16 December 2003 03:17
Mortgages Face More Hurdles
With pro-presidential forces controlling the majority in the new State Duma, there is more and more talk of possible
amendments to the Constitution, passed in 1993.
And some of the proposed changes to the Constitution -- along with other legislative amendments currently under
discussion -- may have a direct influence on the development of the country's real estate market.
"One of the obvious suggestions that can now be easily made into law is to amend the declaratory constitutional
clause that guarantees everyone the right to housing. Mortgages cannot develop at all with such a clause in place,"
a United Russia State Duma deputy told Vedomosti last week, on condition of anonymity.
But Yevgeny Chepenko, who heads the legal department at the State Agency for Home Mortgage Lending, or AHML, which
provides refinancing for home mortgages and is working on the development of a unified federal system of home mortgages,
called the deputy's statement "nonsense."
"This is a substitution of concepts. The clause guarantees the right to housing and protects against arbitrary
evictions, but has no relation to mortgages," he said.
But other legal hurdles, albeit unrelated to the Constitution, still remain, market analysts said. Until they are
overcome, the mortgage market -- potentially one of the largest in Europe -- is likely to remain relatively small.
According to the World Bank report on Russian mortgages, prepared in February 2003, the mortgage stock is estimated
at less than 0.1 percent of gross domestic product, or 29 billion rubles ($1 billion). AHML spokesman Andrei Vishnevsky
places the figure higher, at 50 billion rubles, but that still puts the country far behind developed economies and other
emerging markets. For example, the World Bank estimates that the European Union's mortgage stock is roughly 53
percent of its GDP, while in Colombia and South Korea it is 12 percent and 14 percent, respectively.
According to Vishnevsky, this discrepancy is not surprising, given that in Russia there are currently as many as 38
mortgage-related laws awaiting approval. One of them is an amendment to the Civil Code, which currently prohibits a
property owner's eviction if the apartment or house in question is the only accommodation available to the
owner.
The amendment, which would change the law to allow eviction, is likely to be approved in the first half of 2004,
Chepenko said. Until that happens, the creation of a special housing stock for the temporary settlement of "special
evictees," could solve the problem, said Yekaterina Komarova, a lawyer at CMS Cameron McKenna.
Although setting up such a fund specifically for those evicted from their only available accommodation has been
discussed for some years, in most regions it has never happened, said Dmitry Rayev, a corporate lawyer at Swiss Realty
Group.
"It is difficult to set aside a special housing fund for the evicted, when other people are spending years
waiting for a municipal apartment to be allocated to them," he said.
The system of mandatory residency permits, or propyski -- a remnant of the Soviet era, like the constitutional right
to housing -- further complicates matters.
"According to Article 292 of the Civil Code, the owner of the building, as well as his family members who live
on the same premises, possesses the right to use the premises. And they retain this right even if the apartment's
owner changes," Rayev said. "Therefore, without the family members' consent to vacate the apartment, it
will be transferred to the new owner with all the people registered there."
And although mortgage agreements usually stipulate that the mortgagee or his or her family members cannot register at
their new apartment until the mortgage is paid back, in reality this is not adhered to since often the mortgagee does
not have an alternative address at which to officially register. This makes it extremely inconvenient for the bank in
the case of a mortgage payment default.
Other existing laws stipulate that the "lender does not have the right to claim the property," said Gerald
Gaige, head of Ernst & Young's real estate services.
Although a number of local and foreign banks -- including Sberbank, Delta Credit Bank, Vneshtorgbank, and Raiffeisen
-- are now offering mortgages, they have so far been extremely cautious. No exact figure on the number of mortgages
issued is available, but it is probably little more than a few thousand, experts said.
There are very few default cases, making it difficult to really test the existing legislation and its practicality.
The impossibility of evicting those who cannot pay back their mortgages remains a "purely theoretical
problem," according to AHML's Chepenko.
Of the roughly 2,000 mortgages processed by AHML, there have been only three default cases and all of them were
settled out of court, said the agency's spokesman Vishnevsky. Delta Credit bank, which has handed out 2,300
mortgages since 1998 -- worth a total of $85 million -- has not had any cases of default, the company said.
Ernst & Young's Gaige said there were "no legal foreclosures in Russia" both because the banks
remain cautious and issue mortgages to the most reliable lenders and because there were very few cases of
mortgage-lending to warrant proper statistics.
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