Mortgage credit in Italy
(By Associazione Consumatori Piemonte )

Mortgage credit to consumers in Italy and in italian law

1. Premises.

In Italy, mortgage credit is a well-accustomed form of financing private people who are looking for a new home to buy. For italian families, to own the house where they normally live is still a primary goal; moreover, since around the seventies middle classes families started to think about buying a second house as an affordable target, and so nowadays figures tell us that Italy is one of the european countries where the quote of estate property directly owned by families and privates is higher.
The italian banking system is very often involved in estate business, just considering that in a high demand market, such the italian one is, prices keep high for years and families quite always need a financial support in order to buy their new property. So, banks are the third actor on the scene aside of privates and estate agencies. Anyway, while the presence of an estate agency is not necessary in an estate business between privates, even their precence is quite common. While there is an estate agency, it will mostly offer a service of financial consulting, helping the buyer in finding the kind of financial service, and even the particular bank, which will suit most his needs. Which will, or should… but it would be another tale to speak about, this one about estate agencies; and it would be a long one, too.
Now, let’s focus instead upon the financial services that the buyer, a private or a family, will find on the market, and mostly about the guarantees he will be asked to give to his financer, the banking institute. First of all, the buyer will have to determine his financial needs, in comparison with the total cost of the flat or building he’s going to buy. Since few years, the banking system offers financing up to the 100% of the price, while before the private did have to find out in his own finances at least the 20% of the price. Small and aggressive banks used however to accept a covered agreement where the price declared in the deed was pumped up by the parties so that the 80% of the declared price provided by the financial institute was indeed the 100%. Of course, the lack of direct availability of almost a part of the price will induce the bank to be most careful in according the credit. A carefulness which will reveal itself either, quite straightforwardly, in the refusal of giving credit to the prospective buyer or, more frequently, in the request of a particular guarantee. This could be a personal guarantee by a more well-furnished person (tipically, in the case of a first-house buying by a private or a young couple, this will be a parent or relative) or a “real” one, where “real” comes from latin “res”, meaning “thing”. So, a guarantee funded upon a concrete thing. And what better of the same flat or building the consumer is going to buy? This is the typical case of a mortgage credit: it’s also possible to base the mortgage on a different building already owned by the buyer, as it’s theorically possible to fund the mortgage upon other goods, like vehicles and boats, but these are minority cases. Let’s focus instead now on the law regulating mortgage and mortgage credit.

