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. Last Updated: 07/27/2016

The Missing Link for The Mortgage Market

Over the years, people have often asked why Russia has not achieved the scale of other mortgage markets in neighboring emerging markets. With its population size and economic growth, Russia would appear to be a strong candidate for a thriving mortgage market.

Although more and more banks are now offering mortgages to their customers, the question remains: Why has the market still not reached its vast, untapped potential? The answer is fairly simple: Banks need long-term financial resources to finance long-term mortgages. Since bank liabilities in Russia are short-term, the only way for banks to avoid a mismatch on their balance sheet is to borrow long-term liabilities from outside of Russia. This is where the draft law on mortgage-backed securities provides a significant step toward completing the final link for a thriving mortgage system.

The draft law, which is supported by the Central Bank, has already passed the first two readings in the State Duma and is scheduled to have its third reading and be passed this fall.

It would provide much-needed funding for financial institutions to originate long-term mortgage loans. With the law's passage, under certain conditions banks and financing agencies will be able to issue mortgage-backed paper to investors to finance mortgage loans to the general public.

It will also provide an attractive investment vehicle for investors looking for stable, long-term investment opportunities. Mortgage-backed securities are an attractive investment alternative to the capital markets because the paper is backed by real assets that are stable, understandable and trusted by the investment community.

The law will also provide the stimulus for a secondary market to provide liquidity for banks offering mortgage loans but also pave the way for banks to effectively manage portfolio risk since part of the risk can be passed to the holders of the securities and priced accordingly. Since the mortgage assets backing the security will be held off-balance in a special purpose vehicle, banks offering mortgage loans will be able to grow and leverage without having to constantly increase their capital. These developments should enable equal access to various banks interested in tapping into Russia's millions of potential mortgage customers.

Even with the recent developments of the proposed law on mortgage-backed securities, some skeptics remain unsure that it will work in Russia when it hasn't worked very well in more developed countries. You might be surprised, but one of Russia's best kept secrets has always been its strong existing foundation for mortgage-backed securities. When individuals were given the right to privatize their apartments in the early 1990s, there was a massive shift of state housing into private ownership. Up to 70 percent of Russian citizens now own their home, setting the foundation for a system built on vast existing property wealth.

This transfer of wealth to the average Russian citizen provides a unique advantage for both Russia and for lenders. Since individuals have property with no existing liens, this property wealth can be tapped to trade up to better living conditions through mortgage loans. With the passage of the law on mortgage-backed securities, lenders will be able to securitize these mortgage assets where there is already significant equity built into the transaction, thus providing investors with a stable and attractive investment for their portfolio. The law's passage would be one key step toward completing this last remaining missing link -- and setting a milestone for building a middle class through home ownership.

James B. Cook is chairman of DeltaCredit Bank and chairman of Delta Financial Services Group.