The mortgage system in Moscow is on its way to development. Many Muscovites are presently seeking mortgage loans. However, in an underdeveloped and loosely regulated market, the system has to confront many problems before it gets into a smooth operation.

Banks are cagey. The legislation system is not fully set up to prevent risks of banks and Loan receivers. Legislators are trying to bridge the gap, drafting amendments to existing laws in an attempt to make the market more secure. So far, three base laws on mortgages were passed in 1997 and 1998 and regulate, respectively, mortgage, property rights registration, and assessment of property. Yet there’s lot more to do.

The market is growing and the main market participants look optimistically to the future.
Several years ago, especially around 1998, when the major banks collapsed, buyers, sellers or realtors could hardly think of mortgage. Today, trust in banks is slowly returning. According to one of the realtors, between 8,000 – 12,000 mortgage deals may be signed annually.

Similar to Turkey, the crucial thing is scarcity of “long money” to be spread for mortgage loans. Most Russian banks’ mortgage opportunities are limited because they have almost no sources of “long money” which would reasonably match the long terms (10 to 15 years) of mortgage loans. Some banks offer loans for only three years.

Legal Framework for raising “Long Money” and Proper Implementation of the Mortgage System
Legislation of securitization of mortgages - one of the main sources of long money for the bank – is in process. As experts say, “securitization of mortgages is going to be happen in the coming year and a market for mortgage bonds may develop in the next few years. And in the next five years, the market will become civilized.”

Another source for “long money” is foreign loans, which have become cheaper due to improvements in the economy, but they are short term. On the other side, Turkey’s unstable economy never succeeded to receive foreign loans to be allocated for mortgage system.

Legislation on creating Russian version of Germany’s Bausparkasse, or building societies, which would enable people to save to buy housing, is currently forcing its way through the parliament.

At present, the law on mortgage securities has passed the first reading in the Duma and the ones on savings for housing and securitization of mortgages are being mulled over by the parliament, the government, and the Central Bank. As experts state, their passage would be within the next 6 to 18 months and especially the law on building societies, would be implemented immediately after it is passed.

Moreover, legislators together with the executive branch have been busy fine-tuning the bills, largely in order to minimize some of the risks that stall the introduction of mortgages, especially the risk of default. Those who take out mortgage loans need protection from fraud as much as banks do, and legislation that would protect them is also in the works.

The system is implementing or adapting the whole legislative framework step-by-step in order to implement the mortgage system properly.

Profile Of The Customers
Experts say that a family with a monthly income of $500 to $1,500 can easily afford a loan.
If you have a steady job and a stable salary you can take out a mortgage. If you do not change jobs too often, as long as you go up the ladder, even if you change companies you can count on a loan as stated by experts in the sector.

There are two main categories of customers; the first one consists of young employees of multinational corporations looking to buy their first, relatively small apartments at fairly low prices. This is the emerging class. The average minimum mortgage is $30,000 - this means that a person will have to pay at least $40,000 for their apartment.

The other category represents people who have prospered and grown large enough families to start looking for larger flats.

Partly because the risks in the mortgage business are high and the clientele is sparse, selection of clients is rigorous. Experts say that European Trust requires a full set of documents proving that the potential client is well established in their business and has a promising career.

At Sobinbank, you will be asked about your income between 1998 and 2000, your marital status and your children, and you will have to show your university diploma, your foreign passport, and your driver’s license. All of these factors are important to the bank’s assessment of your eligibility.

Experts from Probiznesbank say that about one application in ten will get a loan.

In giving out mortgages, banks try to steer clear of schemes involving too many parties, whereby the deal transforms into a chain of transactions. Each link in the sale needs to be researched by bank staff while deals involving a single buyer and seller are rare.

One of the main problems is that almost none of the potential clients in Russia have a traceable credit history.

One of the risks banks have to watch out for is whether the seller of the apartment is conspiring with the buyer to arrange for a larger loan. The Banks’ judgements are largely based on the client’s social status.

The tradition is the sellers cannot accept the idea that their money is not presented to them in cash, but as a bank account. Therefore, the common practice is people first borrow money from a friend, pay the owner of the property in cash and then repay the friend after getting the mortgage loan.

The other problem is both the buyers and the sellers are reluctant to pay taxes. There are other expenses that may discourage buyers, such as the costs of assessing an apartment and insurance. There is also an initial payment for the bank’s services, which is not refunded if the deal is never completed.

Mortgage As a Prospering Sector
Experts say that in the coming years, the percentage of mortgages will become very high. Many companies and banks are presently very active in this field. Increasing numbers of banks are offering loans to individuals. There is competition going on between banks because interest rates on mortgages are falling. Experts say that with a proper legislation system, experience of other countries shows it may take six to eight years to involve one-third to half of a country’s population in mortgages.

However, at present due to a lack of the needed legislation, mortgages largely remain an exclusive product in Russia. Rates are too high, and the terms are too stringent for a great many people. At the moment some of the banks that issue mortgages have only a few hundred clients. Experts state that laws on mortgages have made tens of thousands of loans possible so far, but a law on housing societies in combination with other, new forms of legislation, is likely to bring this number to hundreds of thousands, they add.

This means that the market volume roughly estimated at about $100 million may increase ten-fold in a relatively short period of time.

As stated by the experts, presently, only banks that do have enough “long money”, such as the European Trust Bank, or Raiffeisen Bank, one of the market leaders, are able to comfortably extend mortgage loans. European Trust Bank has extended loans to the tune of $8 million in the past few years. European Trust is at an advantage; being part of a group of companies, it is able to offer loans while a building is still being constructed by another arm of the group.

And, an expert from Sobinbank stated that over 300 loans for up to 10 years totaling over $5 million have been extended. The initial installment on mortgage is about 30% of the cost of the property, but it can go as high as 50 percent.

Mortgage loans taken out while the building is still under construction constitute a promising line of business. This way, apartments cost 10 percent to 30 percent less than those in completed new blocks or on the secondary market.

In every market, one might expect a downturn after a spectacular rise, and the creditor would face defaults. The risk of non-repayment still weighs heavy on banks; they could incur losses if prices fell after they had to sell mortgaged property at below-market level. Someone may buy a flat for $100,000 and take out a mortgage for $70,000. Then the market price falls to $50,000. Their options are paying $70,000 back and telling the bank, or taking the apartment, and auctioning it.

As it is stated that there have been no signs of a downturn, both clients and creditor banks are growing more confident in mortgage schemes. Those schemes prompt more people to buy apartments that they could not afford otherwise, and this also pushes prices up.

Who knows what will happen in the future? But the banks are ready to confront the many issues particular to this market, and as legislation and consumer outlook changes, demand is expected to continue to grow.