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. Last Updated: 07/27/2016

Draft Law on Mortgages Lies in Limbo

A draft law designed to foster the growth of Russia's housing mortgage industry by making it easier for banks to foreclose on defaulted properties is languishing after a July veto by President Boris Yeltsin.


Proponents promise the mortgage law will boost lending to potential homeowners by improving foreclosure processes and creating rules for a new secondary market for trading the zakladnaya, as mortgages are known in Russian. But the draft law has been shunted off to a commission composed of representatives of the State Duma, the Federation Council and the presidential administration to bring it into line with the civil code.


"The passage of the mortgage law will give a big stimulus to the development of mortgage loans and to the solving of house-building problems," said Arkady Murashov, the president of Russian Mortgage Banks Association. "Unfortunately, the law seems postponed for the indefinite future."


Russian banks have largely shied away from providing loans for buying homes and loans for other things using homes as collateral because the Russian Constitution guarantees citizens a right to housing, making it difficult to foreclose when loan recipients default.


According to one of the draft law's authors, Sergei Dubkin, the current law allows for foreclosure, but it is a long and difficult procedure that normally ends with a court decision in favor of tenants, who often have no place else to live and thus qualify for constitutional protection.


The draft law, which has been in the works for five years, seeks to bolster the chances of lenders in court without directly challenging the constitution by clearly spelling out the obligations of borrowers who might take a loan without intending to repay it, knowing they cannot be evicted.


"The law defines the conditions of the mortgage agreement and the results of nonfulfillment by one party or the other," Dubkin said.


To provide incentives for mortgage lending, the law would also give mortgages status as tradable securities and outline rules for their secondary trading, Dubkin said.


The Federal Agency of Mortgage Loans was founded to facilitate such a market last year, but has not yet been registered because the government gave only 75 billion rubles of 225 billion ($13 million of $39 million) needed to establish the agency.


The agency is supposed to buy mortgage debt from banks at a discount and then sell it to investors, indirectly boosting the housing industry in Russia, Dubkin said.


Under the current system, banks are very reluctant to take the risks associated with mortgage lending unless a borrower can put up secured assets as collateral.


One banker, the credit department head of a prominent Moscow bank who asked not to be identified, said only one bank in Moscow -- SBS-Agro -- is actively pursuing the mortgage lending market. He said SBS has created a special unit called Universal Financial Company, which gives up to 10-year loans at an annual rate of 20 to 23 percent with a down payment of at least 30 percent of the purchase price.


Sberbank recently announced it would begin granting 10-year mortgages at the relatively low interest rate of 15 percent, with 30 percent down and adequate collateral, which can include the borrower's old domicile. Under this scheme, the borrower technically remains the owner of the old property, but must give up rights to it under Russia's personal-identification system, which operates with residence permits.


Mortgage specialists said, however, that it would be very difficult to qualify for such a loan. "You better go and try, after that talk about conditions," Murashov said laughing. He said big banks give such credits only to their employees.