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   September 23
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Analysis & Opinion
20.11.08 Too Much Of A Home
By Sergei Balashov

At a recent meeting of the International Mortgage Club, the Chairman of the Fora Bank Alexander Sinelnikov downplayed the effects of the crisis on the mortgage system, suggesting that it was time to diversify savings into multiple currencies to preserve purchasing power and catch up with growing interest rates. He examined the very etymology of the word “crisis,” which literally signifies a simple turn with no negative connotations.

Indeed, Russia’s mortgage market seems to be making a turn, but it’s one toward panic. “We get calls from debtors almost every day asking us to advise them what to do. They think they’re in deep trouble,” said the Vice President of the International Academy of Mortgages and Real Estate Irina Radchenko.

A record number of mortgages were issued earlier this year, but the situation was very different back then. The amount of mortgage loans granted in 2007 reached over $23 billion, more than double the numbers of 2006, when the homeowners received about $11 billion. The total amount of mortgages granted in 2008 was about $150 billion.

The average interest rate on the loans, stretched over 15 to 20 years, was around 11 to 12 percent, depending on the currency. A large percentage of the newly-made homeowners are now having trouble paying these loans off, following massive layoffs and pay cuts brought about by the crisis. Back in 2007, about 21 percent of mortgages were issued in foreign currencies, and the recipients of these loans could be the one group facing the most severe consequences. “There isn’t much trouble as of right now, as most Russians are earning about what they were a year ago, but if the ruble keeps getting weaker, those who have to pay off debts in dollars could end up paying double of what they were paying just a few months ago,” said Radchenko.

Last week, the head of Laurel-Ipoteka Alexei Terebkov stated that in the next nine months, about ten percent of debtors could turn insolvent. “This could be caused by a decline in people’s income; often the loaners overestimated their capabilities and now their income is falling not by a certain percentage, but by multiple times,” RIA Novosti reported Terebkov as saying.

Before the crisis ensued, about 85 percent of applicants had their mortgage requests approved, and the requirements weren’t strictly enforced by most banks. Today, according to the Fosbourne Home mortgage brokerage, this number is down to 40 percent, while the number of would-be homeowners seeking money has doubled, notwithstanding the fact that in October alone, mortgage interest rates grew to the 2002 levels of 17 to 18 percent for mortgages issued in rubles, and 14 to 15 percent for ones issued in foreign currencies. “People fear that the interest rates will grow even higher and the requirements will get stricter, so they try to get mortgages now while they can still afford it,” said Vasily Belov, the general director of Fosbourne Home mortgage brokering.

Along with bumping up the rates, banks increased the down payment requirement from 0 to 20 percent, and demand that the monthly payment be no greater than 45 percent of the debtor’s income, compared to the 70 percent requirement that existed before. Fosbourne Home reported that banks are quickly dumping their mortgage programs, as just a little over ten banks in Russia are still actively promoting this service. “The banks aren’t interested in mortgages anymore; they’re having a hard time refinancing the loans they’ve been granting and nobody has the ‘long money’ to give away for 25 years anymore,” said Radchenko.

When it comes to dealing with existing debtors, the banks have a few options to choose from. The easiest way would be to force the debtors to sell their property in order to pay off the loan and maybe even make some money, if the value of the property has increased since the time the mortgage was granted. Yet, Belov believes this to be highly unlikely. The banks could postpone the payments until the debtor finds a new job for as long as six month and temporarily lower the interest payments, giving the client more time to adjust. “There can hardly be any clampdowns in a situation like this, when the problems people are having with paying off their loans are temporary,” said Belov, while admitting that mortgages will not be as affordable anymore.

While there have been no defaults yet, it is clear that the system as we know it now will cease to exist. “This could ultimately lead to a point where we wouldn’t have affordable housing anymore, and this could happen as soon as within a quarter,” said Radchenko. “We can already say that the mortgage crisis has come around and that the system is already inefficient.”

The real estate market is not likely to suffer much of an impact from the possible mortgage crisis. Fosbourne Home predicts that the demand will fall by as much as ten to 20 percent in the wake of the tightened restrictions, thus adjusting real estate prices by anywhere from 5 to 15 percent. Lower prices would then lead to a spike in demand, and thus balance things out. “Real estate prices will eventually get to the same levels,” said Belov, downplaying the notion that mortgage is doomed to failure in Russia. “This is a crisis and any crisis is temporary, but it’s a fact that we will not have cheap affordable mortgages anymore,” he added.
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