In: Root » Legal and finance » Market and Finances
After the effective privatization of state-ownedandstate-enterprise owned apartments to the existing worker/tenants, there is now a growing market in Russia for transactions involving privately ownedurban dwellings. A survey conducted in seven Russian cities indicated that the turnover rate ranged from 2.4% to 9.3%, comparable to the turnover of existing homes in the USA (Kaganova, 1996). In the realm of Russian housing finance, two notable developments have taken place: establishment of a rudimentary legal framework anda regulatory basis for mortgage lending, such as the Law on Collateral andthe Law on Mortgage. Russia's mortgage lending is complicatedby high andvolatile inflation, which leads to severe interest rate risk. Lack of legislation on use of residential units as collateral further magnifies default risks in mortgage operations. The task for commercial banks and real estate companies is to findinnovative ways to reconcile the weak legal basis, the lack of experience with growing mortgage demand, as well as with underwriting and intermediation standards, with a view to developing longterm lending resources. The government's role in Russia is likely to include facilitating the creation of a secondary market through the formation of a central agency for mortgage lending. According to Skyner (2005), the underdevelopment of mortgage lending to individual households in Russia can be explained quite simply by the lack of demand, which in turn is due to high credit risks resulting from the lack of security of title, lack of financial depth that translates into high interest rates on mortgage loans, the limitedlong-term credit resources of originating banks resulting from the failure to develop secondary market financing, lack of transparency, andthe current structure of public subsidies, among many others. As Skyner says: Compounding the problem, the lack of trust towards financial institutions by the population does not tend towards indebtedness … The residual risk from the macroeconomic crisis of 1998 and the constant threat of inflation have kept mortgage interest rates high … andthe concomitant lack of long-term pricing benchmarks has kept mortgage maturities relatively short. The incomplete nature of financial markets andlack of participation by insurance or pension funds further exacerbates the problem.
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