out (4.). In the end of the pro-posal a conclusion will be drawn (5.)

2. The System of “Grundpfandrechte” in Germany

“Grundpfandrechte” have a long tradition in Germany and are legally con-sidered as a component of the basic codification of the Germany private law, the Germany Civil Code (Bürgerliches Gesetzbuch - BGB) from the year 1900. During the recent years, first of all in order to match require-ments of European Law, this code has been reformed in many parts. Nevertheless the provisions concerning “Grundpfandrechte” have not gone though any considerable changes for ages. Especially those European di-rectives, that were to be transferred to Germany law for the purpose of a harmonised standard of consumer protection were taken into account in that part of the Germany Civil Code, which deals with the law of obligation.
a) “Grundpfandrechte”
The expression “Grundpfandrechte” as such can not be found in the Ger-man Civil Code. However, in the legal language it has established itself as a comprehensive term for legal phenomena, which are expressively named and regulated within the Code, namely “Hypothek” (see BGB §§ 1117ff.) and “Grundschuld” (see BGB §§ 1191ff.). The so called “Renten-schuld” (see BGB §§ 1199ff.) is a special case of the “Grundschuld” and therefore stipulated within the same section, but practically barely of any importance and therefore not a matter of further interest for this over-view. Of crucial practical importance is the fact, that principally either a “Hypothek” or a “Grundschuld” can be chosen as a collateral security based on real estate property. Those rights have two common character-istics. Firstly, both “Grundschuld” and “Hypothek”, - because of the princi-ple of the abstract nature of rights in rem which governs the Germany law - are effective even if the contractual basis is not. Secondly, the holder of a “Hypothek” (see BGB § 1147) as well as the holder of a “Grundschuld” (see BGB §§ 1147, 1192) are entitled to use the real estate under matter via enforcement and in this way realize e.g. a loan repayment. In com-parison to other creditors, who might also make use of the real estate, a holder of a “Grundpfandrecht” is privileged by the stipulations of the law of enforcement and insolvency (see § 10 Gesetz über die Zwangsver-steigerung [ZVG] and § 49 Insolvenzordnung [InsO]). The significant ad-vantage in praxis therefore is, that the real estate`s value is so to say “reserved” first and foremost for the holder of a “Grundpfandrecht”. The “Hypothek” differs from the “Grundschuld” through the so called “Akzes-sorietät“ (accessoriness).
b) “Akzessorietät” (Accessoriness)
The definitions of “Hypothek” and “Grundschuld” within the Code (BGB §§ 1113, 1191) are almost identical. They differ from each other only be-cause the “Hypothek” is granted expressively “zur Befriedigung wegen einer ihm [dem Hypothekengläubiger] zustehenden Forderung“ (BGB § 1113), which means as a collateral for a certain debt. The binding be-tween “Hypothek” and the debt that is thereby described is called “Akzes-sorietät” (accessoriness). Practically this means that a “Hypothek” which has been granted as a collateral for a loan repayment only exists if and as long as there is a valid claim for repayment at the same time (see BGB §§ 1163, 1170) – thus at least not after the loan has been paid back. How-ever, it is still a matter of a scientific dispute whether the lender is entitled to make use of the registered “Hypothek” even if the loan contract was revoked or invalid due to any other reason (details: Baur/Stürner § 37/47ff.). The “Grundschuld” on the other hand exists independently from a valid claim. Correspondingly BGB § 1192 stipulates that only those pro-visions of the law of the “Hypothek” which do not precondition the exis-tence of a claim also apply to the “Grundschuld”. Consequently, the holder of a “Grundschuld” is principally entitled to utilize the real estate at any time and without any trouble. It is true that if a “Grundschuld” is granted, usually an agreement is made that the holder is entitled to make use of his right just to a definite purpose, for instance to realize the repayment of a loan. Nevertheless, the real estate owners’ protection which is medi-ated by such an agreement is not effective if the “Grundschuld” is trans-ferred to a third party which is not bound to the named agreement. Fur-ther on, especially banks tend to word agreements offered to their cus-tomers rather extensively, so that for example not just a certain repay-ment of a loan but also any future claims are covered by the “Grund-schuld”. The jurisdiction of the Germany Federal Court has considered such agreements valid in most cases. From that court’s point of view, only an agreement on the basis of which the real estate owner had granted a “Grundschuld” intended for the debts of a third party is not valid (BGHZ 101, page 29). Thereby it becomes clear why almost all Germany banks consider the accessory character of the “Hypothek” as being to their det-riment and loans are practically given almost exclusively if “Grundschuld” is granted to secure the repayment.
c) Formalities
In order to grant a “Grundpfandrecht” for the first time efficiently, ac-cording to the principles of Germany real estate law it is not enough that the owner and the purchaser make a corresponding agreement only. In addition, a so-called act of publicity is necessary which makes the exis-tence as well as the holder of the right clear to the public and at the same time offers the possibility of a bona fide transaction. For that purpose the local courts keep a so-called “Grundbuch” (land register), in which prop-erty and other rights concerning a certain piece of land are registered. In other words, registration of a “Hypothek” or “Grundschuld” is constitutive (BGB § 873). The same applies principally also to the transfer of these rights. But it is important to note that usually a corresponding certificate is being issued and given to the holder of either of the rights (BGB §§ 1116, [1192]). The manual delivery of that document in such cases replaces the registration of the transfer in the “Grundbuch”.

