Research On Risk Control Legal System Of Mortgage Loans

From its birth to the development, mortgage loan has been more than100yearsof history, during this time mortgage loan regulation system comes to merge gradually,and become a core banking business with similar forms both in the Anglo Americanlaw countries and civil law countries. On the surface, the mortgage system as a kindof retail loan can use real estate as collateral, and can meet the pledge guarantee way,so its risk is very small, but in essence the mortgage loan system has a closely relationwith banking system which have serious influence on the economy and real estateindustry which fluctuates greatly, so the mortgage loan system is actually a high riskmarket. That’s why although the mortgage system has existed for hundreds of years,the development and perfection of it has never stopped: the formation of the mortgagesystem is similar, but the situation and development of countries’ mortgage marketis different, and this difference makes countries adjust the mortgage loan regulationsystem according to its own market situation. For example, the United States is one ofthe earliest countries developed mortgage regulation system and nearly has a perfectsystem, but in its2010’s "Dodd-Frank Wall Street Reform and Consumer ProtectionAct" still has the amendment on the mortgage loans.It is very important for the mortgage loan to construct risk control system. The narrow sense refers to the mortgage is a retail banking business that bank lend to theresidents loans for the purchase of commercial houses which also guarantee its repay,but the general sense of it is formed with the development of modern mortgagemarket, which is scale continues expand, business forms continues diversity and riskconstantly increase, so it included all regulations which aim to control the risk of itand this can also be called ‘mortgage loan risk control system’. Mortgage loan riskcontrol system can be divided into three levels: First, risk control system on the basisof the mortgage loan business. The mortgage system design at the beginning is aim toguarantee banks get the loan repaid, but as a retail bank loans business the auditsystem and the borrower’s credit system is also essential, especially in the mortgageloans in total expanding circumstances often result in some risks; secondly, the riskcontrol system on mortgage assets management. The characteristics of mortgage loanassets is poor fluidity and long period, according to the "Basel Capital Accord" thismeans high capital requirements for banks, which will triggered a series ofmanagement activities on the mortgage assets, and these activities are very complexfor it always involve in off-balance sheet business, which will cause the nature ofmortgage business to be changed and resulting in risk increase for the mortgagemarket trading parties; finally, the systemic risk control system to the mortgagemarket. Systemic risk is the result of total quantity increase and form complicated,which often lead to financial crisis, and always the most concern risk to the authorities,particularly when the real estate market is overheated it is difficult to avoid risks.The risk control system of mortgage loan is required the participation both forgovernment and banks. The risk control system usually can be divided into theexternal monitoring system and internal control system to control the risk. Externalsupervision system can establish market structure and environment, our mortgageloan external supervision system originated in the1997when "City real estatecollateral management approach" announced, in2005introduced series regulation topilot off-balance sheet business but make a little progress until today, in recent yearswhen the overheating in the property market become obviously, with the risk ofmortgage market gradually exposed, credit policy which to restrict systemic risk gradually introduced and continue to be emphasized but with little effect; Internalcontrol system is the service specification for bank about its risk management, fromthe system point of view is mainly by the “Basel Capital Accord” series as the core,the proper configuration of business norms, but the construction of this system hasbeen unable to get attention, resulting in little progress. Then came the basic system ofmortgage loan market: basic external supervision regulations, management assets(also called the OBSA) external supervision regulations, systemic risk controlsupervision regulations, basic internal control regulations, internal assets managementrisk control regulations, internal systemic risk control regulations. And the core issueof this paper is to find out the relationships between these six kinds of regulations.The problem of information asymmetric is the core of the risk control mortgagemarket system. The risk control system is to control the risk, so the key question is tofind out where the risk comes from, I think that as a loan mortgage business marketthe biggest risk is from information asymmetry, and this problem is widely existed inthe mortgage market: From the view of basic business mortgage loan system, whetherthe bank can get the loan to be paid is on the understanding of housing prices and theborrower’s balance of payments, which is common cheated; From the view ofmanagement mortgage loan’s asset, the existence of information asymmetry betweenbanks as part of the deal made people are often associated with other counterparties,the mortgage asset pool treatment among trading intermediary organizations also havethe condition of information asymmetry; From the view of control systemic mortgagerisk, the regulators try its best to control the systemic mortgage risk, but the risk of itactually originated from the bank’s Micro mortgage business, so only banks can knowhow to deal with it, information asymmetry will caused by the SupervisionDepartment not only by the lack of risk information but also delay in its process. So Ithink to solve this problem will have three advantages to the mortgage market: First isto improve the mortgage loan market’s asset quality, reduce the risk of the borrower’sdefault; Second is to increase the professional level of the mortgage market, theinformation symmetry can reduce the agency cost which will allow more professionalinstitutions exist so as to make the market mature; Finally is to improve the treatment efficiency of systemic risk.The research on the information asymmetry about mortgage loan risk developedto