Missed Mortgage Payments Up 6-Fold

For MTSemenyaka presenting the state's plans to support mortgages last week.
The number of homeowners missing payments on their mortgages more than sextupled in the first nine months of this year, the Central Bank said Wednesday, in a first indication of how badly the crisis was battering the mortgage market.

Industry insiders predicted that the mortgage market would be dead for at least the next two years as banks funneled funds from a multibillion-dollar state bailout of the banking system elsewhere.

The Central Bank said the volume of overdue mortgage payments increased 6.2 times in the first nine months of 2008 to reach 5 billion rubles, or 0.5 percent of all outstanding mortgages.

While the figures remain relatively small, they represent a significant increase and may be a harbinger of the results that will be released for the last three months of 2008, when the crisis took a firm hold on the economy.

Russia's mortgage market comprises less than 3 percent of GDP, compared to 10 percent in Poland, 52 percent in Germany and 65 percent in United States. Despite a spike in global interest rates, it skyrocketed 59 percent from 611 billion rubles at the end of last year to 974 billion rubles in September, according to the Central Bank. Overdue mortgages accounted for 0.13 percent of all mortgages in December 2007.

Banks started facing liquidity constraints at the end of 2007, when the first investment banks announced losses on sub-prime mortgages in the United States, leading to a tightening of capital markets, but they had continued to disburse mortgages in hope of a return of better days.

Not anymore.

"To prevent defaults, banks are looking to compromise with borrowers, adjusting their repayment schedules and helping them move into cheaper apartments," said Igor Zhigunov, deputy chairman of City Mortgage Bank, a leading mortgage bank acquired by Morgan Stanley for $185 million in late 2006.

Zhigunov said his bank was working on developing such programs to avoid defaults.

He and other mortgage specialists predicted that the mortgage market would decline throughout the first half of 2009 and only start recovering in two to three years.

"Banks are not interested in disbursing long-term money at the moment. They want to limit their risks, especially given the prospects of a further ruble devaluation," said Viktor Afonin, head of marketing at Fosborne Home, a leading credit broker.

"We have had several cases where a bank changed its lending conditions at the last moment, after the credit agreement was signed," he said.

Afonin said that as recently as the summer, Fosborne Home had more than 80 partner banks that offered mortgage programs, and now no more than 10 of its partners continue to disburse mortgages -- and these banks have only a limited number of programs.

Banks are more interested in funding companies at the moment because the risks are much lower than funding individuals, the terms are shorter, and returns more attractive, said one mortgage business investor who spoke on condition of anonymity, saying he did not want to draw attention to his company.

"Aside from the usual credit risks of the borrower, banks are facing a real estate devaluation risk, as well as another issue -- matching their short-term financing with long-term loans," he said.

Coping With Fewer Funds

Funding resources for banks have become very limited, and the share of government funding in the banking system has increased to 10 percent from an average of 3.8 percent in the first nine months of 2008.

"Banks are accumulating cash cushions at the moment," said Olga Naydenova, a senior banking analyst with Alfa Bank. "Even if they are able to refinance their existing portfolios through a mechanism offered by the Agency for Housing Lending Development, they are unlikely to disburse this money again through mortgages."

Naydenova said that in an environment of limited funding sources, banks without a significant cash cushion could face bankruptcy if they saw a repeat of what happened in October, when a run on banks caused deposits to fall by 6 percent in a single month.

The first signs of disappearing funding for banks appeared in the summer of 2007, when U.S. investment bank Bear Stearns announced losses from its holdings of mortgages and mortgage-based securities. By the end of the year it had written off $1.9 billion of holdings and posted a loss of $854 million, its first in 80 years. Other Wall Street investors also became victims of a slowdown in housing prices, which led to much higher default rates on risky home loans than was expected and unprecedented losses.

As a result, securitization, an instrument developed to help banks fund themselves by selling their mortgage portfolios to third-party investors, has now reached a dead end. In theory it works well, letting the selling bank receive cash for its portfolio right away and put it to use, while the investor gets future cash flows. One of the advantages of securitization includes the ability of a bank rated "BB" to borrow at "AAA" rates if it has an "AAA"-rated mortgage portfolio, leading to a steep reduction in borrowing costs. But in practice, securitization has backfired, as defaults on portfolios sold to financial investors proved to be much higher than estimated.

Since August 2007, financing has really dried up, as previously committed securitization transactions were completed but investors showed no new interest in funding.

"The banks that are continuing to disburse mortgages are offering unattractive terms to borrowers," Afonin said. "They also now have limited programs and some of them do not offer ruble programs."

