Introducing Shihoshoshi: Our Role in the Real Estate Securitization of Bad Debts

I would like to first ask how many of you are familiar with our profession? Not so many, I see.

The same applies to most Shihoshoshi. We don't know you; you don't know us. The Shihoshoshi profession very much lags behind the pace of internationalization in the Japanese legal profession. Honestly, most Shihoshoshi never dream of providing services for foreigners.

Today I would like to tell you how this internationally shy profession has come to work for foreign investors.

Three months ago, Mr. Morimoto called me and told me he needed a lot of Shihoshoshi at once. He was working for foreign investors on an assignment of bad debtts. These loans were secured against real estate mortgages. The mortgages had to be transferred with the claims and registered at the Legal Affairs Bureau. Otherwise the mortgage transfers could not be perfected against a subsequent purchaser if that purchaser registers before we do. First registration takes all.

Mr. Morimoto's request was not an easy matter. Finding experienced Shihoshoshi in the field of real estate workouts in a short period of time is almost impossible. Shihoshoshis are independent professionals, and usually have an office composed of one Shihoshoshi and a few assistants. The law does not permit us to operate a corporation type of office, and the market for Shihoshoshi is very closed and limited. This makes us very competitive with each other. When we hear that one of our competitors has passed away, we thing "Oh good! His clients are gonna be mine." We are not used to working as a group on a single project.

Mr. Morimoto was also very anxious about our fee. Our fee scale is very complicated and I am always confused when I write a bill, even though I have been in this business for more than 20 years. Mr. Morimoto's request was that I simply bill by the hour. And an hourly fee system is very new to our profession.

Well, I performed his request and that is why we are here together today. We worked together in a friendly and cooperative manner as a well organized group, and agreed to an hourly billing system.

In two days seven Shihoshoshis investigated 850 mortgages. Japan's registration system is very strict, and the registrar will only accept documents that are fully completed. We checked registration copies for all of the mortgages to be transferred to the foreign investor, and all the application forms as well as the attached necessary papers for mortgage transfer registration. These documents were prepared by the seller and Shihoshoshis introduced by the seller.

In all honesty if the foreign investor had gotten his own Shihoshoshi involved at the beginning of this work out he would not have needed to hire us. Maybe the reason he didn't do that is that investors are not familiar with our real estate registration system, or perhaps he didn't have time to find a group of Shishoshoshi on his own.

Now, let me discuss our participation in the investigative work. The contracted period for investigation on this portfolio acquisition was only one week before the closing date. During this time the seller allowed the buyer to check all the documents necessary for the transaction. We went to the headquarters of the seller. The building was strictly guarded. We were led into a room full of portfolio acquisitions papers. We rearranged mortgage related documents from other portfolios and started our investigation work.

As a general rule in our business, bad debts are secured by bad mortgages. The mortgages that we checked were really complicated and confused. Almost all of the debt was covered by one mortgage over several properties. This required that we check each property very carefully. Omission of one property can have a very dangerous influence on the mortgage transfer. We also had to check the condition of the mortgages: were the mortgages assignable? did these mortgages have encumbrances preventing a safe transfer?

We are now involved in our second case on behalf of a foreign investor in a real estate workout.

When we first accepted Mr. Morimoto's offer, we were a little bit nervous about providing service for foreign investors, at least in part because of our internationally shy characters, as I previously mentioned. The main reason we agreed is because this offer presented a new challenge to us, and we wanted to get to know you. Please get to know us, too!

Misako Niikura, Shihoshoshi, 5-11-23 Yakumo, Meguro-ku, Tokyo 152; phone (03) 3723-3199; fax (03) 3723-9016; <niikura@pa2.so-net.or.jp>.

(translation by Vicki L. Beyer)

Temple University Japan