the problem about the uncoordinated regulation system. Although the six aboveregulation aspects manifest in different ways, I think that the core idea still is theinformation asymmetry, the information disclosure is the main way of externalsupervision to dealing with the information asymmetry, which include mortgagelender’s credit system in the foundation regulations, information disclosure systembetween counterparty in off-balance sheet business field and systemic risk disclosureof banks; The Internal way to deal with the information asymmetry is the credit rating,the development trend of bank credit ratings is from external credit rating to theinternal rating, and from the view of a legal point, the two systems can promote thesymmetry information from external and internal jointly. At present, our risk controlsystem’s inconsistency is mainly for lack of relation between the external supervisionsystem and internal risk control system: The development trend of externalsupervision is to accelerate the development, expansion of the related system, may notdeliberately, but a large percentage of regulation is aim to solve the problem byexternal supervision, with the increase of systemic risk in recent years, restriction loanpolicies frequent passed but with minimal effect, which can prove that authority’spower has been over expansion; The development trend of internal risk control systemis just on opposite, showing a gradual refinement on its trend, this trend ofdevelopment is fundamental by the "The New Basel Capital Accord", which give asolid foundation on risk management system. The barriers between two kinds ofsystem coordination are that both of them focus on establishing its own system butignore the influence from each other, and this affects the development of the wholesystem.For the solution of the lack of coordination is to begin with informationasymmetry in two kinds of system and their status in the system. On the basis ofbusiness regulations, external supervision established the basic framework of themarket, this is the starting point to develop a unified framework of the mortgagemarket, which determines the mortgage loan risk control rules for all banks should be based on the development of the internal control system, so as to avoid overly broadunfocused condition; In the system of risk control, the current in the externalsupervision mainly composed of risk control seems to come to the end of thedevelopment of the system. Although regulators have greater power, but the realsystemic risk is from the bank business, and only the bank can really understand andbe able to timely control the systemic risk which they are facing, so the systemic riskcontrol system should be based on the bank internal control as the center, externalsupervision system should focus on it. Thus we can establish the relationshipsbetween two systems: for the basis business system, the rating system in the internalrisk control system should develop based on the credit system which supervised bythe external supervision system, for the systemic risk control system, the externalsystemic risk control system should develop based on the supervision of rating marketand bank internal rating as the main direction.The overall development trend of risk control system can be found from therelation of mortgage loan external supervision and internal risk control system. Thecore position of the external supervision legislations in the base mortgage systemmeans that its legislation should be emphasize, and special for the borrower’s externalcredit system, which means the establishment of covering the whole social creditsystem. Since credit system established，it has long suffered from a lack of regulation,until the2013"credit management regulations" is promulgated that improved thissituation, but only just a beginning to institutionalized process, it is still far from thecore of the internal control system which will meet the mortgage market need. Sincethe internal control is in the core of the systemic risk control system, this means thatthe capital estimating should not be the only way for bank to control the mortgage risk,the rating results should also be used in the actual operation system to determinewhether to provide a loan or not. Thus the basic external supervision regulations,systemic risk control supervision regulations, basic internal control regulations,internal systemic risk control regulations formed the development trend of themortgage system: regulators in the market risk control should be indirect, such asestablishing credit system, supervision rating agencies, and the bank should be more independent on market risk control, such as establishing a more comprehensive creditapproval mechanism and systematic risk management mechanism.The development of risk control system of mortgage loans is a sequential process.System development should be progressive, if the indirect of regulatory supervision istoo fast, it will lead to the vacuum of market risk control, and if the internalmechanism developed excessively, it will also trigger the inhibition of businessefficiency. Compared with the development of internal control mechanism, externalsupervision gradually withdraw from the model is more reasonable, and this processalso should pay attention to the connection between two system, which means insteadof promote the whole system, more reasonable way is to develop the system in thisprocess: basic external supervision regulations, basic internal control regulations,internal assets management risk control regulations, internal systemic risk controlregulations, management assets (also called the OBSA) external supervisionregulations, systemic risk control supervision regulations. This sequence means thatbanks and regulators have different status in the propulsion of the system: if accordingto the change of the market banks need to the develop its business, they must developtheir whole system include basic internal control regulations, internal assetsmanagement risk control regulations and internal systemic risk control regulations, forthe off-balance-sheet risk regulations could not develop separately, otherwise it willmake it hard for the banks to control the risks, which determines that the bank is animportant role in driving force for mortgage loans risk control system to promote. Theresponsibility of the government is to suit the change of systematic risk control frombanks and then to determine how to develop external supervision systematic