The following terms are used in this Law:
1) mortgage bond(s) – (hereinafter referred to as mortgage bond or bonds) – a security of
public circulation, issued by a bank and secured by mortgages and other collateral,
stipulated by this Law;
2) mortgage loan(s) (loan(s)) – is a loan, secured by pledged real estate (mortgage),
registered with the Land Book in accordance with the regulations of the Civil Law;
3) market value of the real estate to be mortgaged – the calculated value – the money
amount, determined as of the day of valuation, for which the property may be sold
(purchased), in a transaction between a willing seller and willing buyer.
The terms "mortgage" and "mortgage bonds" and their derivatives together or separately may
be used only when referring to securities, which are issued and are in circulation in
accordance with this Law.
The provisions of this Law shall be applied only to such mortgage loans which can serve as
security for the mortgage bonds in circulation as set forth in this Law.
Issue and Circulation of Mortgage Bonds
The mortgage bonds are issued and circulated under the Law "On Securities", this Law and in
cases determined by the Law " On Securities Market Commission", under the regulations of
the Securities Market Commission.
(1) Banks meeting the following criteria are entitled to issue mortgage bonds:
1) which have own capital not less than five million Lats; and
2) which are permitted to conduct all the banking operations (transactions), specified by
Paragraph 4 of Article 1 of the Law "On Credit Institutions" without any restrictions
imposed by the Bank of Latvia; and
3) which have submitted to the Securities Market Commission rules of the banks' board
of directors on mortgage transactions and internal bank procedures, which must
provide for the establishment of a Mortgage Bond Collateral Register and
management of data therein including mortgage claims and substitute collateral. The
mortgage claims and substitute collateral must be kept separately from all other assets
of the bank.
(2) Subsequent to the request of the Securities Market Commission, the Bank of Latvia will
issue an opinion on the procedures, specified in sub-paragraph 3 of Paragraph (1) of this.04-08-99 2
Article, as well as with the criteria, determined by sub-paragraphs 1 -2 of Paragraph (1)
of this Article.
The following basic provisions shall be followed in respect of mortgage bonds:
1) the issue prospectus shall determine whether the mortgage bonds have a call option; if
there is a call option, it should set forth the procedures;
2) if the issue prospectus defines a term during which the mortgage bonds call option shall
not be exercised, the provisions of Article 1767 of the Civil Law are not applicable;
3) should a call option be exercised while the bonds are still in circulation, the accrued
interest payments should only be terminated on the interest payment date subsequent to
the mortgage bond retirement date;
4) if any part of mortgage bonds series is prepaid, then all the mortgage bonds of that
respective series shall be subject to a similar right of prepayment;
5) the interest coupon payment on mortgage bonds shall take place not less than once per
If the mortgage bond prospectus provides for recalculation of the nominal value and interest
on mortgage bonds in accordance with changes in macroeconomic indicators, foreign
exchange rates or refinancing interest rate of the Bank of Latvia, or other changes, then the
basis for recalculation may be only the official data published by the State Statistics
Committee of Latvia or the Bank of Latvia.
If a mortgage loan is included in a mortgage bond issued then the bank shall not refuse to
accept the repayment of such loan by delivery of a mortgage bond of the same series for the
nominal value of the loan outstanding.
Mortgage Bond Collateral
(1) The mortgage bonds in circulation shall be backed in the full amount of their nominal
value at least by the same volume of mortgages. Guarantees of the government of Latvia
may fully or partially replace the mortgage bond security.
(2) The total interest expenditure on mortgage securities shall always be covered by at least
the same amount of total interest revenues from mortgage loans.
(3) The collateral of mortgages, government guarantees and interest income from mortgage
loans may be replaced by the substitute collateral (see below), not exceeding 20% of the
total amount of nominal value and accrued interest on mortgage bonds in circulation.
(4) The issuer may include as substitute collateral:
1) liquid T-bills of the Government of Latvia or securities, guaranteed by the
Government of Latvia, in the amount of 95 % of their market value, but not
exceeding nominal value of these securities;
2) a cash deposit with the bank and correspondent account with the Bank of Latvia.
(5) Redemption of the mortgage bonds in circulation and their interest payments (in
compliance with the issue rules) shall always be secured by principal and interest
repayments of mortgage loans of at least the same value (in accordance with the loan
agreement) and substitute collateral.
(1) If as a result of the collection of a mortgage loan serving as collateral for the mortgage
bonds the bank takes onto its balance sheet the real estate, then such real estate may be
utilised as mortgage bond collateral. In this circumstance the real estate may be valued at
no more than 50% of the original mortgage loan collateral value, and the real estate may
be held as collateral at the reduced value for a maximum period of two years.
(2) A mortgage loan, obtained by the issuer from another bank pursuant to a contract, may
be utilised as a collateral for the mortgage bonds, only if either the issuer assumes
responsibility for valuation of the real estate, or the contract stipulates which bank is
responsible for the valuation.
(3) A mortgage may not serve as the collateral for bonds, if the bank, when granting the
mortgage loan, has not complied with the provisions of Article 52 of the Law on Credit
(1) The bank shall keep a Mortgage Bond Collateral Register, to provide evidence of the
mortgage bonds collateral at any moment of their life.
