Where can I find information about the russian mortgage market?

Question

Stuff like the market attractiveness, size, growth rates and what is making it grow.

Answer 1

The Russian Federation is at the present time 12 years into a radical process of privatization and democratization, begun in 1991 following the collapse of the Soviet Union. The process has had many challenges, as might be expected, in no small part due to a lack of prior history with private property and democracy. The Russian government remains today deeply committed to this process, despite setbacks that include the default on government bonds in 1998.

A central component to this process of privatization is the development of a private housing market supported by a private mortgage market. President Putin has a goal of doubling the Russian GDP in ten years, and is on the way to achieving this, with GDP growth at five to seven per cent per year for the last several years. Housing is a central part of the plan for economic growth, as well as critical to meeting the severe housing shortage in the country. An active mortgage market is a key component of a growing private housing industry. For this reason, the Russian Chamber of Accounts (a new government department filling the role played in the U.S. of the Congressional Budget Office and the General Accounting Office) requested the U.S. Treasury, as part of its program of technical assistance, to send a delegation to Moscow to train federal, regional and local officials on the U.S. housing finance system. There was particular interest in how the U.S. government supports, intervenes in, and oversees this market, and in the U.S. secondary mortgage market.

Prior to 1991, virtually all housing in the Soviet Union was built, managed and owned by Gostroi, a department of the Soviet Government roughly equivalent to the U.S. Department of Housing and Development, but with far more scope and power. Virtually all housing built by Gostroi was high-rise concrete apartments, generally in urban areas. Families were allocated the right to occupy units for minimal rent, but with no rights of ownership (although many families in cities like Moscow effectively owned small dachas in the countryside). Following the collapse of the Soviet Union, the new government of the Russian Federation transferred "ownership" of most of these apartments to the current residents of each unit. The word "ownership" is in quotations because the concept of private property, and the legal structure to support this, is still evolving in Russia. One result of this transfer is that the rate of homeownership in Russia today is 68 percent, roughly the same as in the U.S. As one senior government official joked, "At last we have caught up to the U.S. in something!"

Despite this high rate of ownership, housing is in short supply in Russia, and the existing housing suffers from years of deferred maintenance. Gostroi, the governments of various oblasts or regions, and district and local municipal governments are still developing and financing much of what new housing is being built at this time. There is, however, a small though growing group of private developers partnering with different government entities to develop private housing. Overall housing production, though increasing, remains slow. As a result, prices for apartments in Moscow and other major cities are rising rapidly. This is putting intense pressure on affordability, and only a small percentage of Russian citizens can afford new housing without heavy subsidies.

There was, of course, no mortgage market in Soviet times, as all housing was financed by the government and provided virtually free of charge. The Russian Federation, therefore, has had to build the entire infrastructure for mortgage finance from the ground up. They have studied the U.S. housing finance system as a successful model (with the assistance of a number of U.S. advisors representing the public and private sector.) The Russians, however, neither wish to nor can they copy the U.S. system exactly.

Many new laws have been adopted since, including such basics as the right to own property, the right to sell it, and the right to pledge it as security for a mortgage. In the last several years, the Federal Mortgage Agency has been created, along with mortgage agencies in a number of the oblasts, and mortgage or housing agencies at the district and municipal levels. Delta Credit, a private Russian/U.S. joint venture, has also begun creating a private mortgage market. Both the government agencies and Delta Credit work with a few private Russian banks, and some of the government agencies also issue mortgages directly.

Though mortgage money is still scarce in Russia, which is limiting housing construction, mortgages terms are evolving rapidly. In just a few years, the maximum length of a mortgage has been extended from five years to 20, and interest rates have fallen from the mid 20s to 15 percent. Other terms are also moving toward world standards, though loan-to-value ratios are still in the 50-percent range, requiring large cash downpayments. Mortgages have begun to be sold out of the primary market into a secondary market that is less than two years old. This process is hampered by a number of factors, including the absence of credit reporting agencies; and a lack of uniformity in documents, information gathering and reporting, and underwriting standards. It is impossible, therefore, for investors to assess the quality of the pools of mortgages being offered through the secondary market. This has limited investment in these pools, whether directly or through the purchase of mortgage-backed securities (MBSs) to government entities.

Plans are underway to allow government pension funds to invest in MBSs, which will greatly expand funds available for the mortgage system. There are also plans to create a federal guarantee of mortgages and/or mortgage pools, which will do much to make these pools attractive investments for private capital.

The private banking system is, at the present time, still struggling from the aftermath of the 1998 government default. Most Russian banks failed then, and with no deposit insurance, depositors lost all their savings. Deposit insurance is being considered but has not been created yet, and so few Russians are putting funds into Russian banks. This has limited the role of private banks to acting as mortgage brokers, forcing them to await the recent creation of a secondary market to issue mortgages.

Russia, always a country of profound contrasts, is climbing out of 70 years of economic devastation - what is euphemistically referred to as the Soviet "experiment." Conditions are very difficult for many people, but in Moscow there is a growing and vibrant middle class full of young entrepreneurs and dedicated government employees. There is a hunger to join the world economic system, and enjoy the full benefits of a capitalistic system, even though many among the older or more rural populations are being cruelly left behind.

The hand of the Soviet past is everywhere to be seen, not least in the fears many have of private property and its implications. For instance, a critical aspect of a mortgage is the ability to foreclose in the event of non-payment, and to evict—forcibly if necessary—the former owners. The new land code passed last year now for the first time does make such evictions legal—a family could not be evicted from their apartment in Soviet times—but, and this is still a big "but," there is as yet no mechanism by which to enforce an eviction. In fact, as plans for a return visit to the U.S. were discussed, Russian officials specifically requested to meet with the U.S. Marshall Service to understand how evictions are conducted in the U.S.

Despite the challenges ahead for the Russian housing and mortgage system, an extraordinary amount of progress has been made. In only 12 years, the Russians have put in place the basics of a system that took the U.S. 50 years to develop. Given the energy being put into the continuing development of this system, it could be only a few more years before Russia has a world-class mortgage finance system. Then, if the Russian economy continues its rapid growth—which, given the vast natural resources Russia holds, is a reasonable prospect—the housing system itself will also expand. Nothing is certain in Russia, but the opportunities are great, and it is a market worth watching closely in the years ahead.