The state will offer banks a new instrument - mortgage securities, the risks for which will be assumed by AHML. State guarantees may ultimately reduce the cost of housing loans

Photo: Oleg Kharseev/Kommersant

Insurance from AHML

Deputy Prime Minister Igor Shuvalov on Tuesday, May 17, announced that a new financial instrument will soon appear - a risk-free mortgage security. “We have now agreed on a preliminary plan with the Central Bank - the Central Bank has agreed, we will try, as a pilot project, to issue such a paper that will be based on a first-class risk-free mortgage,” Interfax quotes Shuvalov’s statement at a meeting of the State Council on Housing Construction.

Finance Minister Anton Siluanov added that the most important thing is to ensure the reliability of this security so that it is backed by real square meters.

A mortgage-backed security is a bank debt security that is backed by a mortgage loan. Other banks or funds buy them and receive interest payments from the funds that come from paying off the loans. Issuing mortgage-backed securities, or securitization, allows banks to unload their balance sheets, and the funds that banks receive after selling securities are used for new loans.

The idea to issue mortgage-backed securities emerged as a result of discussions between the Ministry of Finance, the Central Bank and AHML about further measures to support the mortgage market after the completion of the state program for subsidizing interest rates (valid until the end of 2016).

As Deputy Minister of Finance Alexey Moiseev explained to RBC, AHML has a project whose goal is to help small banks securitize mortgages using AHML capital. “The paper will be conditionally risk-free. It will comply with the Basel concept, which says that if a bank has government support, in this case from AHML, then the regulator can assess the asset as less risky,” Moiseev said. In particular, banks will need to create fewer reserves on such assets.

In essence, this scheme means that the agency will provide buyers of mortgage-backed securities with insurance - in the event of a loan default, it will compensate the holder of the securities for losses.

The paper that Shuvalov is talking about is not new to the market, it is simply an improved version of the previous mortgage-backed securities that banks are still issuing as part of securitization. Now these issues have a rather complex structure: they have several tranches, the securities are issued by different mortgage agents, they are not sufficiently standardized, the AHML press service clarified. As a result, it is quite difficult for an investor to understand how one issue differs from another. “We propose to issue a simple standardized single-tranche paper from the balance sheet of one mortgage agent - a subsidiary of AHML,” they said.

The new paper will also be different in that the risks of non-payment of coupon income or non-repayment of the par value will be borne by AHML, not the bank, the AHML press service said, adding that the agency is now working with the Central Bank to change the standards for deductions to reserves for papers with AHML guarantee.

The first deputy chairman of the Housing Finance Bank, Igor Zhigunov, believes that an important advantage of this paper is the possibility of expanding access for primary lenders - banks to cheaper funding, which may also affect the reduction of interest rates for borrowers on loans. President Vladimir Putin once again recalled the need to reduce mortgage rates at a meeting of the State Council.

Real estate risks

It is incorrect to say that covering AHML’s unfulfilled obligations is the distribution of budget money, says the AHML press service. “The fact is that when we issue a guarantee, AHML assumes the obligation to pay funds in the event of a default on the bonds, after which it is ultimately possible to foreclose on the collateral and receive funds from the sale of real estate,” they say.

At the same time, the agency believes that it is technically impossible for the proceeds from the sale of collateral property to be less than the funds spent by AHML. “In particular, the mortgage-backed securities law requires that the loan-to-collateral ratio be no higher than 80%. This means that in any case, all obligations will be covered after foreclosure on the collateral,” the agency says.

As Oleg Ivanov, vice-president of the Association of Regional Banks of Russia, says, the scheme used by AHML is trying to replicate the scheme used by the Home Loan Administration in the United States, but without guaranteeing each individual loan. “However, so that the history of 2008 in the United States does not repeat itself in Russia, the fall in real estate prices, according to my estimates, should not exceed 20–30%,” notes Ivanov.

According to Zhigunov, the risk that AHML assumes in the event of a possible decline in real estate prices is not so great. “Firstly, risks reduce the collateral and loan ratios discussed above. Secondly, when banks evaluate collateral, they initially approach the valuation more conservatively and, as a rule, can reduce the value by another 10-15% from the current market,” says Zhigunov.

However, it is important to understand that mortgage-backed securities are a long-term product and it is quite difficult to predict for the long term what will happen to the real estate market and the macroeconomy, so risks always remain, Zhigunov emphasizes.

Unpopular mortgage

In 2015, the number of banks providing new mortgage loans decreased significantly, according to the material “On the state of the residential mortgage lending market in 2015,” published by the Central Bank on Wednesday.

By January 1, 2016, according to the Central Bank, a total of 559 credit institutions were engaged in mortgage loans. But it was actually possible to get a loan in only 433 of them. The rest simply continue to service previously issued loans. Over the year, the share of banks where you can actually get a new loan to buy a home has decreased from 85 to 77% of those credit institutions that deal with mortgages.

Against the background of high interest rates on loans and falling household incomes (according to Rosstat, they decreased by 3.5% over 10 months of 2015), the volume of newly issued loans also fell. In 2015, credit institutions issued about 700 thousand housing loans (30% less than a year earlier) for a total amount of RUB 1,161.7 billion. (34% less than in 2014).

Their share in the total volume of loans provided to individuals was about 20%, decreasing by 0.6 percentage points compared to the previous year. The average size of loans provided decreased from 1.74 to 1.66 million rubles, while in Moscow it amounted to 3.63 million rubles.

Risk-free mortgage: the state will insure banks for mortgage loans