MORTGAGE BENEFIT

The falling dollar, the crisis in the international mortgage system - 2007 was a very bad year for the US economy. And the USA's mortgage crisis still has a long way to go, according to figures from the US Mortgage Bankers Association (MBA). The number of households that cannot meet their mortgage payments and have had to leave their homes to the banks has reached record levels. According to the association, the number of unpaid loans in the fourth quarter of 2007 grew from 5.59 to 5.82 per cent, its highest figure since 1985. The number of borrowers unable to make repayments to the banks has already passed the one million mark. This is an absolute record since 1953 when the association began to collect these statistics. Experts forecast that this year more than two million American families will have to return to the housing rental market.

Unstable property

On the eve of 2008 US President George Bush promised to support honest Americans who want to meet their loan payments but are temporarily unable to do so. Experts are today awaiting the results of the first quarter of 2008 which will show how the authorities are keeping their promises, smoothing the negative effects of the mortgage crisis. Credit organizations are watching with horror as the once reliable property market slumps by the day with more and more houses falling empty. The situation was aggravated by the recent appeal by the chairman of the US Federal Reserve, Ben Bernanke, to the leadership of American banks to reduce mortgage principal if debts exceed the value of the mortgaged property. In addition, the FBI has begun an investigation into a major US mortgage company, Countrywide Financial (The New York Times). The investigation is seeking to clarify how the company carried out audits, placed mortgages and whether it falsified information on losses in the subprime mortgage crisis. The investigation into Countrywide Financial is one of 14 initiated by the FBI into American mortgage companies. The FBI is working with the US Securities and Exchange Commission which is investigating over 30 cases involving the mortgage market.

The mortgage crisis is also affecting Britain. The British Council of Mortgage Lenders has warned that this year hundreds of thousands of potential property buyers will have serious problems in getting a mortgage, the Daily Mail reports. According to the council's calculations, mortgage loans will require 30bn pounds sterling more than the banks can offer. This year mortgage loans will require 90bn pounds, while the banks can finance roughly 60bn pounds through savings deposits. This means that almost 200,000 people will not get a loan, the average size of which is 155,000 pounds in Britain.

In the past six months many Russian banks have raised mortgage lending rates, toughened the requirements on borrowers and some have refused this type of credit altogether. In addition, the Russian banking sector still has a problem with liquidity. As a result, the Russian Federation Central Bank has raised the refinancing rate, which will lead to a rise in the cost of loans from commercial banks.

The only plus - the first mortgage securities, though admittedly with unusually high interest rates, have already been issued in the USA and some loans to individuals have begun to be refinanced. However, the overall situation on the financial market remains extremely tense and, according to Western experts, it will not become much easier for businessmen and financiers in the next six months. Moreover, there is insufficient action in the USA to tackle the mortgage crisis. President Bush has announced a plan to revive the economy based on proposals to stimulate spending through tax deductions. The Senate approved the programme on 8 February. The cost of helping the economy will be around $167bn - tax benefits of between $600 and $1,200 for some 117 million families. At the same time this action is targeted not at unravelling the mortgage knot but at buoying demand. 

Three reasons for the National Bank

Although the US mortgage crisis has not affected Azerbaijan, the National Bank of Azerbaijan (NBA) immediately began to work out additional measures to boost the immunity of the country's banking system to the international financial crisis. For example, in June 2007 the NBA decided on a temporary halt to lending by the Azerbaijani Mortgage Fund (AMF), that is, to state mortgage lending, which was wholly justifiable.

Initially budget-financing problems were cited as the reason for this step: the AMF was expecting 20 million manats from the Azerbaijani Finance Ministry, as envisaged in the 2007 budget. These funds were to have met the AMF's requirements for refinancing mortgage loans for three to four months - to October 2007. However, the fund received only 3 million manats and began to have technical problems in issuing mortgages.

The Finance Ministry then reviewed the practice of mortgage lending in the country. Its results revealed negative instances in mortgage lending - borrowers were buying their own apartments and profiting from the difference between mortgage and commercial rates. The Finance Ministry thought it suspicious that 1,300 mortgages had been issued in just one quarter (in January to May 2007 the number of mortgage loans issued under the standards of the loans fund increased by a factor of 7.3). Earlier the National Bank announced the results of a check of 200 mortgage loans by seven AMF agent banks and found that the rules had been broken in only 0.5 per cent of cases.

