W7 - Appraisal of Collateral

Collateral

refers to the property/ies which the borrower puts up to repay a loan in cases of default, or any undertaking from other credit worthy entities to guarantee the borrower’s obligation.

• The borrower’s capacity to pay shall always be the primary consideration in the extension of credit. However, endeavor to have a fallback or a secondary source of repayment in the form of value adequate and legally enforceable collateral/security

• The strength of the collateral is measured and represented by the quality of the assets the lender holds and the completeness and enforceability of all supporting legal documents

• All collateral/security accepted shall be properly documented and registered/notarized in favor of the lender

Appraisal

is an estimate or opinion of value usually transmitted in writing of adequately described property as of a specified date supported by presentation of analysis of factual and relevant data. It is conducted to affix a value on a property or properties offered as collateral to secure a loan accommodation. The value most commonly sought in an appraisal is market value.

Market value

may be defined as the highest price estimated in terms of money which a property will bring if exposed for sale in the open market, allowing a reasonable time t find a purchaser who buys with knowledge of all the uses to which it is adapted and for which it is capable of being used. Frequently, it is referred to as the price under which a willing seller will sell and a willing buyer will buy, neither being under abnormal pressure.

General Considerations in the Choice of Collateral

• Stability of value

• General purpose use
• Liquidity/salability

• Ease of documentation

• Control over collateral

Risk Areas and Control in Appraisal

• Proper identification of property appraised

• Authenticity of titles/documents – verification with respective government agencies concerned

• Approaches to values – determination on whether subject for appraisal/inspection is income productive or not

• Reliability of information gathered

• Time and resource management

• Confidentiality of report

Requirements for Collateral (Real Estate Mortgage)

• Photocopy of the Transfer Certificate of Title (TCT)/Original Certificate of Title (OCT)/Condominium Certificate of Title (CCT)

• Declaration of Real Property/Tax Declaration

• Tax Clearance or latest copy of Real Estate Tax Receipt

• Location Plan and Vicinity Map signed by Geodetic Engineer

• Insurance

• If corporation – a copy of the board resolution duly executed and acknowledged indicating the names and positions of authorized signatories to the mortgage

Requirements for Collateral (Chattel Mortgage: Motor Vehicle)

• Proof of ownership

• Chattel Mortgage contract duly registered with the Register of Deeds

• LTO Certificate of Registration and Official Receipt (current) of motor vehicle

• Stencil of Motor and Body Number of Motor Vehicle

• Property listing including detailed description, location and purchase cost

Purpose and Importance of Title Verification

• To ascertain that the borrower is the true and legal owner of the property

• To determine any restriction/encumbrance registered and annotated on the tile

• To determine authenticity of the title being offered as collateral

Types of Collateral

1. Primary Collateral

2. Secondary Collateral

Primary Collateral

1. Real Estate Mortgage (REM)

2. Chattel Mortgage (CM)

3. Hold-Out on Deposits

4. Third Party Mortgage

5. Negative Pledge

Real Estate Mortgage (REM)

the conveyance of a real estate as security for the payment of a loan and conditioned to become void upon such payment. It is essential that the mortgagor be the absolute owner of the property being mortgaged

Unacceptable properties for Real Estate Mortgage

• Properties in underdeveloped subdivisions

• Properties in depressed area

• Properties occupied by squatters

• Properties for government appropriations

• Properties with no right of way

• Churches, Funeral Homes, Cemeteries, Memorial Parks, Schools, Hospitals and the likes

• Properties with involuntary restrictions such as subdivisions restrictions, Sec. 4, Rule 74, Adverse Claims, Lis Pendems

• Properties with government restrictions such as Free Patent, Sales Patent or Homestead Patent

• Properties subject to CARP

• Properties with unlocated or overlapping boundaries

• Affected by lahar or foreseen to be affected by lahar

• Properties located along rivers that erode properties with setbacks

Chattel Mortgage (CM)

similar to the REM, except that the subject is chattel or personal property

Chattel Mortgage: Merchandise Inventory

• Proof of ownership

• Copy of the Special Power of Attorney executed by the owner

• Chattel Mortgage contract duly registered with the Register of Deeds

• Insurance Certificate and endorsement certificate/s in favor of the bank

Assignment of Shares of Stock (Pledge)

• Deed of Assignment

• Certificate of Stocks

Assignment of Deposit

• Deed of Assignment

• Waiver of Confidentiality

• Original Certificate of Time Deposit (when applicable)

Hold-Out on Deposits

is the transfer or setting over of deposit or of rights or interest therein from one person to another, or the act by which one person transfers to another, or causes to vest in another, his right over said deposit. It merely purports to convey the deposits as collateral in order to secure the payment of a loan. If the borrower pays the loan on maturity, the transfer becomes null and void.

Third Party Mortgage

this is executed when the borrower is not the owner of the offered collateral

Negative Pledge

an undertaking on the part of the borrower whereby he agrees not to mortgage, encumber, transfer or dispose of his fixed assets without the consent of the creditor, while the loan is outstanding

Mortgage Trust Indenture

this is executed by a borrower who has a huge property and has assigned a trustee/custodian of this property. All the creditors will have to receive a Mortgage Participation Certificate (MPC) indicating the extent of the collateral portion for the corresponding loan amount of each creditor

Secondary Collateral

1. Assignment of Inventory, Receivables and Proceeds of Export Letters of Credit

2. Joint and Several Signature (JSS)

3. Parent Guaranty

4. Cross Guaranty

5. Co-maker

Assignment of Inventory, Receivables and Proceeds of Export Letters of Credit

by assignment, the deed convey the collateral to the lender to secure indebtedness

Joint and Several Signature (JSS)

also known as suretyship where a surety binds himself solidarily with the principal debtor. However, in this undertaking the surety does not incur liability unless and until the principal debtor is held liable. In a suretyship a creditor deals/transacts with both the principal borrower and surety. Generally, a JSS is executed when the offered primary collateral is insufficient. It is a practice to require JSS under the following rules:

• For a sole proprietorship, if the husband is the principal borrower, the wife shall execute a JSS and vice versa or any third party other than the spouse

• If the borrower is a corporation, the principal directors and stockholders shall execute the JSS

• If the borrower is an association, the principal officers shall execute the JSS

Parent Guaranty

written promise to pay for a debt in case of failure of the principal debtor. Usually, applies to multinational companies, whose mother companies are based outside the country. In case of default shall be done on the properties of the principal borrower first. The guarantor’s property shall be subject to foreclosure if the total value of properties of the principal debtor is insufficient to cover the loan.

Cross Guaranty

this exists when a person or company guarantees the loan of another and vice-versa.

Co-maker

required for secured loans when borrower is more than 60 years old. Preferably, co-makers must be the spouse or any single and gainfully employed children who is also knowledgeable of the project. Unsecure loans granted to individual borrower shall require at least 2 co-makers.