How to Hand Out Cash

Market participants welcome a recent and rapid rise in Moscow's mortgage lending levels, as many buyers who delayed during the crisis are now ready again.

Mortgages are on the rise. Many pre-crisis buyers who postponed planned purchases have now returned, and there is high demand for housing in Moscow. There’s a buzz felt about town.

The market has been depressed for 18 months, so certain participants welcome the news that Russia’s overall mortgaging has doubled year-on-year for the first quarter of 2010, to the still slender figure of almost 49 billion rubles ($1.5 billion), as analyst Rusipoteka calculated in late May.

James Cook, known by some in Russia as the "father of mortgage lending," said his “mortgage pipeline” is doubling week by week. Further still, the quality of borrowers currently in Moscow is much better than pre-crisis when the danger of a bubble in the sector began to loom.

Cook said that really it is not a good idea
for governments to control mortgage rates too heavily.

“Prior to 2009, things were moving in the sort of sub-prime direction, as 100 percent loan-to-value mortgages were being issued,” said Cook, who is chairman of credit supermarket Kreditmart. “In a way, the crisis actually saved Russia from that and helped people stand back. Now there are reasonable rates and clients who really do put down something in return for a loan.”

In February, the prime minister, Vladimir Putin, who has been vocal about ambitions for the mortgage sector in recent years, also sought to “warm up the market” and give the country’s commercial lenders up to 250 billion rubles ($8.3 billion) this year for new housing construction loans. He said that as part of the deal, banks’ lending rates should not be above 11 percent, citing the current average of 14.5.

In fact, Putin’s scheme only started operating at the beginning of June, Vedomosti recently reported, with just three of the country’s major banks taking part — VTB-24, UralSib and GPB-Ipoteka. Even Sberbank, the country’s biggest bank, was not clear on its participation.

Cook said that really it is not a good idea for governments to control mortgage rates too heavily. “Whenever the government comes in to cap rates it’s a disaster because people just make mortgages, and there is no growth; nobody buys in because it is below market — as Luzhkov [Moscow’s mayor] did in the 1990s, saying we need 10 percent rates in Moscow.”

The lowest ruble-denominated mortgage rate offered via Cook’s credit supermarket — a broker that provides automated comparisons for borrowers — is currently 11 percent. “But I remember when Jimmy Carter was president,” he continued, “mortgage rates in the United States were 16 or 17 percent, but people were still taking them out.”

According to Cook, who has been active in the Russian credit market for over 15 years, what a lot of people in the country do not take into account are the inflationary and tax conditions that help borrowers. “Add to this that some companies pay employees housing credit that can be used for mortgage payments and the effective interest rate that people end up paying in Russia can be near to zero.”

Going Back to Greek

James Cook’s story is simple; indeed, “it’s the simple things that make money,” he said. In 1994, via a Washington think-tank, Cook was dealt a hefty grant from the U.S. government to come over to Russia and lay down the country’s legislation on mortgaging and help banks get going. He soon realized the money to be made from the place: “Russia had the most favorable environment for mortgage lending in Europe because of what was basically the biggest transfer of wealth from state to private hands worldwide... most people probably didn’t realize the amount that was being transferred.”

Having “invented” the word for mortgage in Russian — from the Greek “ipoteka,” though the term is in fact used in most major European languages — in 1998 Cook helped set up lenders DeltaBank and DeltaCredit. These began as effectively arms of the U.S. Congress private investment firm in Russia. But they were sold in 2004 and 2005 to GE and Societe Generale respectively as the U.S. government spun off its assets in the investment firm.

“Will there be a bubble again? I don't think so, because people are not overbuilding.”

James Cook

Cook continued to work under the new GE ownership of DeltaBank, but soon after being spuriously refused a mortgage himself in Moscow by a major foreign bank, he saw a niche in the market and went solo. Kreditmart and its sister Flexinvest Bank were the fruits of his idea. His operation now examines many mortgage packages provided by banks in Russia and offers what he said is based on the idea of aggregator sites like Confused.com.

Opportunity Knocks Or E-mails

“As a private equity investor or as a banker, if you can make it into this kind of underpenetrated market, then you’re onto a good thing,” Cook held. Just as Kreditmart packages mortgages, sells them to the lender and in doing so seeks a discount for its clients — $10,000 is a figure Cook cited as a recent saving for one borrower — so other investors can capitalize on the burgeoning Russian mortgage trade, he said.

Kreditmart’s typical client is a 25- to 35-year-old Russian manager — “not necessarily upper-middle class” — whose monthly income is 45,000 to 75,000 rubles per month ($1,415 to $2,360) and seeking a 2.5 million ruble to 5 million ruble ($79,000 to $157,000) loan. Terms go up to 25-30 years nowadays, but most people pay off loans in around seven years. “Like the West,” he said.

But unlike the West there are huge numbers of outright property owners in Russia. The privatization of real estate in Russia, following the collapse of the Soviet Union has been extended until 2013, but even so 75 percent of people in the country already own, or part-own property. “The fundamentals are there,” Cook explained, “the margins are very, very good, default rates are still low and there is pent-up demand going back to Krushchev’s time.”

Furthermore, surveys show that 75 percent of Russians are unhappy with their current living space, yet mortgaging barely makes up three percent of Russia’s gross domestic product. By comparison, Poland’s ratio is about 10 and Britain’s is about six that, Cook said. Fortunately, vetting potential borrowers is still a thorough process in Russia, Cook added, describing how the national credit bureau now works much more effectively.

“Will there be a bubble again? I don’t think so because people are not overbuilding, although there will probably be a more gradual growth curve than previously,” he predicted. For Cook, most real estate in Russia is still not overvalued, principally because infrastructure in the country has yet to catch up with construction. This is a serious restriction on development, and some places in Moscow’s suburbs may have to wait around two years just to get linked up to the basics.

That said, Cook’s outlook favors the suburban parts of Russia’s main cities because of the heavy prices of the centers: “People will start moving out there and commuting into the city more and more as transport opportunities develop: The future is in the suburbs.”

Farther from Moscow’s suburbs, the areas that Cook described as performing particularly well for his company at the moment, unsurprisingly, are those cities like Tyumen, which are oil-rich. “In the regions, there is affordability,” he explained, “so people are still willing to buy.” Tyumen’s level of ruble mortgage lending in the first three months of 2010 was greater than even that of the Moscow Region or St. Petersburg, data from Russia’s Central Bank showed. Logically, such growth places, including southern city Rostov-on-Don with the 10th highest level of foreign-denominated loans in the first quarter, are where Kreditmart is choosing to expand.

Drawing Parallels

The state of Russia’s mortgage market now is not that dissimilar to that of the United States at the turn of the 20th century. The same mindset of seeing credit to buy a house as a yoke for life was something that the founder of Bank of America, Amadeo Giannini, shook off much of middle-class U.S. society. This was done by actually marketing credit to people, especially to immigrants in the country in Giannini’s case.

Unlike the United States, however, one less attractive aspect of mortgage lending that has not struck Russia nearly so much has been foreclosures. “At the beginning, everyone said to me you can’t foreclose in Russia. Well you can.” In 1998, a law clarifying foreclosing was passed.

“But the last thing anybody wants is a foreclosure — most Russians will do whatever they can to avoid defaulting on a mortgage. Even if you do foreclose, nobody wants to kick people out on the streets,” Cook said, “and certainly not in winter.”