3. Comparison to the Other States of the European Union

The regulations concerning these matters in the other European states differ considerably in some parts from the corresponding Germany princi-ples mentioned above (see v. Bernstorf, RIW 1997, S.181f.). In this con-text not only the principle of the abstract nature of rights in rem as a pe-culiarity of the Germany legal system has to be taken into account. What is also very important is the fact that in almost every Member State of the European Union only an accessory right which can therefore be compared to the Germany “Hypothek” is acknowledged. Entirely different from the legal praxis in Germany, lien on real estate property and the obligation to pay back a loan are usually very closely connected throughout the Euro-pean legal systems. The English “mortgage”, the French “hypothèque con-ventionelle“ (Code Civil Art. 2124ff) may illustrate that, as well as the corresponding Portuguese law (Art. 686 Código Civil). In many legal sys-tems the mortgage is even terminated, which means that it can be used for the period of time which is no longer than 10 years (Finland) or 20 years (Italy) unless it is formally prolonged. Significant differences appear also within the formalities. On the one hand, land registers in other coun-tries are not in any case and aspect comparable to the Germany “Grund-buch”. This becomes clear by taking into consideration that the registra-tion in some countries does not have any legal consequences at all (for instance, in Portugal or Luxembourg) and sometimes is of importance just with regard to a bona fide transaction (for instance, in France). On the other hand, the manual transfer just on the basis of a written certificate is not possible in most European countries. Thus a harmonisation of mort-gage loans in the European economic region seems to be possible only in case the Member States should be ready to allow or to undertake far-reaching re-arrangements of their legal systems.

