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. Last Updated: 07/27/2016

Mortgage Market Shrugs Off Turmoil for Now

VedomostiA Bank of Moscow branch with a sign offering clients the chance to "fulfill their dreams" with a 25-year mortgage.
The worldwide turmoil caused by the U.S. subprime crisis appears to have made little impact on the Russian mortgage market, but problems may still be lurking around the corner, analysts said.

The domestic market has little exposure to high-risk debt, ensuring that a repeat of the U.S. scenario is unlikely to play out.

"While many banks talked about cutting down on mortgage loans, none actually did," said Olga Keselyova, a banking analyst at Troika Dialog.

Indeed, the recent history of the mortgage sector has been one of the country's many economic success stories.

"Taking into account its short history, which is a mere nine years, mortgage lending was actually a colossal success in Russia," said Marina Melkonyan, head of the mortgages department at Penny Lane Realty. "In 2000, banks issued mortgage loans at 18 percent interest rate, but now this has come down to about 8.5 percent or 9 percent annually."

Banks are currently giving mortgage loans worth up to 1 million rubles ($40,000), allowing customers to buy expensive mansions, she said.

Melkonyan said new legislation opening the way for the purchase of land plots with credit has also provided a boon to the mortgage industry.

Troika Dialog research also lends weight to the idea of a steadily growing mortgage market.

In 2006, banks issued out $13.3 billion worth in mortgage loans, but in the first quarter of 2007, figures grew 18 percent to $15.8 billion, Troika data show.

Realtors said the market was bound to grow over the next few years.

But some industry players still remain concerned about spillover from the subprime crisis, and some bankers said it could even provoke a collapse of the country's fledgling housing loan institutions.

Gorodskoi Mortgage Bank president Nikolai Shitov said that if the crisis persisted for more than two months, some Russian mortgage banks might wind up operations due to lack of funds.

Shitov said that as ripples from the subprime crisis spread, the cost of securitizing mortgage deals would inevitably rise, making it virtually impossible for smaller banks to borrow.

Central Bank deputy head Alexei Ulyukayev said last week that a 2 percent increase in borrowing rates for banks would raise interest rates on mortgage loans in Russia by 1.5 percent, Rossiiskaya Gazeta reported.

"Until the financial system stabilizes, some banks might stop giving mortgage loans. Others will ponder by how much they should raise mortgage interest rates," Ulyukayev said.

What is at stake as it becomes more expensive for domestic banks to refinance mortgage loans, forcing them to expand their assets at a more modest rate, is less a crisis than a slowdown.

Faced with such a prospect, some banks, such as VTB-24, have either postponed or dropped securitization plans until the situation stabilizes.

Russky Standart bank, whose consumer credit programs have attracted up to 30 million customers, said it would adopt a wait-and-see attitude toward mortgage lending.

"We are only at the test stage of our mortgage program, which the bank continues to assess," Russky Standart head of communications Preston Mendenhall said in e-mailed comments.

In any event, the effect any mortgage crisis could have on Russia is limited by the relatively small size of the sector. In Russia, mortgages account for 1.3 percent of gross domestic product, while in Central Europe it stands at about 10 percent. In Germany, the mortgage market accounts for 50 percent of GDP.

In part, growth has been held back by weak and incomplete legislation, State Duma Deputy Pavel Medvedev said.

Medvedev, deputy chairman of the Duma's Committee on Credit Organizations and Financial Markets, said one reason for high mortgage interest rates was that banks have to factor in litigation costs. The law currently forbids mortgage lenders from selling on collateral, such as apartments, without first seeking legal recourse, thereby piling on overheads.

Medvedev said he is sponsoring an amendment to existing regulation that would give banks more scope to issue mortgage loans.

Legislation on mortgage loan securitization also needs amending to allow for more uniform enforcement in the fragmented market environment, Penny Lane Realty's Melkonyan said.

The change could also bolster a second-tier mortgage market, which Melkonyan said is lacking at present.

"There is still no business mortgage law that would allow offices, warehouses and shops to be bought with mortgages," she said. "The inclusion of these would give a fillip to the mortgage loan business."

Another explanation for the sluggish performance of the country's mortgage sector could be that consumers are still distrustful of an industry that has shown a tendency to be opportunistic in its practices.

"At an average of 15 percent, the interest rate on mortgage loans is significantly higher in Russia than in more advanced economies and this is part of the reason they are unpopular," said Kim Iskyan, head of research at UralSib.