Ukrgasbank came out with the local inaugural issue of mortgage notes within the project of United States Agency for International Development (USAID) "Initiative of Crediting Assistance” (ICA) in association with Pragma Corporation.

After nearly a quarter of millennium since mortgage securities were firstly issued in the world history (that was in Lower Silesia (Prussia) in 1796), one of the key financial instruments finally came up in our country.

During the road-show on February 27, its initiators presented the three-year mortgage notes they issued in the amount of UAH 50 billion with the coupon rate of 10.5%. HVB Ukraine and Grant Thornton Ukraine were selected as Mortgage Pool Administrator and Auditor correspondingly.

Ukrgasbank explains that the small issue volume (even for the domestic financial markets) is due to the necessity to test and master the instrument which is absolutely new for the national market. The ICA selected the Bank for partnership in issue of mortgage notes as early as in December 2005 when Ukraine adopted the Law “On Mortgage Notes”.

The manager of the project “Initiative of Crediting Assistance” David Lucterhand thanked their partners for accomplishment of their pioneer mission and noted that even after the Law “On Mortgage Notes” came into force in 2006, those were the bylaws which formed the basis required for actual issue of that kind of securities. Everybody (foreign advisers, Ukrainian bankers and representative of the regulatory authorities) had to work hard for that.

Some experts from the ICA Project and Ukrgasbank claim that several matters in the regulatory and legal framework are still in need of adjustment.
The defects in the profile law revealed in preparation of the inaugural issue of mortgage notes refer, in particular, to auditing and licensing of activities related to administration of mortgage cover.

The ICA Project manager also informed that it continued to work with other financial institutions, in particular with the State Mortgage Institution (SMI). Therefore he forecasted dramatic activation of other loaners and rapid growth of the market as early as this year with its turnovers, as he forecasted, to become multibillion in the years coming.

In support of his words, Mr. Lucterhand instanced such statistics: late in 2005 the capitalization of the European market of secured notes (including mortgage ones) was 1.8 trillion euros.

Indeed, as far back as last year the opportunities to issue mortgage notes were being studied by Ukrsotsbank, Ukrsibbank, Raiffeisen Bank Aval, ОТР, Forum and Rodovid Bank. However none of them have announced parameters for hryvnya issues.

Sergey Biryuk, a member of the State Commission for Securities and Stock Market (SCSSM), thinks "it is very important that the first (loan) succeed". "If it does so, all the rest will do the same", says Mr. Biryuk. "You should be not only courageous but willing to spend for free a lot of intellectual and manual power for more than one year to prepare the issue, work out the regulations and master the new instruments. Many people do not want to deal with it but prefer to get the ready framework and work on its basis".

According to some experts, creation of the secondary mortgage market is one of the most critical targets for further development of the domestic financial system. In Mr. Lucterhand’s opinion, the urgency of this challenge is not only due to the emergence of long term financing source for the banks but to creation of the attractive instrument to boost long term savings inside the country. The high reliability and long terms for redemption of mortgage notes make this type of securities very attractive for such investors as pension funds and insurance companies. And if in 2009 the second level of the pension reform starts working in its full power, in the years to come the demand for these securities can exceed 150 million dollars per month in UAH equivalent.

Mortgage refinancing can play one more key role in the Ukrainian reality decreasing dollarization of the housing finance market.
It is known that up to 90% of mortgage loans are directly granted in the foreign currency or set equal thereto. Thus development of mechanisms for efficient UAH refinancing will contribute to decrease in the pressure on the foreign currency market and inspire confidence in the national money unit.

Meanwhile the banks and other loaners make up for the shortage of long term resources in external markets. According to the estimates of the Board of the National Bank of Ukraine, at the end of 2006 the total volume of external loan of Ukraine arrived at about 50 billion US dollars rising up over 10 billion US dollars last year. Now this figure is steadily approaching 50% GDP. Since the early 2007, the placement of Eurobonds has already raised more than 1.2 billion US dollars. Subject to the plans declared by the corporate sector, this amount will extend in extra 3.5-4 billion US dollars to the end of this year.

Yuriy Kamenetskiy, Director of Ukrgasbank Investment Operations Department generally explains how the security mechanism for mortgage notes works.

