Mortgage in new face

After 3-month stay the Azerbaijani Mortgage Fund (AMF) received the last instalmenet in the amount of AZN 10mln out of the budget last week. Hwoever, it does not mean that AMF has again set up allocation of mortgage. The fudns will be directed at refinancing the mortgage allotted earlier. AMF suspended refinancing of mortgage credits due to lack of funds. Some AZN 26mln was allocated from the State budget of 2006 and AZN 20mln for 2007.

At the moment of cessation of mortgage system, the loan allotted by the banks exceeded the amount of vacant capital by AZN 20mln, whihch exceeds the sum allocated for AIF out of the public budget twice.

Absence of necessary finncing was the key reason for cessation of mortgage crediting system. Since the beginning of the activity of the AMF in 2005, the mortgage credits have been financed only through the State budget and AZN 46mln have been allocated for this goal, but is seemed too insufficient. Probably, the Government did not expect such agiotage among people around he mortgage crediting, thogh the forecasts wre optimistic. High pirces of real estate also promote the process.

According to the AMF's calculations, AZN 20mln is necessary to provide normal activities of the Fund in the initial stage. An even more is required for restoration of mortgage crediting. "It is not excluded that we will be a success in attraction of additional funds through securities issue, which are to be medium-term in the initial stage. Grants, allocations from the State Oil Fund of Azerbaijan Republic (SOFAR), as well as the funds received from the Finance Ministry, can be another source of financing, according to AMF. The funds paid for previously allotted mortgage credits can also be used for this purpose, but that is not big money for quotation rate makes up 2%. Anyway, a total of the credits allotted owing to this source made up over AZN 0.5mln. Negotiations have been already held with a range of bodies and a purposeful work on attraction of additional funds is carried out in this connection.

Meanwhile, the NBA suggests several variants for restoration of mortgage crediting via AMF. Firstly, it suggests changing of mortgage crediting terms, namely separating commercial and social mortgages. Experts calculated that the whole of the current terms and initial factors makes the process of social mortgage lacking vitality. Social mortgage should be offered at the current terms and should be subsidized by the State, while commercial mortgage should be formed and financed on market terms. Commercial mortgage should be based on commercial terms to enable development of mortgage crediting, to attach large scale to this process, and to involve all possible internal and foreign finance sources.

In 2007, maximal commercial rate for AMF's credit was reduced from 12% to 8%, while credit period was increased to 25 years and the volume of the credit to AZN 50,000. Commercial mortgage was expanded rapidly and the new changes caused increased interest rate to 6%. Now, privileged mortgage credits are allotted for 30 years. Maximal volume of a credit makes up AZN 35,000, and initial instalment is not required. Maximal interest rate comprises 4%, quotation rate for banks - 1%.

After the last improvementthe scheme of issued mortgage crediting:

  Primary conditions Average conditions Total Social mortgage Differences
Interest Rate 12% 8% 6% 4% 3
Term of credit issue 15 years 15 years 25 years 30 years 2
Initial payment 30% 30% 15% 15% 2
Sum of credit, AZN 30 000 30 000 50 000 35 000 -2

After restoration of its activities, the Fund plans to finance only privileged crediting of a restricted circle of young families on the same terms - 4% interest rate for a sum up to AZN 30,000. The rest will be offered mortgage credits on commercial terms which are unavailable for the most population. They also will be re-considered and possibly toughened. Today only several banks are engaged in sale of their own mortgage products having nothing to do with the State program. In future an independent field for manoeuvres will be demanded from them. Thus, Bank Respublika is developing its own mortgage program. The rates of the program will be competitive, and neither higher nor lower than the market rates. Maximal sum will exceed AZN 50,000. In accordance with the Kapital Bank's own mortgage program, the annual interest rate will vary between 10% and 12% and the credits will be allocated for from 5 to 7 years. The banks are directly interested in continuation of mortgaged crediting, while the International Financial Corporation (IFC) will be an ally for commercial banks in technical assistance to mortgage crediting system.

The Government realizes the necessity in development of a mechanism to provide stability of mortgage crediting system. Azerbaijan has its own peculiarities in forming mortgage market and this mechanism is intended for improvement of the population's housing condition. This project is of social character, and therefore, up to now financing of mortgage crediting has been implemented at the expense of budget funds. But the public budget is not able to meet the full demand for mortgage credits generally allocated for a long term. So, additional financial sources are planed to be defined for AMF to decrease its dependence on the public budget.

The decrees of the NBA envisaging a complex of arrangements - attraction of funds from foreign capital markets through issue of mortgage papers - are intended to solve this problem. Foreign investors have a great interest for that. They agree to purchase AMF's active portfolio. According to the Deputy President of the NBA, Rufat Aslanli, the opportunity for that is available and the current regulations do not exclude this.

AMF can re-finance local banks through their securities which can be pawned for the funds drawn from foreign capital markets. In classic mortgage brokers at mortgage market collect free funds at the market and allot them to consumers as mortgage credits. Aslanli believes mortgage companies should completely sell their portfolios at market. This mechanism is also has to be used in classic securitization, namely, funds of foreign investment companies are attracted through the securities issued by the mortgage funds.

Potential amount of mortage market of Azerbaijan is estimated to $5bln, while only 1% of this sum has been spent so far. To develop the market it is necessary to attract additional financial resources. Many participants in the market and especially population are interested in the rehabilitio of the mortgage crediting.

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