VENEZUELAN PROJECT lenders may have to amend their mortgages as a result of recent devaluations in the Bolivar, the Venezuelan currency

VENEZUELAN PROJECT lenders may have to amend their mortgages as a result of recent devaluations in the Bolivar, the Venezuelan currency

February 01, 2003
VENEZUELAN PROJECT lenders may have to amend their mortgages as a result of recent devaluations in the Bolivar, the Venezuelan currency.

The mortgage may no longer provide enough security for loans made in dollars.  Many mortgages are fixed in Bolivares.  The Bolivar has lost 60% of its value against the US dollar since early 2001.

Mortgages — called hipotecas in Spanish — are a type of security that lenders take from borrowers in exchange for making a loan.  If a borrower does not pay the total amount of a loan, then the lender can take over the asset secured by the mortgage and recover his losses, but only up to the amount of the mortgage.  Mortgages are normally used in the United States only to secure real property, like buildings and land.  However, in Venezuela, they are used also to secure equipment.

Venezuelan mortgage documents specify the loan amount being secured.  This provision is known in Spanish as the cobertura.  One of the purposes of the cobertura is to ensure that a lender will not recover from the mortgage more than he lent.  The cobertura usually is fixed at an amount equal to or slightly higher than the total amount of the loan.  However, the cobertura must be fixed in Bolivares, even if the loan itself is made in dollars or another currency.  Otherwise, the mortgage could be held invalid by a Venezuelan court.  The mortgage amount can be amended.

Venezuela abolished a registration tax last year for amending mortgages.  The tax had been 0.25% of the amount covered by the mortgage.  There is always a risk the tax will be reinstated.  Thus, lenders should probably act quickly.

Keith Martin