“The difference between mortgage notes and common corporate liabilities is that they are secured with cover in the form of specially selected portfolio of mortgage loans. It is the quality of this portfolio that provides the main guarantee of repayments to investors. So it is under continuous control of the administrator, auditor and SCSSM while working out the criteria and procedures to form its structure as well as creation of the relevant data base were one of the most difficult tasks to perform in preparation of the issue.

If the cover is made under clear, reliable and transparent criteria understandable for investors, the risk of non-repayment under mortgage notes may be practically considered zero. Indeed, the interest and nominal value are paid and redeemed thereunder with payments the bank regularly receives under real estate loans granted thereby where such real estate is pledged for the bank.

Until the notes are redeemed, the mortgage cover is transferred for administration to the special administrator and in the event of bankruptcy of the bank it is excluded from the overall liquidation estate. The administrator sells the loan to other interested parties, most likely to another bank. That is, it sells the right to receive interest on the loan and principal of the loan and such sale does affect neither the noteholders nor the loaners.

The highly reliable mortgage notes allow to establish a comparatively low (as against common debt instruments) nominal yield: in case of Ukrgasbank it is 10.5% per annum in hryvnias under the three-year liabilities. Although some observers doubt that the market will be attracted by such level of yield, the initiators of the issue are confident in the contrary.

Judging by the European experience, the difference in the yield on public and mortgage notes, subject to the high level of market development, is only 15-25 basis points (0.15-0.25 percentage points) as it is, for example, in Germany or Spain. It comprises 100 bps on the comparatively young Hungarian market. However in Kazakhstan where the market has already developed well for the last few years, the spread is the same as in Poland comprising about 60 bps.

That is why Mr. Lucterhand is sure that 125 bps premium with respect to the three-year public notes (efficient yield on Ukrgasbank mortgage notes is 10.9% per annum - Yu.S.) will be enough to compensate the investors for the liquidity risk and loan risk as well as for such factors as the novelty of the instrument, legislative defects and lack of experience of application of bankruptcy proceedings to issuers of mortgage notes.

The indirect evidence for the high demand for such securities can be the recent information that SMI received the applications from some potential investors for purchase of the five-year notes they were issuing (in the volume of UAH 1 billion under 9.5% per annum) in the total amount of UAH 5 billion.

Well, if the expectations of the strong demand for mortgage notes are answered, then the growing issue volumes and share in the capital market will provide the bankers with a good long term financing source alternative to foreign currency loans. Therefore the value of long term UAH resources in the economy will be decreasing”.

But in order to finally achieve this goal, the government, according to Ukrgasbank experts, must more actively influence the situation in the country’s mortgage loan markets. "That is what happened in Kazakhstan where Kazakhstan Mortgage Company (KMC) has been dynamically operating since 2001. Its basic objectives include achievement of acceptable loan terms for people with the average income and that below the average”, tells Mr. Kamenetskiy. “Thanks to active involvement of the government, after four years the country’s mortgage loan rates decreased by more than two times and the period of loan increased from three years to twenty".

Ukraine is still taking its first steps along this way. But the haste would not hurt. Following the results of this January, the aggregate volume of currency loans granted in Ukraine (USD 24.5 billion or UAH 123.7 billion in equivalent) went beyond the volume of UAH loans (121.3 billion) for the first time since 1999. The reason is well known – the rapid growth of USD loans for individuals mainly due to the dramatic development of mortgage and auto loans. Last year the rate of growth of individual foreign currency loans (UAH 30.4 billion in equivalent) overtopped, in absolute figures, those in the national currency (UAH 14.6 billion) by more than two times.

Such trends cause understandable concerns in the National Bank. But the methods chosen to change the situation are absolutely odd. A simple ban is far from any methodology even for our half market economy. Oh, and it is at least naïve to declare the bankers to be likely the main party in fault for the unrestrained advance in real estate prices simply because they dynamically develop mortgage loans. They develop because there is the demand which they so satisfy.

You should be realistic: UAH mortgage loans will be more popular only when the mortgage loan rates become reasonable for the loaners. Their current level (17-20% per annum) is nearly half as much as that for foreign currency loans (12-15%). However, the truth is that those rates are unacceptable.
But what should people do to solve their housing problems? Should they wait till the good bankers, despite the governmental inactivity, resolve the issues of both housing finance and easing of housing loans?


Weekly Newspaper "Zerkalo Nedeli"-



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