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Newsletter - January 2006
 
PROPERTY TITLE RISKS FOR FINANCIERS IN HONG KONG
 
The HK Land Title System
 
Hong Kong's land title system has fundamental flaws to the extent that the Law Society has stated, "instances of properties with absolute good title are rare if not unknown".
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The Government is seeking to improve this situation with the introduction of the Land Titles Ordinance (anticipated to be implemented in 2007). However, the Ordinance offers limited protection to lenders1. Of greater concern, the phased implementation over a period of 12 years will cause a two-tier marketplace to develop in Hong Kong; one market for registered titles and another for unregistered titles. This will undermine the value & marketability of distressed properties with unregistered title; particularly in market downturns when buyers use title defects to exit from acquisitions or negotiate prices down.
 
What Does this Mean for Financiers?
 
Title is a risk management issue. Typical Title problems include:
Property not belonging to owner

Defects in title

Forgery, fraud, undue influence, duress and incapacity

Recorded illegal structures

Breaches of the occupation permit

Third party rights of possession

Defective execution

Prior encumbrances on title

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Specific mortgage problems relating to title include:
Late registration of mortgage - may affect bank's priority
Errors in mortgage, such as parties' names, property description - may affect enforceability of mortgage
Invalid mortgage - such as a "3 parties" mortgage with no shareholder authorisation, lack of consent of Director of Housing for certain mortgages and undue influence. In these cases, the bank becomes an unsecured creditor.
Mortgage subject to prior encumbrance such as a charging order
Matter of opinion - a solicitor expresses an opinion as to whether title to the property is in order. The opinion is subject to challenge by others and evolving case laws. We have seen many banks reduce selling prices significantly to reflect title problems.
 
Title Insurance
 
Essentially, title insurance protects owners and lenders against any claims against the title, and guarantees that the mortgage is valid, enforceable and of first priority. The coverage includes financial losses and legal fees to defend or perfect title. For mortgagees, if a claim cannot be settled within 180 days, the insurer will pay the monthly principal and interest on the loan until settlement.
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Using First American's title insurance due diligence process, we are able to incorporate our risk management tools into lenders' standard mortgage processes and solicitors' instructions. Title insuring mortgages not only manages and mitigates title-related risk, it adds value to any subsequent securitizations of mortgage portfolios and negates the requirements for residual warranties.
 

1 The Ordinance only provides an indemnity for loss which affects ownership
 

 
For further information on how title insurance can improve your credit performance,
please visit our website,
www.firstam.com or call us on +852 2161 9105.
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