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. Last Updated: 07/27/2016

Mortgages Unleash Small Revolution




From the ninth floor balcony of her new apartment in the outlying district of Mitino in northern Moscow, Valeria Astafiyeva looks out at a sea of trees extending to the horizon.


Inside, the walls rattle as the neighbors, also new arrivals, use a power drill to install a metal door at the entrance to their apartment.


Astafiyeva's apartment is modest: one room with a kitchen and bathroom in a layout that has remained unchanged since the Brezhnev era.


However, it is part of a minor revolution in the history of local urban development.


Astafiyeva purchased her new home at the end of last year with a mortgage loan. While mortgages are the norm in most industrialized countries, the concept is still very much a rarity here.


Astafiyeva's previous home - a two-room apartment in Khimki, outside Moscow - was allocated to her during the 1970s by the military-industrial enterprise she once worked for.


"Some of the better-funded organizations, such as the military or military-related enterprises, were able to build their own housing projects, so if you worked for one of those organizations, you could get on their waiting list, which was much shorter than the general municipal list," she said. "Teachers and doctors could only rely on the municipal list, which put them at the bottom of the heap."


In Soviet times, people on municipal housing lists could wait as long as 15 years to get an apartment. Now, the market is replete with residential houses. But the cost has become prohibitive for many.


There is only one full-fledged mortgage program operating in Russia, and Astafiyeva is one of the first people to use it to buy an apartment.


For the past six years, Astafiyeva has worked as an office manager at a leading American consulting firm, where she first heard about the mortgage program while attending a company-sponsored seminar.


Skeptical at first, she decided to give it a try when she heard the U.S. Congress was funding the program.


"It was sort of a guarantee that this was a real program and not some fancy scheme to con people out of their money," she said.


The program is administered through The U.S. Russia Investment Fund, which was set up in 1994 by the U.S. Congress to stimulate investment into the country's private sector. The fund does not loan directly to would-be homeowners, instead lending to local banks that in turn lend at a slight mark-up to people who meet the criteria for a mortgage loan.


With the banking industry still under development, loans given for any period over a year are considered long-term loans. The fund's program is one of the few long-term lending schemes available for any purpose.


The mortgages, denominated in dollars, can be taken out in sums up to $100,000 for 10 years. The interest rate hovers around 15 percent, which is high by world standards but considered reasonable in the domestic lending environment.


"Even at that interest rate there is a relatively small group of people who are able to take out this kind of loan," said Richard Hainsworth, an analyst with Thomson Financial Bankwatch in Moscow, a bank-rating agency.


"Because of the pent-up demand and the lack of other alternatives, the absolute number of people applying for [mortgage] loans is high," he added.


Astafiyeva got her loan approved within a week, although she spent two weeks preparing all the necessary documents for the bank.


"You're not just plunking down a sack of money for your apartment," she said by way of explanation. "The bank needs to make sure you are a trustworthy borrower, that you are not insane or an alcoholic."


Other would-be borrowers, however, have been less understanding about the bureaucracy involved, complaining that the red tape and poor customer service from local banks make it difficult to successfully apply for a mortgage loan.


"We had people calling banks who were not getting the quality of service they needed," said James Cook, senior vice president of The U.S. Russia Investment Fund. Worried that it might tarnish the program's reputation among the already-skeptical local populace, the fund set up a hotline number where applicants can get basic information about the program. Applicants can also get pre-qualified at the center before speaking with a local bank.


"We give the banks the names of the applicants, and the banks call in to follow up," said Cook. "The bank that's the quickest and provides the best service will win."


About 15 local banks are participating in the program.


The lending rules have been modified since the program's inception last year and they now allow for the loan to cover closing costs and even the cost of buying down the interest rate if the customer wishes to, said Cook.


For Astafiyeva, the main obstacle to getting the apartment was not the bank bureaucracy, but rather the very novelty of mortgages.


"The only real difficulty was finding somebody willing to sell his or her apartment to somebody who had taken out a mortgage to buy it," she said.


Most apartments here are paid for in cash. In these cases, banks only serve as a drop-off point for the buyer to exchange a cash payment with theseller, Astafiyeva said.


"People don't trust the banks, which makes the m wary of agreeing to be paid through a bank transfer rather than a direct cash transaction," she said. "It's been known to happen that a money transfer gets lost between one bank and another."


Only a handful of real estate agencies were even willing to help her look for an apartment after hearing she was planning on purchasing it through the mortgage program.


Everything since the purchase has been easy though, she said, drawing the loan documents from a fireproof safebox she keeps in her dresser.


"You understand what you are agreeing to," she said, showing the repayment schedule, which lists her monthly payments for the next 10 years.


The payments are modest, even by local standards, and Astafiyeva said she will likely pay off the loan early to avoid some of the interest payments.


More importantly, she said, the mortgage was the key to her becoming a homeowner, as she did not have the cash to pay for it up front.


"I bought one of the cheapest apartments in Moscow, but without the mortgage credit, I would not have been able to afford it," she said.


As such, Astafiyeva represents a largely untapped market made up of people with stable incomes, but incomes that are still insufficient for huge cash outlays.


Astafiyeva said that already some of her friends who also fall into this category are considering applying for a mortgage through the fund's program.


"My experience showed a lot of my friends who are looking for new apartments that a mortgage is a real possibility," she said. "It's true that none of them have gone through with it yet. But, on the other hand, when I go to the bank every month to make my payment, there are more and more people there to make mortgage payments."