Another scandal is brewing over mortgages, which had been growing for six years. A flourishing business has waned overnight, and the future of mortgage lenders is grim.
Before the end of the year, Russian authorities intend to take crucial steps to overcome the mortgage crisis. They are working on bills designed to improve the predicaments of lenders and borrowers, to be enforced early next year. Most of them concern the rules for the issue and circulation of mortgage bonds, issued by banks to raise funds for new loans. This results in the development of a secondary mortgage market feeding the system.
Russia has not had a secondary mortgage market before, forcing banks to develop the mortgage system on money borrowed from abroad. In the past few years, banks have been advocating the need to create national sources for mortgage funding, but their proposals only gathered dust in committees and commissions.
The system for domestic refinancing of the mortgage market has now become clearer. It will cover three issues: the rules for issuing and selling mortgage bonds, and the buyers. This should adjust the unviable law on mortgage securities to reality.
Initially, the state will be the main source of mortgage funds, to be provided through the Agency for Housing Mortgage Lending (AHML). The Agency will also be responsible for assisting those who are no longer able to pay their mortgages due to job or partial income loss.
A 12-month respite
Prime Minister Vladimir Putin proposed encouraging the banks to postpone the payment of the bulk of debts by bona fide borrowers until the end of 2009.
So the current scheme is as follows: After a borrower appeals to his bank to restructure his loan, the bank reviews his material assets and grants or rejects his request.
Borrowers will be exempt from repaying their loans only in exceptional cases. The AHML believes that borrowers must pay at least something to maintain their commitments. The smallest payment will be calculated depending on the borrower's income.
The state will not help out selflessly. In fact, the borrower will get a kind of loan from the state and will have to pay interest on it, although it has not yet been decided how much and when. Some propose using the Central Bank's refinance rate (13%). Payments on such state loans will be added to mortgage payments after the borrower's income stabilises. If the combined sum is too large, the term can be extended.
To restructure his mortgage, the borrower will have to prove he has financial problems, in particular provide proof of his registration with the employment agency or a 2-NDFL document proving that his income was reduced. Data from the State Real Estate Register will indicate how much property the borrower owns. He will also be required to submit a copy of his passport and loan agreement as well as declare the income of his spouse.
Borrowers wishing to receive state support must file an appeal with their creditors, which may not be the banks that issued the mortgage loans. Many banks sell their mortgages. The bank must inform its borrowers about this in writing, and borrowers must check the notifications to see who their new creditors are.
If the bank refuses to grant a borrower's appeal, he should address it to the AHML, which has a hotline for hard pressed borrowers.
Barrowers contact: +7 (495) 660-5540 for a consultation on mortgage refinancing options.
The banks' compensation for assisting borrowers has not been determined. The AHML said the information would be published soon. Most banks would like to get state guarantees of compensation for lost profits, but this is unlikely. A more realistic scenario provides for a permit not to register a restructured loan as a default mortgage that entails the accumulation of additional reserves and affects the bank's balance.
If this is part of the process, the AHML will not need to spend budget funds on compensation; it would only have to pledge to buy out the loan if the borrower defaults.
Bad luck
Not everyone will get the right to state support in time of need. Those who received a major part of their salary "in an envelope" and have lost this part of their income will be unable to prove their loss. If the borrower has other property apart from the mortgaged property, he will likewise be denied the right to restructure his loan. Also, these privileges are not for the wealthy.
Analysts say that some bad mortgages are not the result of a borrowers' lack of income. Some borrowers, when they learn that their bank is facing bankruptcy, think they can violate their mortgage contracts with impunity.
Clients who paid their mortgages irregularly before the crisis will be seen as mala fide borrowers not entitled to AHML support.
The state will set a 12-month limit for a mortgage debt that can be postponed. That should be sufficient for compensating the cost of a loan used to buy an averagely priced flat.
Loans issued on uncompleted construction shall not be considered mortgages unless the borrower has collateral in the form of finished housing. Therefore, a borrower who put up his flat as surety for a mortgage may not get loan repayment postponement.
It is alarming that the proposed restructuring of mortgage debt will take the form of the right to postpone the payment "of interest on mortgage or the principal debt." Under the annuity form of debt repayment predominant in Russia, it is the interest on the loan that makes up the bulk of monthly payments in the first few years. Therefore, the right to postpone the payment of the principal debt will not save many borrowers.
The AHML staff who will draft the standard restructuring plan should take this into account. AHML head Alexander Semenyaka said borrowers would only be obliged to pay "minor sums" under their mortgages.
Although mortgages account for less than 3% of GDP, this is an important sector, because the state cannot leave 800,000 Russian families, which took out mortgages, in the lurch for fear of social unrest.
Apart from helping to solve the housing problem, the mortgage industry is also a major prop in the construction sector, which has been badly hit by the crisis. Therefore, every possible measure should be considered to increase the demand for housing.
Housing construction in the regions earns up to 30% of GDP and provides a huge amount of jobs, Alexander Semenyaka said.
In short, the mortgage industry must be supported at all costs. The Government's goal for next year is to keep the number of mortgages at the 2008 level. It is unlikely to attain this goal due to the ongoing crisis, but it is nice that the Government plans to act so generously. Its actions are bound to bring at least some result.
According to the worst-case scenario of the Regional Development Ministry, the volume of bad mortgages may grow to 300-400 billion roubles soon. As of October 1, 2008, borrowers owed banks 974.5 billion roubles in all kinds of loans, the Central Bank reports. This means that the Regional Development Ministry expects delays in the repayment of 30-40% of loans.
The Government also approved a bill on the use of maternity capital to pay mortgages. If everything goes as planned, mothers will be able to use this money one year before the approved deadline, on January 1, 2009.
As of now, maternity capital granted to mothers giving birth to a second child amounts to 250,000 roubles. This figure is to be adjusted for inflation next year. This is not enough to repay a mortgage, but if a family's income plummets, maternity capital could be used to pay interest and the principal debt.
A borrower asks his bank to restructure his loan; the bank considers his situation and grants or rejects the request.
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The forecast of the Regional Development Ministry seems improbable, because the average volume of delayed mortgage payments is 2%, leading mortgage analysts say. Delays in loan payments mean payments made five to 90 days behind schedule, which means that the number of insolvent debtors cannot be calculated from the current number of delayed mortgage payments. There are far fewer insolvent debtors, because even disciplined debtors sometimes lag behind payment schedules.
Olga Senatorova, "Kvadratny Metr" weekly supplement of RBC Daily