NPL best practice/the 3 credit assessment traps

There is a substantial difference between credits and mortgage credits, which goes well beyond guarantees.

Mortgage credits refer to credits to which an executive or insolvency privilege is granted at a certain degree.

However, everyone (including some insiders) should know that a credit resulting from a mortgage loan is not necessarily a mortgage credit.

Or rather, it can be regarded as such with reference to principal, interests and any additional sum according to the applicable legal provisions (in short as described in art. 2855 of the Italian Civil Code.)

The assessment of the credit principal may be full of pitfalls, as indicated below:

1. Difference between credit gross value and mortgage credit

As already mentioned, these two values do not necessarily ​​coincide. In this case, operators often make mistakes, since the selling party tends to submit the gross value (the so-called GBV, “Gross Book Value”) in the first instance.

Moreover, considering also the complexity of the calculation and the poor availability of documents, most of the servicers do not assess the mortgage value and are hold harmless for all the credit features, except for the actual existence of the credit.

Furthermore: the applicable law is interpreted in different ways by the Courts, with special reference to the calculation period compared to conventional interests as well to the allocation of default interests to unsecured loans or to the privilege. Sometimes, as happened in the Milan case, some guidelines are internally provided and all the specialist operators must know them.

2.Difference between mortgage privilege in executive and insolvency procedures

Mortgage is surely considered a privilege, however, it may take on a different value depending on the procedure type.

In this case, the most important aspect is not the credit assessment, but rather its proper placement (and expectation) within the allocation plan.

As for executive procedures, it is easier to outline the privilege degrees and any credits to be submitted to the mortgagee, while insolvency procedures are more complex, due to a higher number of privilege categories, complex calculations and collection forecasts.

3.Difference between mortgage and real estate credits

The fact that a mortgage credit may have a real estate nature deeply influences its collection. In this case, too, the most important aspect is not a different credit assessment, but rather a greater privilege (in some cases), a greater ease of collection and shorter credit collection times.

Without wishing to go into a detailed analysis of the relevant technical aspects (for further information see the judgment of the Court of Cassation, Third Civil Division, 12 September 2014 n.19282) it is striking to note that the two instruments can be used for the same purpose but with different outcome in terms of collection actions.

Some differences are provided by way of example: the land owner may complete an executive procedure even in case of bankruptcy of the execution debtor; the land owner shall receive the execution revenues in advance of the final allocation.

This issue is complicated and should be further investigated, however NPL operators face situations which have been already outlined, i.e. they will afterwards discover whether the credits are mortgage or real estate ones and will act accordingly.

Emanuele Grassi

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