TRIUMPHANT RETURN

Is the crisis in the global mortgage and finance system that emerged in 2007 over? Alas, no! The financial and economic crisis still reigns in the majority of countries and banks and insurance companies do not trust many borrowers, even though they have an acceptable salary and good credit rating. Many financial organizations, including the banks of many CIS countries, have given up on mortgage lending while others have increased mortgage rates and tightened the requirements placed on borrowers, not to mention the problem of the liquidity of the banking sector.

There's no longer any need to wonder how well the Azerbaijani economy is protected in this situation: state mortgage lending resumed here on 1 June according to the standards of the Central Bank's Azerbaijan Mortgage Fund (AMF), which is one of the government's anti-crisis measures.

There'll be money!

Although in the disastrous year 2007 the mortgage crisis in the USA did not affect Azerbaijan, the country's former National Bank decided in 2007 as a preventative measure to suspend AMF lending temporarily, i.e. state mortgage lending. Budget-financial difficulties were initially given as the reason for the step: the AMF was expecting 20 million manats from the Finance Ministry envisaged in the 2007 budget. These funds were to have been sufficient for the fund to cover refinancing of mortgage lending for three to four months, until October 2007. However, the fund received only 3 million manats and began to experience technical difficulties in issuing new mortgages. When the shocking results of a revision of mortgage lending practice by the Finance Ministry were published, it emerged that in some cases borrowers had mortgaged apartments that they already owned in order to benefit from the difference between the mortgage and commercial lending rates. The Finance Ministry had been suspicious at the issue of almost 1,300 mortgages in just one quarter (between January and May 2007 the number of mortgages issued by the fund increased by 730 per cent).

It later emerged that the National Bank had decided to correct the actual procedure of financing mortgage operations without changing the fairly soft terms for social mortgages, and at the same time planning to bring commercial mortgages closer into line with the terms existing on the market, so that the procedure was at least partially in line with market conditions. Even then the National Bank was considering several procedures for mortgage operations. They included additional budget funding, the issuance of securities (securitization) and attracting external financing. Proposals came from the International Finance Corporation, the German bank KfW and other international organizations and commercial banks.

Practice showed clearly that the Central Bank leadership achieved its objective without loss to potential borrowers. To tackle the refinancing problem the bank first suggested raising the interest rates on mortgage lending to the market rate "for freer refinancing of mortgages" (to bring commercial mortgages closer to existing market conditions so that they might at least partially be in line with market conditions) without changing the fairly soft terms for social mortgages.

The Central Bank, therefore, decided to provide funds to the AMF's agent banks raised from the issue and placement of securities. At the end of May, the Azerbaijani State Securities Committee registered a prospectus for the issue of 55,000 AMF fixed-rate bonds (AMF's capital is 65 million manats) for a total of 55 million manats. The bonds will mature seven years after the placement of the first issue and the annual rate is 3 per cent. 

The board of the Baku Stock Exchange decided at a meeting on 1 June to free AMF fixed-rate bonds from commission payments. As a result, when bonds are placed commission will not be deducted from the issuer. "This step was taken in order to build the mortgage bond market and support the new instrument on the market," Baku Stock Exchange said.

For its part, the AMF set the terms for the issue of mortgages by authorized credit organizations. The loan has to be issued in national currency - Azerbaijani manats - to citizens of Azerbaijan for a period ranging from three to 25 years. The loan must not be more than 50,000 manats while the annual interest rate must not exceed 8 per cent. The size of the loan must not be higher than 85 per cent of the market value of the mortgaged property on the day the loan is made. Monthly repayments of the mortgage must not exceed 70 per cent of the borrower's monthly combined income. The borrower's life and ability to work and the mortgaged property must be insured based on market prices for no less than the size of the mortgage. The age of the borrower at the end of the mortgage term must not exceed the legal pension age. The insured property must be valued by an independent valuer. The loan itself and the interest payments must be paid monthly in equal parts (annuity).

Only social mortgages will be funded by the state budget, which has allocated 14.5 million manats to social mortgages in 2009. The AMF has already applied for funds for social mortgages and expects to receive them in instalments. The AMF and its agent banks have already completed preparations to issue social mortgages. 

