Sale of Mortgaged Property to Creditor Per Se Is Not Prohibited

When dealing with mortgaged properties, many people assume that selling such assets to the creditor is legally prohibited. However, this is not necessarily the case. Under the right legal framework, the sale of a mortgaged property to the creditor is allowed, provided that it does not violate laws on foreclosure, dation in payment, or the prohibition against pactum commissorium.

How Mortgages Can Be Paid

A mortgage is a security interest granted over a property to secure the performance of an obligation, typically the repayment of a loan. The debtor can satisfy the mortgage in several ways:

1. Full Payment of the Loan – The most straightforward way to release the mortgage is by repaying the debt in full. Once the debt is fully paid, the creditor must execute a release of mortgage, which should then be registered with the relevant land registry.

2. Foreclosure Sale – If the debtor fails to pay, the creditor may initiate a foreclosure process to sell the property, either through a judicial or extrajudicial foreclosure proceeding. The proceeds from the sale are then used to settle the outstanding debt.

3. Dation in Payment (Dacion en Pago) – Instead of paying in cash, the debtor may transfer ownership of the mortgaged property to the creditor in satisfaction of the debt. This is a voluntary arrangement between both parties and is valid as long as it does not constitute a disguised pactum commissorium.

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Relationship Between Dation in Payment and Pactum Commissorium

Dation in Payment (Dacion en Pago)

Dation in payment occurs when the debtor transfers ownership of the mortgaged property to the creditor in exchange for the extinguishment of the debt. This is a negotiated and consensual agreement between both parties. The key difference between dation in payment and a foreclosure sale is that in dation, the debtor willingly conveys ownership as an alternative means of settling the obligation.

For the dation to be valid, it must be agreed upon by both parties and must not be forced upon the debtor. It is a lawful and commonly used method of settling obligations when cash payment is not feasible.

Pactum Commissorium: The Prohibited Clause

Pactum commissorium, on the other hand, is an illegal provision in a mortgage or pledge that allows the creditor to automatically appropriate the mortgaged property in case of non-payment. This is prohibited because it is considered oppressive and inequitable to the debtor, as it bypasses the due process of foreclosure or voluntary dation.

For a transaction to be considered a prohibited pactum commissorium, two elements must be present:

1. A security arrangement (such as a mortgage or pledge).

2. An automatic transfer clause in favor of the creditor upon default.

Unlike dation in payment, which is voluntarily agreed upon after default, pactum commissorium is a pre-arranged forfeiture mechanism that is deemed invalid under the law.

Conclusion

The sale of a mortgaged property to the creditor is not inherently prohibited. It can be done through legitimate means, such as dation in payment or foreclosure. However, what is illegal is the automatic appropriation of the property by the creditor without due process, as seen in pactum commissorium. Understanding these legal concepts helps ensure that mortgage transactions remain fair and within the bounds of the law.

Source: Ziggurat Real Estate

Credit growth further slows in July

Credit growth slowed for a fourth straight month in July, as high interest rates took its toll, Bangko Sentral ng Pilipinas (BSP) data showed.

Data from the BSP showed outstanding loans of universal and commercial banks, net of reverse repurchase (RRP) placements with the central bank, rose by 7.7% to P11 trillion in July, from P10.21 trillion a year earlier.

The 7.7% bank lending growth in July was slower than 7.8% in June, and the 11.9% expansion in July 2022. It was also the weakest increase since April.

China Banking Corp. Chief Economist Domini S. Velasquez said the slower credit growth reflects the cumulative impact of the aggressive monetary policy tightening of the central bank.

The BSP hiked borrowing costs by 425 basis points from May 2022 to March 2023 to curb inflation, bringing the key policy rate to a near 16-year high of 6.25%.

“This is compounded by a slowdown of economic activities, with spending moderating from the highs of revenge spending post-pandemic,” Ms. Velasquez said.

Philippine gross domestic product (GDP) expanded by a slower-than-expected 4.3% in the second quarter, as household consumption growth slowed. For the first six months, GDP growth averaged 5.3%, still below the government’s 6-7% target this year.

Security Bank Corp. Chief Economist Robert Dan J. Roces said consumers and businesses are more cautious in borrowing as inflation remains elevated and interest rates remain high.

Inflation eased to 4.7% in July but marked the 16th straight month that inflation exceeded the BSP’s 2-4% target band. For the first seven months, inflation averaged 6.8%.

“Additionally, anticipation of future monetary policy shifts by the BSP, with the stance of a hawkish hold, could influence borrowing decisions,” Mr. Roces said.

The BSP has kept policy rates unchanged for a third meeting in August. However, stubborn inflation has increased pressure on the central bank to maintain its hawkish stance.

BSP data showed outstanding loans to residents, net of RRPs, expanded by 7.8% to P10.69 trillion in July, from P9.92 trillion in the same month last year. The pace of annual expansion was a tad lower from 7.9% in June.

Borrowings for productive activities jumped by 6.2% to P9.54 trillion in July from P8.98 trillion a year ago. This was slower than the 6.3% growth in June.

Borrowings increased for sectors such as information and communication (10.8%); electricity, gas, steam and air-conditioning supply (10.5%); wholesale and retail trade, and repair of motor vehicles and motorcycles (9.4%); as well as real estate activities (5%).

However, annual declines were seen in loans for professional, scientific and technical activities (-12.5%); education (-7.6%); and arts, entertainment and recreation (-0.8%).

“On a positive note, consumer lending continues to hold up with growth still in the 20% rates, consistent with previous months. Consumer loans continue to buck the trend, remaining robust amidst a period of high interest rates,” Ms. Velasquez said.

Consumer credit jumped by 22.6% to P1.15 trillion from P934.7 billion a year ago. However, consumer loan growth was slightly slower than the 23.7% growth in June.

Double-digit increases were seen for credit card loans (29.8%) and salary-based general purpose consumption loans (24.4%), while motor vehicle loans rose by 8.7%.

Outstanding loans to nonresidents jumped by 6.2% in July, faster than 4.8% in June.

“Moving forward, if the BSP maintains its stance and inflation remains high, we might observe a continued moderation in loan growth. Elevated inflation can deter borrowing, as it erodes the real value of money and can make both consumers and businesses hesitant to take on new debt,” Mr. Roces said.

BSP Governor Eli M. Remolona, Jr. earlier said the central bank still has space for further policy tightening this year, as risks to the inflation outlook are on the upside.

Ms. Velasquez said bank lending may continue to moderate in the coming months until the BSP starts to loosen monetary policy.

“We have not yet likely felt the full effect of tightening due to the lag of monetary policy transmission (about 12 months),” she said.

Mr. Remolona earlier said a rate cut is not on the table, at least not at the Monetary Board’s Sept. 21 meeting.

Source: Business World