Russia Needs Law on Mortgages

Anyone who's negotiated the purchase of an apartment in Russia can tell you that although the negotiations are bound to be long and complex, finance terms are usually quite simple; 100 percent payment due upon transfer of property. Thus, the purchase of property in Russia generally involves the transfer of large amounts of cash over very short periods of time, whereas in the West most property purchases are funded through long-term mortgages.

The main reason for the difference in financing property purchases is the unavailability in Russia of long-term mortgages at feasible interest rates. At present, mortgage rates are typically 10 to 30 percent per year in dollars (and higher in rubles) and the term of the loan is generally only two to five years. With short terms and high interest rates, mortgages are generally not practical.

It may seem a bit strange, but most people who can afford to use the current mortgage system to purchase a flat can also afford to buy a flat outright. For all practical purposes, this limits the utility of mortgages to the people who need them least. Furthermore, high-rate, short-term loans backed by one's home are not particularly attractive when considering ways of financing discretionary spending.

Why are mortgage rates so high and terms so short? Mainly because there is a lack of law governing mortgage, making mortgage a risky and cumbersome business for lending institutions. The Russian Civil Code says that mortgages are governed by the Law on Mortgages. Unfortunately, Russia does not yet have a law on mortgages.

At the present time, mortgages are governed by the Law on Pledges of May 29, 1992, the Civil Code and a hodgepodge of decrees and regulations, none of which really give the lender clear power to foreclose on residential property. Thus, lenders who do offer mortgages are often unable to evict the occupants of mortgaged flats even when it is clear to all that the mortgagees did not honor the terms of the mortgage. Additionally, even when enforceable mortgages can be obtained, the process of perfecting them is so cumbersome and confusing that banks either charge high interest rates or choose not to work with mortgages at all.

In an attempt to remedy this situation, a law on mortgage has been drafted and it has just passed its first reading in the Duma. It is unclear when this law will be adopted and in what form. However, if it is adopted in its present form or close to its present form, Russia will have a clear and commercially viable system of mortgage.

The effect that a workable system of mortgage will have is incalculable. The purchase of one's own home will for the first time become a reality for millions of people. Additionally, mortgages not only allow people to buy homes, they also allow people to utilize the money they have tied up in their homes without having to sell their homes.

In Russia, millions of people own their apartments and can't do anything with them other than live in them or rent them out. When long-term low-rate mortgages do become available, the spending power of the average Russian family should increase dramatically, and this should profoundly increase the money being spent and invested by Russians in the Russian economy.

Jamison Firestone is an attorney and managing partner of Firestone Duncan, which maintains offices in Moscow and St. Petersburg.