Federal agency pushes variable rate mortgages

The Agency for Housing Mortgage Lending (AIZhK) will launch an 8.75-10.5% annual mortgage rate by the end of April according to Kommersant.

AIZhK is planning to support the low rates by introducing an adjustable rate mortgage system with an adjustable interest rate based on the Central Bank’s refinancing rate.

AIZhK Innovations Executive Director Stanislav Dambrauskas announced on wednesday that AIZhK’s bank partners will soon be able to offer their customers new mortgage loans within the Variable Rate Program. Their interest rate will be adjusted against the Central Bank’s refinancing rate. With the bank margin, and the 0.5 % applicable to the secondary residential market deals grows to 0.7 %, not including mortgagee’s personal insurance.

Central Bank has cut the refinancing rate 12 times in the last year. The current refinancing rate of 8.25% should make new housing deals available between 8.75-10% and secondary deals available between 9.25-10.5%. Prime Minister Putin had earlier proposed an 11% rate for banks participating in the Vnesheconombank mortgage promotion programme for the new residential housing which was considered unrealistically low by many experts.

Stanislav Dambrauskas believes that banks may be interested in the project if it allows for a 3-4% bank margin with operating and reservation expenses. In this case the actual mortgage rate the borrowers will get is much higher than what has been announced by the AIZhK, but Mr. Dambrauskas, talking to Kommersant, said that AIZhK is going to recommend banks apply the 0.5 % bank margin to high-quality applications, i.e. those with a large downpayment and personal insurance.

The agency is planning to secure the adjustable rate mortgage against dramatic fluctuations. The rate is to be adjusted once a year. Its lowest and highest annual limits will be fixed at 5% and 20%.

In order to step up the launch of this mortgage loan AIZhK has developed a new refinancing system which will issue loans on mortgage, according to AIZhK Director General Aleksandr Semenyaka. This system will apply only to the Variable Rate Program (with the planned 10.5 billion RUR worth of loans to be issued in 2010) and the Maternal Capital Program (6.3 billion RUR).

Until recently AIZhK’s refunding followed the standard model. The agency redeemed mortgage pools from Western banks and issued mortgage bonds as security. This enabled the banks to avoid burdening their balance-sheets with mortgage credits and to provide mortgages while having no long-term resources of their own. Refunding the banks with AIZhK loans is a forced measure. The classical refunding requires development and introduction of design documentation for each program, something that tends to delay the process. Under the new scheme, the AIZhK will be able to start refunding four or five months later, Dambrauskas says, adding that he believes there is significant interest from banks.

“We held preliminary meetings with banks, and we saw they were interested in the mechanism. Actually the AIZhK gives them funding on mortgage.”

Vadim Pakhalenko, Director, Department for Work with Financial Institutions, DeltaCredit, agrees

“This sort of credit should definitely be introduced; this will mean that the AIZhK is moving towards the market.”

Thanks to the budget’s 60 billion rubles, AIZhK was able, throughout 2009, to keep the rates on its programs at 9.5-11.5%, whereas the smaller commercial bank rates were at 13-15%. This distorted the market, because the cost of borrowing made it impossible for the banks to compete with AIZhK, according to Pakhalenko.

“The AIZhK programs were no market product, their mission was to sustain the market, and they did that.”

However, Sergei Bessonov, General Director, New Building Investment doubts that AIZhK will be able to let the rates slide below 11%.

“If you put aside the bank margin and look solely at the Central Bank rate, the rates, on paper, look low.”

Pakhalenko adds that the new refunding scheme could also lead to problems.

“If the mortgages are left on a bank’s balance-sheet, the assets will be under pressure very soon.”

AIZhK hopes to solve this problem, but also notes the intent of the program is to stimulate lending, according to Dambrauskas.

“The banks may make before-term repayments of AIZhK loans and use mortgage packages at their own discretion, including issue mortgage bonds. Or AIZhK may over time redeem those mortgages from banks and securitize them.”