Borrowers, on the other hand, are much more hesitant to borrow in dollars in an environment where the ruble has depreciated by more than 20 percent against the dollar since the beginning of the year and is expected to depreciate further.

"We have seen a two times reduction in mortgage applications since July," said Zhigunov of City Mortgage Bank, the first private bank to securitize its mortgage portfolio, selling 1,275 mortgages for $72.6 million in early 2006.

The bank now offers mortgages only in dollars, the amount borrowed cannot exceed 60 percent of apartment's market value, the prepayment penalty is as much as 5 percent, and regardless of a borrower's monthly income, the interest rate is 13 percent, unless the loan amount is less than 50 percent of apartment value.

For those that took a dollar mortgage and are now facing repayment difficulties, VTB-24 is offering a program that allows clients to convert to a ruble-based mortgage. Ruble rates vary from 13.6 percent to 16.6 percent, but the customer pays a 24,000-ruble commission for the issuance of a new loan, in addition to being mandated to assess the value of the property again and buy insurance.

Vera Lanina, a 45-year-old Moscow homebuyer, said she was satisfied with her dollar-based mortgage, which she took out in January when the exchange rate was 24.6, because choosing the dollar had allowed her to borrow a higher amount at a lower interest rate.

"It [the ruble] has depreciated a lot, but so far I have been able to make my payments," she said.

Market specialists said that neither the clients nor the banks will be keen to finance mortgages in the coming months. "People will be afraid to borrow in dollars because of devaluation prospects, banks will be hesitant to offer mortgages in rubles because the resources are limited," Afonin said.

Even if the government's Agency for Housing Lending Development buys mortgage portfolios from banks, the banks are not likely to re-invest these funds back into mortgages, he said.

State Efforts Dismissed

Finance Minister Alexei Kudrin said earlier this month that the Agency for Housing Lending Development, which is in charge of developing Russia's mortgage infrastructure, a key element of the government's housing policy, would receive up to 200 billion rubles through credit lines from state banks to refinance mortgages in 2009. In addition, the agency is in the process of receiving a 60 billion ruble capital injection from the state. This means that the agency could refinance as much as 20 percent of all mortgages outstanding in 2009, giving a significant liquidity boost to banks. But the key question is how the refinancing will be implemented and whether banks will use new funds for mortgage programs.

In the past several months, the situation on the mortgage market has changed drastically. Down payments have increased from an average of 10 percent to 15 percent to 30 percent to 40 percent, the number of banks offering mortgages has shrunk from 100 in early 2008 to no more than 20 now, City Mortgage Bank said. It said 90 percent of mortgages are currently disbursed by eight to 10 banks and interest rates range from 11 percent to 15 percent in dollars and 17 percent to 26 percent in rubles.

"It is practically impossible to get a mortgage without an official employment form proving income, and banks have essentially stopped loans for country houses or new housing developments," Zhigunov said.

Agency for Housing Mortgage Lending head Alexander Semenyaka said at a conference last week that the agency would provide guarantees for banks that sell their mortgage portfolios to third parties. Semenyaka said that as many as 50 banks with loans of up to 6 billion rubles would receive guarantees from his agency, and 10 banks already approved by his agency have experience in securitization operations.

Semenyaka also said that his agency would finance a minimum of 100 billion rubles worth of mortgage securities from 50 issuers in 2009. "If amendments reducing mortgage security requirements are introduced, this figure could increase to 200 billion rubles," he said.

The Agency for Housing Lending Development intends to tie its refinancing rate to that of the Central Bank, which is currently at 12.65 percent, plus a margin of 0.05 percent.

Zhigunov said this means the effective cost to the borrowers would be as high as 20 percent in rubles, after accounting for credit risks of the borrower and bank expenses.

Meanwhile, state-owned banks have a chance to increase their market share as private mortgage players like City Mortgage Bank step back to focus instead on cost optimization. "VTB-24 is growing very fast as a mortgage lender, although three years ago they were new to this market," Afonin said, noting that state banks offer relatively attractive rates and are viewed as safest by people.

VTB and state-owned Sberbank, which holds half of all savings of the Russian population, declined immediate comment for this report.

Naydenova from privately owned Alfa Bank said even state banks needed to be cautious with mortgages these days. "Sberbank ... is unlikely to use its liquidity to fund more consumer loans," Naydenova said. "Instead, it may help existing borrowers by agreeing to new repayment schedules and then use the money to fund less risky borrowers, such as businesses."