This content is from: Local Insights

New legal regime for mortgage bonds

The Portuguese Government has approved the new regime on mortgage bonds and mortgage credit institutions.

Decree law 59/2006, of March 20, amends the legal regime on mortgage bonds, in force since 1990 and enacted by Decree law number 125/90, of April 16, and boost the mortgage bonds market by making it very similar to the legal regime on covered bonds, which has had success on an international level.

Mortgage bonds are a specific financial instrument within the larger group of so-called covered bonds, i.e. bonds in which the debt service is covered by a specific asset portfolio instead of the borrower's global assets.

The most important feature of this type of bond is the very low risk that comes with the preferred credit from such a bond.

Under the previous regime, only credits guaranteed by mortgages over assets owned by the debtor and free of any other charges or liens can be the object of mortgage bonds, with an exception for assets guaranteed by bail bonds issued by financial institutions or insurance companies.

This new diploma allows mortgage credit institutions to grant and acquire mortgage loans to issue mortgage bonds. It also foresees the possibility of other assets being affected by mortgage credits (like bank deposits or other low risk and high liquidity assets), in order to provide for temporary cash needs.

To ensure a higher security level for this regime, the need for an independent auditor to supervise the enforcement of the diploma has been established, with specific powers from the Portuguese national bank - Banco de Portugal - to supervise and regulate the mortgage bonds market.

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