Asset-Backed And Mortgage-Backed Securities

November 2014
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General

In accordance with Turkish Civil Code (“Civil Code”) art. 970-972, financial institutions that grant loans in exchange for mortgages may issue bonds in exchange for their secured loan receivables in order to finance the projects by collecting small amounts from investments[1]. Thus, loan creditor financial institutions may issue bonds in exchange for loan receivables that are secured by mortgages. Financial institutions sell these secured bonds, and provide the receivables secured by mortgages as security for the investors.

According to Civil Code art. 970, institutions that are authorized by the relevant authority to grant loans in exchange for mortgages may issue secured bonds in exchange for their receivables secured by mortgages, or their receivables arising from current business, even though no agreement is concluded, and no liability concerning delivery is foreseen.

With respect to Civil Code art. 971, creditors shall not request the payment of such secured bonds prior to the redemption plan being put into place. As the loan granted by the financial institution has a determined payment plan, such bond shall adhere to the same redemption plan.

Bonds shall be issued as registered, or to the bearer, and have registered coupons.

In accordance with Civil Code art. 972, issuers, conditions regarding issuance, and the institutions authorized to grant permission for issuance, shall be determined by a special law. The Capital Markets Board adopted important communiqués within this scope.

In accordance with the Capital Markets Law (“CML”), the Capital Markets Board adopted the Communiqué on Asset Backed Securities and Mortgage Backed Securities (III-58.1) (“Communiqué”) and regulated principles and procedures of asset-backed and mortgage-backed securities.

With respect to the Communiqué, asset-backed securities and mortgage-backed securities shall be briefly assessed, below.

Asset-Backed and Mortgage-Backed Securities (“AMBS”)

The Communiqué defines mortgage-backed securities as the securities that are secured by mortgages, issued in exchange for the assets to be acquired by the housing finance fund or mortgage finance fund.

Asset-backed securities are the securities issued in exchange for the assets to be acquired by the housing finance fund or mortgage finance fund.

If the fund is the issuer, an asset finance fund for the issuance of the asset-backed securities and a housing finance fund for the mortgage-backed securities shall be established. The funds established by the financial leasing companies and financing companies shall only issue AMBS through the acquisition of the assets owned by the founders. The funds established by the banks, mortgage financing, and broadly authorized intermediary institutions are allowed to issue AMBS through the acquisition of assets that are owned not only by the founders, but also by other institutions.

In Turkey, these fund may be established for a limited or unlimited period of time. However, the funds shall neither be established, nor operated, for purposes other than AMBS issuance.

The assets of the fund shall not be disposed of for other purposes until the issued AMBS are redeemed. The aforementioned rule shall also be valid in case that a public institution acquires the control or the management of the founder. The assets of the fund shall not be subject to attachment, precautionary measures, or the bankruptcy process, including the collection of the public receivables.

The assets of the fund shall not be pledged or collateralized, with the exception of loans, derivatives, or other similar transactions concluded on behalf of the fund, providing that such provisions are made in the name of the fund, and a specific provision is included in the internal regulations.

Asset finance fund’s portfolio may include;

  1. Receivables of the banks and finance companies arising from consumer loans and commercial mortgage loans,
  2. Receivables arising from financial lease agreements in accordance with Law no. 6361,
  3. Receivables arising from the sale of real estate owned by the Housing Development Administration of Turkey,
  4. Documented or secured commercial receivables arising from invoiced sales to their customers by joint stock companies that provide service and produce goods (with the exception of financial institutions),
  5. Deposit for a term shorter than three months, participation account, reverse repossession, money market funds, short-term borrowing instrument funds, and Takasbank money market transactions with the intention to invest the monies realized from the assets of the fund’s portfolio,
  6. Assets that exceed the total amount of obligations of the fund may be transferred to the reserve accounts created in accordance with the ratio, or amount specified in the service contract. Such assets are transferred to the reserve accounts,
  7. Other assets approved by the Capital Markets Board, with the exception of capital markets instruments.

Housing finance fund’s portfolio may include;

  1. Receivables of the banks and finance companies secured by a mortgage registered to the relevant registry arising from the housing finance set forth in paragraph 1 of art. 57 of the CML,
  2. Receivables arising from the housing finance agreements within the scope of Law no. 6361, provided that they are concluded for housing finance purposes set forth in art. 57 of the CML,
  3. Receivables and commercial loans of the banks, financial leasing companies and finance companies secured by a mortgage registered to the relevant registry,
  4. Receivables arising from the sale of real estate owned by the Housing Development Administration of Turkey,
  5. Assets belonging to the asset finance fund as stated in items (5), (6) and (7), above,
  6. Rights and obligations arising from derivatives.

Application of approval for the establishment of the fund and prospectus, or the certificate for the issuance of AMBS shall be evaluated, together. However, if requested by the founders, such applications may be evaluated, separately. Other documents determined by the Capital Markets Board shall be attached to the application.

Following the issuance of AMBS, the fund’s portfolio shall be established by the cash collected from the investors.

Conclusion

Art. 970-972 of the Civil Code provides an opportunity to certain financial institutions to issue secured bonds. Accordingly, the principles and procedures regarding the issuance of AMBS has been regulated by the Communiqué and, in this respect, an important source of finance has been provided.

[1] OGUZMAN, Kemal; SELICI, Ozer; OKTAY OZDEMIR, Saibe, Esya Hukuku, Istanbul 2013, pg.1039.

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