2. The italian law.

Mortgage is well disciplined in the Civil Code, with very few changes since 1942, the year when the Code was published. Quite unusual in our law, but the institute has ancient and well-developed roots, common to other continental european systems, which don’t easily suffer to be eradicated. Anyway, some of changes are quite important for our purpose; relevant articles of the Civil Code go since art. 2808 until art. 2899.
The purposes of the institute are two: to admit the creditor (in this case, the banking institute) to be preferred to other creditors in the division of the sum coming from the selling of the mortgaged goods and to give the creditor a guarantee which will follow the mortgaged goods even if they are sold by their owner. Both these purposes are well indicated in art. 2808 c.c. Let’s imagine, for instance, that the private can no more pay his debts with the financing bank (let’s put them to 100) and that his mortgaged flat, upon demand of the bank and of other creditors, will be sold by the Court at 150. First of all, 100 of these will go to the financing bank, the other 50 will be divided among the other creditors (and, if there’s still anything after, it will go to the former owner of the flat). Moreover, if the private will sell the flat (without his debt with the financing institute…), the bank will retain its rights against the new owner of the flat while the other creditors of the first owner won’t.
Mortgage can involve only certain kind of goods: estate property and some limited rights on estate property of Roman descendance (usufrutto, superficie, enfiteusi), vehicles, boats, aircrafts, public rents and industry copyrights (see art. 2810 c.c.). That’s to say, goods suitable for mortgage have in common to be all registered by the public administration, and any legal transaction which will concern these goods will have to be registered too. There’s no problem in establishing a mortgage on a quote of property of a building or flat owned by more than one person (art. 2825 c.c.).
In our typical case, mortgage credit to consumers will be given as aforesaid on the same building or flat the consumers will be willing to buy thanks to the credit by the banking institute. Mortgage will therefore take birth by the will of the parties: it will be a voluntary mortgage, which is one of the kinds recognized by law (art. 2821 c.c.). This article provides a written form for the contract establishing a mortgage. Parties could choose between a simpler written form, called “private writing”, and the most exigent one, called “public act”; anyway, after the act has been written down it’s requested to inscribe the deed of mortgage in the public register where the mortgaged good is concerned. That’s to say, in reality it’s necessary to adopt the “public act” form, according to which the act is written not directly by the parties but by a special public officer, the notaio (a role common to other continental law systems, let’s think at the french notaire or at the spanish notaro, but not to common law ones). This is the simplest way in which the act can subsequently be inscribed in the register; otherwise, the signature of the parties will have to be certified as authentic by a notaio (and so it’s necessary to ask for his help anyway…) or by a Court (art. 2835 c.c.). Anyway, the “public act” form is the same which is used for any transaction related to registered goods, such as buying or selling any building or flat is, and so the private consumer would anyway have to look for a notaio for his buying deed. For the mortgage deed, anyway, the inscription on the register is necessary for its true validity, and this is different from the simple buying deed, which is registered only because otherwise it would be impossible to oppose the change of property to third parties but is valid between parties even before registering. It’s no problem, by the other side, in having a unilateral deed of mortgage instead of a contract, given that even this deed will have to be written down as a “public act” and then inscribed in the register. Anyway, registering the deeds is also a job the notaio will care for, according to italian law (and professional customs).
It’s also possible to put a mortgage on a good which hasn’t still come to existence, such it would be the case of a buiding which has still to be built, but the inscription on the register takes place only after the construction is over and the deed will have only the effect of a contract responsibility for the private in case the inscription won’t be done (art. 2823 c.c.). We said “would be” the case of a building which has still to be built because law no. 30 of year 1997 included a new article in the Civil Code, no. 2825 bis, which provides that a mortgage on a building which still hasn’t gone to existence wins over the promise of selling of the same building to a third, that’s to say the third will have to substain the mortgage when he will buy the building. This has been generally interpreted as if the mortgage on a building not yet built can now be inscribed in the register as soon as the deed has been written down.
The law admits that multiple mortgages can be put on the same good, and regulates which will prevail if the good will have to be sold at a public auction (artt. 2852 and following c.c.). The principle is the prevailance of the first in order of time up to the total of his credit; if something remains goes to the second and so on.
A mortgage lasts for twenty years (art. 2847 c.c.). Anyway, upon request of the creditor it’s always possible to inscribe the same deed for a second period of time and so on until the mortgage contract has still effects between the parties (art. 2848 c.c.).
This could be considered a resume of the relevant legislation about mortgage in the civile code, as it is present since 1942 until nowadays. But there are two more recent laws who have intervened in the specific field of mortgage credit to prospective estate owners. One of them is law no. 30 of year 1997, of which we’ve already told. The second is the consolidating act, enacted by the Government under Parliament control, identified as Legislative Decree number 385 of year 1993, regarding the whole of italian banking law. Articles from 38 to 41 are relevant for our purpose, regarding in a specific way credit operations financing real estate transactions (“credito fondiario”). Article 39 specifically deals with mortgages. It’s important the content of article 39 paragraph 5, according to which the debtor has the right to a reduction of the value of the mortgage each time he pays back the 20% of his debt guaranteed by the mortgage. Moreover, article 39 paragraph 7 reduces the professional cost of the notaio work, making easier the stipulation of estate mortgages. Mostly important is article 40, which provides the right for the debtor to extinguish his debt in advance paying a sum comprehensive of interests related to the time passed between the concession of the credit and the extinguishing of the same. In this way it’s of course also possible to solve the mortgage in advance, and this is surely one of the most important rights provided to the private debtor who contracted a mortgage with a bank in order to buy a flat or building.

3. The factual state of the art – problems and prospectives

So, this is, more or less, the present law situation. Problems are related with the factual state of the art and with the way in which the mortgage is generally contracted. As we said, in Italy is especially frequent to have young families and singles who desire to live in a house of their own property, and so it’s also frequent to have over-indebtment situations due to the incongruence of such a desire with the individual financial situation. Over-indebtment may also be favored by estate agencies and the same banking system: both have an interest in the growing of the estate market, and if the estate agency has just to gain from the transaction the bank will carefully protect itself against losing risks contracting a satisfactory guarantee with its debtor. So, it’s generally easy to find an institute who will finance the operation, generally with a research aided by the same estate agency. Agencies generally work with the same banking institutes, with which they have permanent and proficuous professional relations, and have a range of institutes to contact from the main bank to the small financing company. The higher the interest they ask for, the lower the attention they’ll put to the real financial capacity of the consumer. Mortgage, as we also said, is especially used where the banking institute receives no other guarantee, less dangerous for the buyer. If the private consumer or family becames unable to pay, the bank will put the flat or building to sale forcing the occupants to find out another place to live, which can obviously be very difficult and create serious social problems. Public policy since the ‘60ties tried to guarantee particular benefits for the buying of a “first home”, that is, the house the family will use for daily living. Anyway, if fiscal costs were lowered, none of those directly concerned over-indebtment issues, which are still largely a matter for the free market regulations. Of course, correct information is absolutely lacking, left as it is to parts with an interest in selling (estate agencies and banking institutes). An active role by public offices and/or consumer associations in independent information about chances and risks of estate operations with a financing based on the mortgage of the flat or house one’s wanting to buy would be probably strongly needed in such a situation. As for law changes, mortgage is intrinsically finalized to let the financer able to easily put to sale the mortgaged good, so it’s uneasy to think about reforms tending to create difficulties for the banking institute in this regard. Anyway, it would be possible to encourage the substitution of the mortgage with other guarantees, even of a different kind, if they seem sufficient from an objective point of view.