riskcontrol, and then according to the situation changes in the system overall decides thedevelopment of OBSA, also that is to say that the government belongs to the nightwatchman role here.This paper consists of eight chapters, the framework is as follows:First of all, the first three chapters mainly focus on analysis our country’sexternal supervision regulations and set up a system’s framework, thus can find outthe legislative ideas, trends and deficiencies of it: The first chapter discusses the basic external supervision regulations of mortgageloans. Mortgage loans has a long history, the earliest form originated from the British,the right of mortgage was expressed in the form of redemption, after then graduallydeveloped into the modern mortgage loan system; After1930the United States ofAmerica gradually introduced the system of mortgage loans and the conception ofexternal supervision; Hong Kong are the birthplace of the word “mortgage” inmainland, also the mortgage system in mainland are mainly originated from HongKong. Our basic mortgage rules are concluded by law and the specific norms, Lawfixes the contract, mortgage and other infrastructure system, make the specific normshas their system basis, norms established the form of the mortgages, thus making thebank mortgage business been carried out. The basic mortgage loans legal relationshipinclude such relations: real estate transaction legal relationship, credit legalrelationship and guarantee legal relationship, all of them are indispensable in themortgage loan system, but the guarantee legal relationship is the core, the mortgage isthe main form of it, although the pledge and guarantee is also available. The mortgageis mainly use to buy forward delivery housing guarantee, so the nature of this right isreally important. Our country’s external supervision system of mortgage loans arerelatively simple, including the control of the relevant indicators about mortgage andinspection measures on business, which mainly ensure the bank to fully review theborrower information, the problem is due to mortgage loans not only relates to thebanking industry, but also to the real estate industry and including provident fundmanagement, so the mortgage loan management include kinds of administrativeorganizations and the power structure is very complex.The second chapter discusses the external supervision of mortgage debtmanagement regulations. The form of management is decided by the characteristics ofmortgage loans, which is different between different banks, therefore the managementof them will not in the same way, but most of them is carried out through off-balancesheet business way, the basic methods including securitization, other derivativesbusiness for further development may involved in mortgage lending. China began topilot the off-balance sheet business of mortgage loans from2005, after then a set of related regulations have been announced. The current mortgage off-balance sheetbusiness is carried out mainly in the form of trust, its legal relationship of the mainbody involves banks, trust, service bank, fund depositary bank and other intermediaryagencies and the object body include debt, asset pool, trust property, derivatives andother forms. And this means the specific rights and obligations for each parties, thecore of the problem is on its nature, which introduces the core idea of economicsubstance doctrine of OBSA, the problem of asymmetric information becomesobvious and require disclosure of information, effective external supervision rules canensure the information be disclosed through a variety of ways, more advanced methodis to establish mechanism of induction or the excess capital mechanism from the“Basel Accord III”.The third chapter discusses the systemic risk control of the supervisionregulations. With the systematic risk of mortgage loans increased gradually, thuscause the attention from supervision department. The prevention of systemic riskmainly has two aspects: first is due to the total increase of mortgage loans which themain reason is for the overheated real estate market, so the main methods now is thelimit credit policy; second is for the development of asset management business thatcreate the systemic risk, this can be proved by subprime mortgage crisis in the UnitedStates in2008, which the main way to prevent it is to further standardize the relatedbusiness system. From a legal point of view, the control method of systemic risk needdynamic regulation, the method of counter cyclical capital in "Basel Accord III" is akind of innovation, it is the combination of external supervision and internal control,external supervision organizations will be based on the relevant indicators to decidedthe excess bank capital requirements and the bank will use this as the internal riskcontrol part, the idea is to emphasize the dynamic. Disclosure of mortgage loan risk isalso an important part of the whole risk control system, which involves thequantitative and qualitative disclosure on mortgage loans and its assets management,this kind of disclosure is for macro conditions of mortgage loan.Secondly, the fourth to the sixth chapter focus on the China’s mortgage loaninternal risk control regulations’ introduction and Analysis which bases on the “Basel Accord” to form and develop a structure of internal risk control system, thus can findout the legislative ideas, trends and deficiencies of it:The fourth chapter discusses the basic internal risk control system of mortgage.in our country no attention had been paid to the internal risk control system ofmortgage loans for a long time, our internal control system of banking risk graduallycarried out since the bank share system reform, the core is the "Basel Accord", whichhas three versions with a gradual refinement of the evolution trend and the "Basel II"is one of the most detailed and comprehensive version, which is the main basis forrisk control of mortgage loan in China. Mortgage loan business on the basis of riskcontrol mainly has three ways: first, the loan review. Beginning in2004, the CBRCpromulgated a series of relevant rules, but it is regret that it’s too general; second,"The Basel Accord" use capital measurement to control the risk of mortgage, thisrequire the regulatory authorities confirm the weight of mortgage’s exposure and thenmultiplied it, More complicated method is to determine the risk weights by bank itselfthrough its default data of mortgage loans, called the internal ratings-based