4. Problems with Mortgage Loan

Practically, from the consumers’ point of view mortgage loan plays in Germany a crucial role in the financing of real estate purchase. One might even say that for most of the consumers real estate (separate home) pur-chase is possible only because the legal system generally allows to buy and use real estate as a collateral security at the same time. However, business in this field is often problematic. This will be illustrated in the following by two representative examples. An overview shall be given con-cerning the problems of so-called “Vorfälligkeitsentschädigung” and “Ver-bundene Verträge”.
a) “Vorfälligkeitsentschädigung”
Loans are very often granted on the basis of a fixed long-term interest rate. In case the capital which is necessary to repay the loan is offered on the market under more favourable conditions, a conversion of the debt is reasonable from the borrower’s point of view. A conversion of the debt preconditions on the other hand that the loan which has been granted on the basis of a long-term interest rate can be terminated beforetime. Re-ferring to the legal stipulations concerning mortgage loans, this is princi-pally possible only after the period of time of 10 years has elapsed (see BGB § 489/1). Nevertheless, a couple of years ago the Germany Federal Court (BGHZ 136, 161) held that under special circumstances the bor-rower can claim a termination agreement, which would include the bor-rower’s obligation to pay compensation because of the beforetime termi-nation of the loan contract (“Vorfälligkeitsentschädigung” – see Reifner, NJW 1995, 2945). This idea has recently been taken up by the Germany legislator and is expressively stipulated as an extraordinary right to termi-nate the contract. However, basically two problems remain. On the one hand, there is still a considerable uncertainty concerning the question whether such special circumstances can be assumed in an individual case. On the other hand, the amount of compensation that can be asked for bears an immense conflict potential between consumers and banks. It is obvious that sometimes the right to terminate a loan contract can turn out to be worthless, when taking the amount of the compensation into consid-eration.
b) “Verbundene Verträge”
By the stipulations concerning consumers’ loan, a certain level of con-sumer protection has been reached (see the proposal concerning “Con-sumer Credits” [topic Nr.2]). Hereby the consumers shall especially be protected from the legal consequences of hasty but economically far-reaching decisions and BGB § 495 therefore opens up the possibility for a consumer to withdraw a loan contract. Without any doubt, a consumer making a loan contract to finance the purchase of a real estate is a typical example for such a situation. Such a contract typically is a once-in-a-lifetime deal for most of the consumers and represents a considerable economical burden to them. Therefore it is especially astonishing that the protection which is mediated by BGB § 495 or other stipulations which en-title the consumer to withdraw the contract are practically not efficient in such cases. This is mainly because of the fact that a consumer obliges himself in two directions. He is not just obliged to perform the loan con-tract, but has also to pay the price for the real estate. It is obvious that in such cases a consumer cannot be protected from the legal consequences of a loan contract as long as he/she is still obliged to perform the sales contract. In case of an economic connection of the creditor and real estate seller, which can be assumed, for instance, if the seller has mediated the contact with the creditor or vice versa, the two contracts are legally con-sidered as “Verbundene Verträge” (connected contracts). At least for such cases, the Germany Civil Code (BGB § 358) generally stipulates that after the loan contract has been withdrawn, the (connected) sales contract does not have to be performed either. However, even this protection does ap-parently (BGB § 491/3) not apply in case of a mortgage loan. Unfortu-nately, this unsatisfactory result has been confirmed by the Germany Fed-eral Court (decision from 9th April 2002 – XI ZR 91/99) without detailed reason. Thus, in the field of mortgage loans the right to withdraw a con-tract does practically not exist (see Hoffmann, ZIP 2002, 1066).

5. Conclusion

After this overview it has been shown, that Germany consumers’ problems in the field of mortgage loan are first of all contractual problems. In this area, especially in the financing of real estate purchase protection is nec-essary. Modalities of collateral security on the other hand seem to be of much less importance. Especially stipulations concerning “Grundpfand-rechte” within the Germany legal system solve conflicts between several creditors of one and the same debtor. They are hardly capable to take a necessity of protection into account, which typically arises within the rela-tion of banks and consumers. Correspondingly a European harmonisation in this can barely have any positive effects on the situation in Germany. On the other hand it seems important to note, that the above described (non-accessory) “Grundschuld” is relatively detrimental from the consum-ers point of view. This kind of lien to some extent bears the danger of dis-proportional collateral security in itself. And the same is true for the so-called (neither accessory) “Eurohypothek” which has been discussed in favour of a European capital market and as an alternative to a harmoniza-tion during the recent years (see Wachter, WM 1999, S. 49ff.). With re-gard to that discussion a European Harmonisation on the basis of a gener-ally accessory mortgage seems to be rather attractive from the consumers point of view.

References:

Baur/Stürner, Sachenrecht, 17. Auflage, München 1999
v. Bernstorff, Das Hypothekenrecht in den EU-Staaten, Recht der internationalen Wirtschaft (RIW) 1996, S.181f.
Hoffmannn, Haustürwiderruf bei Realkrediten und verbundenes Grundstücksgeschäft, Zeitschrift für Wirtschaftsrecht (ZIP) 2002, 1066
Reifner, Schadensbegriff und Berechnung der Vorfälligkeitsentschädigung, Neue Juristische Wochenschrift (NJW) 1995, 2945
Wachter, Die Eurohypothek, Wertpapiermitteilungen (WM) 1999, S. 49ff.