(2) The form and content for the entries in the Mortgage Bond Collateral Register are to be
determined by the Securities Market Commission from time to time.
(1) A mortgage shall be deemed incapable of providing acceptable collateral, if within three
months of a default the bank has not taken any steps to exercise the rights of mortgage as
defined in Paragraph (4) Article 17 or if the borrower has been declared insolvent by the
(2) A mortgage, incapable of providing the collateral in accordance with the provisions of
the Paragraph (1) of this Article, must be removed from the Mortgage Bond Collateral
Register only subsequent to execution of the bank's claim.
(1) It is only permitted to utilise the mortgages included in the Mortgage Bond Collateral
Register, and substitute collateral to secure execution of the liabilities, arising on
mortgage bonds issued.
(2) The mortgages and substitute collateral, included in the Mortgage Bond Collateral
Register, shall be managed by the bank separately from its other assets.
(3) In case of bankruptcy of the bank, mortgages and substitute collateral, recorded in the
Mortgage Bond Collateral Register, shall not be included in the bankrupt's estate
(financial means), from which expenses of the insolvency and liquidation procedures are
covered and creditors' claims addressed.
A Mortgage Loan
A mortgage loan shall not exceed 60% of the market value of the real estate pledged as a
collateral for this loan.
The market value of the real estate to be pledged is determined by persons, who have received
real estate valuation license (a professional qualifications certificate) in accordance with rules
set forth by the Cabinet of Ministers.
The collateral of a mortgage loan shall only be such a real estate, which is not encumbered by
any prior debts registered with the Land Book, or if the creditor of any prior claim has
assigned the priority rights to the bank..04-08-99 4
(1) The mortgage loan agreement must include at least the following obligations of the
1) within the course of validity of the contract to make regular repayments of the loan,
repaying principal together with the interest in equal amounts (except during first 12
months and the last payment, if stipulated by the contract conditions);
2) to provide continuous and sufficient insurance of the mortgaged property during the
whole period of mortgage agreement validity or reimburse the bank for the costs of
insuring the property;
3) not to cash in lease or rent payments from the tenants (lessees) of the pledged asset
for more than one year in advance.
(2) Loans in the amount of up to 20 % of the total amount of loans included in the Mortgage
Bond Collateral Register may not comply with the sub-paragraph 1) of Paragraph (1) of
(3) The contract shall stipulate such activities of the borrower (mortgagor), which reduce or
may reduce the value of the mortgaged property, and therefore require a prior written
consent of the bank.
(4) The bank is entitled to withdraw unilaterally from the mortgage agreement before expiry
of the contract and apply to the court with a claim to sell the mortgaged real estate in the
1) the mortgagor has fallen into arrears with the payment or violated other
obligations stipulated in Paragraph (1), Article 17;
2) the market value of the mortgaged real estate has been essentially reduced and the
amount of the claim exceeds 60% of the value of the property as a result of
activities or inactivity of the borrower (mortgagor).
The loan may be renewed not more than twice and only, if complying with the provisions of
sub-paragraph 1) of Paragraph (1) of Article 17 of this Law, at least 33 % of the loan amount
have been repaid during the initial term, and each term of renewal.
The insurance contract or policy with assignment of the insurance payment to the bank must
be held with the bank during the whole period of the mortgage agreement validity.
Should the market value of the real estate decrease due to reasons outside the borrower's
control, the bank is entitled to request repayment of the part of loan not secured as specified
in Article 14 of this Law.
(1) The bank, issuing mortgage bonds, shall monthly submit to the Securities Market
Commission, in term and form established by it, the information, describing the
underlying mortgage bond security.
(2) The Securities Market Commission is entitled to require additional information and
receive documents, containing such information, as well as, carrying out an examination
of the valuation of the mortgaged property, to insure the safety of the mortgages, recorded
in the Mortgage Bond Collateral Register..04-08-99 5
Should a bank not comply with the requirements under sub- paragraphs 1 – 2 of Paragraph (1)
of Article 5 of this Law or not follow in its operations the internal procedures, specified in
sub-paragraph 3 of Paragraph (1) of Article 5, it is the duty of the Bank of Latvia to notify the
Securities Market Commission, indicating the concrete violations.
(1) The Securities Market Commission is entitled to suspend the issue of mortgage bonds should any of the following arise:
1) in case it has received information from the Bank of Latvia, specified in Article 22 of this Law; or
2) if according to the evaluation of the Commission, the security registered in the Mortgage Bond Collateral Register does not comply with requirements of this Law; or
3) if the terms and conditions of mortgage transactions are not followed.
(2) If the Securities Market Commission decides to suspend the issue of mortgage bonds, it shall specify the reasons for such a decision and set a deadline for correction of the stated
(3) Suspension of the mortgage bond issue shall not affect the liabilities of the issuing bank, as established in the mortgage bond issue prospectus, and shall not create rights to
demand pre-mature redemption of the bonds.
With this Law taking effect, Regulations No. 127 "Decree on Mortgage Bonds" (Latvijas Republikas Saeimas un Ministru Kabineta Zi n ot a js, 1998, No. 10) issued by the Cabinet of Ministers according to provisions of Article 81 of the Satversme (Constitution) become ineffective.
The Law passed by the Saeima (Parliament) on September 10, 1998.
President of the State G. Ulmanis
Riga, September 29, 1998