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The Central Bank may tighten requirements for low-interest mortgages

CrimeaPRESS reports:

The Central Bank intends to fight the tricks of developers on the so-called subsidized mortgage, which sets extremely low rates up to near zero. The regulator may introduce increased requirements for reserves for such loans, Alexander Danilov, director of the Banking Regulation and Analytics Department of the Central Bank, told Izvestia . The Central Bank will take this step if banks ignore their risks and the risks of inflating a bubble in the mortgage market. Experts believe that such a decision will actually put an end to the marketing ploy of developers to allegedly subsidize the interest rate, since it will be unprofitable for credit institutions to participate in such programs.

Return move

For the first time, the head of the Central Bank, Elvira Nabiullina, announced the problem of low rates close to zero on mortgages subsidized by developers in mid-September. She called it a purely marketing move, as people end up buying apartments at an inflated cost. This means that borrowers are misled and the regulator will take action, promised the chairman of the Central Bank.

Very low mortgages may include loans below 6%.

The scheme that developers resort to is quite simple. They attract banks as partners that issue loans at minimal interest rates (in some cases even less than 0.1%), compensating for this with a one-time commission payment. At the same time, they include their expenses for reimbursement in the cost of housing. For example, an apartment costs million rubles, the developer sells it for 05–10 million and gives 2–3 million to a credit institution.

In addition, the regulator believes that this practice contributes to inflating the bubble in the mortgage market, and also carries high risks for both borrowers and banks, Alexander Danilov explained to Izvestia. According to him, the Central Bank may introduce «surcharges» to the level of reserves on the so-called subsidized mortgage loans offered by developers at almost a zero rate.

In cases where banks participating in such schemes underestimate the risks, we may introduce increased requirements for reserving such loans , the representative of the Central Bank specified. — As a result, banks will better assess their risks and may refuse to issue such loans, as this will put pressure on capital and profits.

He emphasized that it is worth talking not so much about the fact that the regulator needs to cool this segment of the market, but it is just necessary to correctly reflect the risk for this product, which banks underestimate, in reserves. Losses on such assets may be higher, and this should be taken into account, Alexander Danilov noted.

He found it difficult to specify the time frame when they could begin to apply measures against «zero» interest, but noted that this issue is a priority for the regulator. However, it takes time to change and adopt the regulatory framework.

From December 1 of this year, the Central Bank introduces a premium to the risk ratio for mortgage loans, where the down payment is less than %. However, when selling real estate under construction, such loans are extremely few. Therefore, apparently, a second step will be needed in the form of increased requirements for mortgages at low rates.

Underestimated risks

  • According to Alexander Danilov, the problem began to gain momentum since the summer, when many developers began to offer programs at an extremely low rate.

    We noted that mortgage rates began to fall sharply in the primary market, and we began to find out what was happening. Such marginal projects are currently being actively distributed now, since such products are combined with preferential mortgages subsidized by the state. Which ultimately allows you to offer a super low rate ,” he explained.

    What risks does the regulator see in low rates on mortgages subsidized by developers?

    Banks may misjudge the fees and future returns on such loans, as well as the associated risks. The fact is that banks in their models are accustomed to taking into account that mortgage loans are usually repaid in seven to nine years, as people try to give money back as quickly as possible in order to save on interest. However, in the case of so-called subsidized loans, the borrower has no reason to repay ahead of schedule, since the interest is practically zero. Banks may underestimate this factor , Alexander Danilov explained.

    Accordingly, for a bank, term extension means greater exposure to interest and credit risks, as well as lower profitability (taking into account the time value of money).

    Another manifestation of risk. For their participation, banks receive a one-time commission from the developer 20–12%. The developer builds these costs into the cost of housing for buyers, that is, in every sense it remains a winner — both due to a quick sale, and due to the fact that people themselves pay. However, given that the developer does not receive funds from the sale of the apartment immediately, but after the commissioning of the object, the commission can be paid to the bank in installments, which carries additional credit risk for the bank , — said Alexander Danilov.

  • He also agreed that the greatest danger in such a scheme is for a borrower who overpays for housing, thus increasing the amount of debt. The risks are especially high until the market value of housing rises to that in the contract, since during the sale (for example, if the borrower defaults), there may not be enough money to repay the loan in full, even taking into account the down payment.

      Debts and Opportunities

      Experts interviewed by Izvestia agreed that the offer of mortgage developers with low rates carries risks for all participants in the process. Ksenia Yakushkina, director of banking ratings at the Expert RA agency, supported the regulator’s position that the borrower has no incentive to repay the loan ahead of schedule, although in the classic version this is a common practice.

        So the bank increases the risks of reducing the client’s solvency due to an increase in the real urgency of finding a loan on the balance sheet, she added.

  • According to NRA bank ratings analyst Natalia Bogomolova, at first glance, such programs look beneficial to everyone. The bank, if the client fails to fulfill obligations, will have property that can be sold as a pledge. The client, in theory, can save a lot on interest, due to which a huge overpayment for mortgage housing is formed. But in the opinion of professionals, there are indeed many pitfalls. For example, this is the lost profit of banks in the form of interest income.

    And since raising funds from banks is not free, the growth of loans at rates close to zero will contribute to the emergence of problems and inflating the mortgage bubble in the future , the analyst believes.

  • Leading Credit Specialist Inna Soldatenkova is sure that such programs are fraught with big problems for borrowers who, due to an insufficient level of financial literacy, do not understand the mechanism and, as a result, buy housing at an inflated cost.

    In the event of a significant decrease in solvency, the borrower will not be able to sell the property at the acquisition cost, and this is the second minus , — the expert explained.

    Irina Nosova, director of the ACRA Financial Institutions Ratings Group, also noted a greater vulnerability for home buyers due to its higher cost. Indeed, in addition to the commission from the developer, banks also receive an initial payment from borrowers.

    And according to Tatyana Shkolnaya, Deputy Director of the HSE Institute of Tax Management and Real Estate Economics, such marketing tricks are detrimental to all parties, including developers. For them, this is a reputational risk, which is fraught with a decrease in trust in the industry as a whole.

    The abolition of such practices will increase the transparency of the market, she is sure.

    Experts believe that if the Central Bank increases the requirements for the share of reserves, then banks will have to abandon mortgages with low rates.

    The introduction of premiums on risk ratios for such loans may slightly cool the market, despite the fact that now the rates for standard loans are at an adequate level , — Ksenia Yakushkina gave a forecast.

  • Natalia Bogomolova from the NRA agrees with her. As she believes, the increase in reserves for mortgage transactions at reduced rates for banks is an additional pressure on capital, which in the current situation may help cool banks from making such transactions. Increasing the premium on the risk ratio is one of the most effective tools to curb this kind of banking practice, supported Irina Nosova from ACRA.

    It is quite logical to use an increase in the share of reserves, since this is one of the effective methods of indirect financial regulation. Unlike direct bans that run counter to the market economy model, the Central Bank leaves banks and borrowers the right to make their own decisions about choosing such a mortgage product. For the first, the issuance of such a mortgage will become less profitable, since the increased reserves that they will be forced to form will reduce potential profits, Inna Soldatenkova expressed confidence.

    To offset this, banks will be forced to either raise rates on such programs or increase commissions for developers, which, in turn, will further inflate the value of real estate, she explained. This will make the practice of subsidizing the rate to “near zero” pointless.

    Source: Izvestia

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