However, it emerged later that the real reason for the halt in state mortgage lending was not the AMF's failure to receive budget funds or the breaking of the mortgage lending rules. The National Bank had decided to correct the actual system of financing mortgage operations. At that time the National Bank considered several systems for securing mortgage operations. They included additional budget financing, issuing securities (securitization) and attracting external financing. Nevertheless, there was still not enough money, first of all to secure the refinancing by the AMF of the growing mortgage portfolio in the country. Then because of the lack of funds to refinance AMF loans the National Bank asked the government to secure the AMF's activity. They submitted proposals to attract funds to the AMF as well as asking for additional financing from the budget.

In other words, the National Bank was ready to use all the levers to secure refinancing. As part of its proposals on tackling the refinancing problem, the NBA also suggested raising mortgage interest rates to the market level for the "freer refinancing of mortgages". Of course, the NBA did not intend to change the fairly soft terms for social mortgages, but at the same time planned to bring commercial mortgages closer to market conditions so that they might at least partially meet market conditions.

Banks' own programme

Against this background a number of commercial Azerbaijani banks announced they were drawing up their own schemes to refinance loans. Moreover, back in 2006 several banks drew up a scheme for accumulative mortgages, without waiting for special legislation to be passed. Some banks independently raised the interest rate. These terms are considered extremely favourable -loans for housing are issued effectively and beneficially in this way in many countries, including countries with a transition economy.

In order to expand the range of services for a broader share of the country's loans market non-banking credit organizations are also planning to enter the mortgage market.

In other words, Azerbaijan's banks have expressed a considerable level of interest in issuing mortgages to the population. Many of them, working under the State Mortgage Lending Programme, attract foreign lending and are beginning to implement their own mortgage programmes. For example, the International Finance Corporation decided to extend the volume of financing as part of its support for the mortgage operations of commercial banks in Azerbaijan. IFC representative in Azerbaijan Aliya Azimova has said that this year the corporation's main priorities will remain projects with credit organizations aimed at financing housing. "The credit organizations have already been identified and separate talks are under way with each of them. Within these projects we are planning to finance three to four banks, while the programme's budget will be $30-35 million," Aliya Azimova said.

The IFC programme is aimed at developing Azerbaijan's mortgage sector through long-term financing of selected commercial banks. Funds will be provided at the corporation's standard rates. 

Market rules

This "self-financing" of the banks serves the interests of the state, which right until June 2007 operated at a loss, financing the commercial mortgage programme. Many experts talked about this, while this position is also supported by the National Bank leadership which thinks that the state should not be financing commercial mortgages. NBA Chairman Elman Rustamov said recently that "changes will be made to the mortgage rules". "International experience shows that the market itself regulates commercial mortgages and this experience has proved itself in Azerbaijan," Elman Rustamov said.

The National Bank chief also said that an increase is unavoidable this year in the rate for mortgage loans issued by the Azerbaijani Mortgage Fund at the expense of the state budget. (This year the state budget is to issue 35 million manats in mortgage loans, 70 per cent more than in 2007. It is assumed that the funds will mainly go on social mortgage lending. Several foreign financial organizations are also interested in the process.)

"We are considering the possibilities of attracting funds from non-state domestic and foreign sources of financing," Elman Rustamov said. "Similar proposals have come from the International Finance Corporation, the German KfW Bank and other international organizations and commercial banks. We hope to continue the mortgage lending process. With the expansion in Azerbaijan's economic capacities plenty of offers of funds have come in. It is difficult to specify the sum that will be offered in advance. It is a question of lending rates. We do not want an increase in mortgage rates, but this is clearly inevitable and the practice of neighbouring countries shows that, on today's market, rates are high which also requires the commercialization of the mortgage process in Azerbaijan."

The bank's package of proposals on the commercialization of mortgages has already been submitted to the Azerbaijani Cabinet of Ministers. The deputy chairman of the NBA, Rufat Aslanli, said that the government has already started examining the package. "The renewal of the mortgage lending framework is the priority at present and after this has been confirmed the Finance Ministry will open the funding of the AMF within the limits set by the budget for 2008," Rufat Aslanli said.

To put it another way, mortgages in Azerbaijan will be more socially targeted. For example, the deputy chairman of the parliamentary commission for economic policy, Azer Amiraslanov, does not rule out a review this year of the privileged categories for social mortgages. 

Despite the crisis in the mortgage system in the USA and the halt in state mortgage lending, banks in Azerbaijan are continuing to offer loans. It is paradoxical but last year saw a more than threefold increase in the registration of housing certificates and the issuance of 3,719 of these securities for 236 million manats. This can be explained by the fact that investors began to use housing certificates more often as collateral. Banks' confidence in this financial instrument has also grown. And in connection with the topicality in Azerbaijan of mortgage lending the mortgage securities segment has shown the highest growth rate (more than 33-fold) on the country's share market.