Social mortgages will be issued for a 30-year period, the maximum loan size will be 35,000 manats and the annual interest rate 4 per cent. As before, young families who include members of the families of martyrs (who died in the struggle for independence and territorial integrity), the families of national heroes, forced migrants and equivalent, civil servants with a minimum of three years' service, the holders of PhDs, people who have done well in sport and servicemen from the Ministry of Defence (excluding conscripts) who have at least three years' service. Every member of these families is entitled to receive just one loan on favourable terms.

Here comes the mortgage boom!

This type of credit is all very well but it's basically just a long-term loan. Do the banks have the resources for this? Some experts think that the resumption of mortgage lending in the country required 170 million manats at the start of this year. The overall portfolio for mortgages in Azerbaijan is 300 million manats while experts assess the potential market for mortgage lending to be one billion manats.

The information from the AMF that the fund's agent banks do not have the right to issue mortgages for more than one million manats came as a dark cloud on the horizon. The AMF made these conditions known in early June. Azerbaijan's Central Bank chief Elman Rustamov was more encouraging: "Every one million manats is equivalent to 20 mortgages and as soon as these funds have been used, the limit for the banks will be reconsidered with a view to an increase."

"One million is not the final figure. We have asked the banks to observe strict priorities in issuing mortgages and as the funds are used up the AMF will issue new funds," the Central Bank chief explained, stressing that the amount of funds envisaged for mortgage lending in Azerbaijan should be increased. The explanation was simple: "There is great public demand for housing while its cost remains high."

Elman Rustamov also said that the terms for mortgage lending remain the same but "could be changed as the world financial crisis comes to an end". He reassured citizens: "While in the past the AMF's agent banks had to give priority to mortgage lending for the acquisition of housing on the primary property market, now mortgages can be offered for apartments on the secondary market too."

The Central Bank has clearly taken account of consumers' dissatisfaction that mortgages were available only for new builds and decided not to give cause for speculation over the reason for the resumption of lending (articles have appeared in the press that this was done at the request of construction companies suffering severe losses because of the fall in demand on the primary market).

Citizens with fluctuating incomes should bear in mind that only people with steady income into the family budget are eligible for loans. The banks will thoroughly check borrowers' ability to pay which is wholly justified amidst the current world financial and economic crisis.

Elman Rustamov said that by the end of June the AMF will begin the process of issuing mortgages through its authorized credit organizations. 

Mortgage plus

What will mortgage lending do for the state apart from partially satisfying the demand for housing amongst the less well-off sections of the population? Elman Rustamov is absolutely convinced that the mechanism of mortgages funded by the issuance of securities will lead to investment in the construction sector and encourage businessmen to complete construction of unfinished buildings. The Central Bank chief said that a further issuance of securities could be organized to match the volume of mortgage lending secured by property which would revive and expand the securities market and enable the financing of mortgage lending.

The general director of MBA Ltd consultants, Nusrat Ibrahimov, commented to R+ that the property market had instantly reacted to the resumption of mortgage lending with an upsurge in activity. The company calculates that since the second half of 2008 there has been a slowdown in the Azerbaijani property market and a fall in prices for both residential and commercial property. 

"As a result, all the market indicators had fallen by between 20 and 40 per cent at the start of 2009 compared with 2008. This also affected construction; work on a range of sites was suspended which also affected employment," Nusrat Ibrahimov said.

Between 1 and 10 June, 12-13 per cent growth was recorded on the market. The number of potential borrowers, i.e. demand, has increased and, no less important, people are becoming more confident: before, people were adopting a wait-and-see stance, putting off the sale or purchase of property, but now they are becoming more active.

The expert thinks that if the state mortgage programme remains in place until the end of the year, then "by March-April 2010 we can return the figures for the construction sector and property market to the 2007 level". Moreover, he is convinced that "the resumption of state mortgage lending will give a powerful impetus to the revival not only of construction but also of the related economic sectors - banking, insurance and the property market - and will also help to solve the unemployment problem."