approach,but the introduction of this rating system on the risk control management of the bankhas a relatively high requirements; three, risk mitigation. Due to the long term ofmortgage loan, banks will occupy relatively large amounts of capital, in this case thebank may choose to buy a professional organization’s guarantee or derivativeproducts to reduce their capital requirements.The fifth chapter discusses the internal risk control regulations for mortgage debtmanagement. Mortgage loans off-balance sheet business forms complex, so theprinciple of the economic substance should be adopted for its risk control, theownership attribution of right and risk liability claims are two specifically questionsof it, which result in capital measurement and risk mitigation as two kinds of riskcontrol method. The core problem of off-balance sheet business is the measurement ofrisk assessment, according to the bank’s ability to assess the risk from the strongest is:non external rating method, external rating method, speculated rating method, basicrating method, the supervisory formula method, internal evaluation method, all ofthem are mainly related to the bank’s capability of collect statistics and identified data. Risk mitigation problem also relates to mortgage debt assets pool rating, In addition tomethod of guarantee such as the mortgage and pledge, there still have different ineffect between risk mitigation mortgage pools with the same rating and differentrating.The sixth chapter discusses the internal control mechanism of the mortgagesystemic risk. The reform for the internal mortgage systemic risk control mechanismis from the subprime mortgage crisis in2008when after then the "Basel III" waspromulgated, which mainly include the reform of the original measurement system,the periodic for internal risk control system and liquidity risk measurement. Reformon the measurement system of mortgage capital includes the modification ofindicators to effectively deal with mortgage credit risk and credit valuation adjustment,reduce asset value correlation multiplier, modification to discount coefficient ofmortgage loan; Mortgage loans off-balance sheet business involves the identificationproblem of bank’s capital, the reconstruction of internal risk control system to bemore systemic and periodic involves the reconstruction of bank’s capital structure,excess capital retention mechanism and counter cyclical capital in excess ofmeasuring system; The nature of staging repayment makes the mortgage become astabilize sources of liquidity for banks, liquidity risk focus on whether bank hassufficient liquidity to prevent the breach in pressure time, in order to achieve this goal,the short-term liquidity coverage ratio (LCR) and the ratio of net stable fundinglong-term (NSFR) on mortgage loans are introduced to the loan management.Thirdly, the seventh chapter discusses the problems about the lack of contactbetween external supervision and internal risk control system and try to build a wholesystem include both of them. Currently the external supervision and internal riskcontrol system of mortgage loan are developing independently: external supervisionsystem has shown the expansion trend, but the system’s efficiency of this trend isgradually reduced, the internal risk control system are showing a trend of legislationintensive, but can not to play its role well. The root of the problem is the lack of clearcommunication between two systems, the main ideas of external supervision is theinformation disclosure and for internal risk control, the main idea is the credit rating, two systems from two directions promote the symmetry of information, for the basicmarket regulation, external supervision determines the market structure, so theinternal control system should be around the external supervision system to carry outso as to avoid the decentralized of internal control energy, mainly should establishdetailed loan examination system. For the systemic risk control system, internalcontrol is more efficient than external supervision, which determines the systemic risksupervision work should focus on the internal control to carry out, further to set up theevaluation of internal rating agencies and banking internal rating’s supervision.Finally, the eighth chapter discuss the rule and development trend of the system.Mortgage loan risk control system’s running is a whole process, in addition to thereform of basic internal risk control and systemic risk supervision in seventh chapter,the basic system of external supervision and internal systemic risk control system alsoneed to be reformed, the idea is to carry our reform according to the actual needs ofthe development of the market. The reform of the basic system emphasis theestablishment of the credit system, the internal control system of systemic risk willactively use the result of capital measurement to apply in the practice of mortgagebusiness, so that the overall legislation trend is the external risk supervision indirectand bank internal risk control autonomy. Through the analysis, the trend of reformmust be carried out step by step, external supervision indirect too fast may lead to risk,internal risk control independence too fast may lead to conflict with externalsupervision and result in reduction efficiency, but the general trend is that appropriateinternal control independent regulatory ahead. Internal control development must relyon the development of overall system, which is in some kind of sequence, and banksand governments play different roles in it.In this paper, in order to solve the coordination of the mortgage system as thegoal, we can obtain three items concerning the conclusion: first，the main target, themortgage risk control system is to solve the problem of market informationasymmetry, external supervision system with the information disclosure as the mainmeans, while the internal risk control system for rating as the main means; second, to reform the trend and achieve this goal，the internal mortgage risk control system forBanks need to be autonomous and government with external control regulation needto be indirect, bank’s autonomous development should be ahead of externalsupervision’s indirect properly in order to avoid risks; finally, whole system mustprogressive in sequence, it is the government’s responsibility to judge whether thisgoal is achieve, but the main driving force of accomplishing this goal is the need fromenterprise who need to expand the mortgage market business.