Putin pins housing hopes on mortgage factory modeled on U.S.

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Vladimir Putin is taking a page from the U.S. housing market to boost homeownership. Call it Russia's Fannie Mae.

The government last year set up a so-called mortgage factory to help lenders bundle home loans with state backing in a one-stop shop. On Wednesday Sberbank PJSC signed a 50 billion-ruble ($890 million) deal using the new mechanism, marking the country's biggest-ever issue of mortgage-backed securities.

"We are testing the waters," Andrey Suchkov, head of securitization at VTB Capital, said in an interview. The bank also plans to issue 50 billion rubles of securities this quarter via the tool set up by the Agency for Housing Mortgage Lending. "This issue will gauge investor appetite for these instruments."

Russia is seeking to attract buyers to its 4.5 trillion-ruble mortgage market to drive down borrowing costs, increase competition and get its population out of cramped, subpar Soviet-era housing. While the debt — with an average interest of 12% and a default rate of less than 3% — offers attractive terms in a low-yield world, the market is relatively small and investors don’t always know how to quantify the risk.

The Russian mortgage market proved resilient to the longest recession in two decades, growing 13% in 2016 even as the economy shrank, thanks in part to state subsidies that kept rates manageable. With the economy growing again and benchmarks declining, banks issued a record 150 billion rubles of new mortgage loans in March, up 26 percent from a year earlier.

Despite that growth, the mortgage market in Russia is about a quarter the size of Poland's when adjusted for the size of the economy. More than 70% of the market is controlled by state-owned VTB Group and Sberbank.

That's where the mortgage factory comes in. Set up with a goal of creating more competition and driving down rates, it will simplify and standardize the process of bundling the debt, while the quasi-sovereign AHML will create a government backstop guaranteeing the notes.

A similar model — the creation of Federal National Mortgage Association in 1938 — helped revive the U.S. mortgage market following its collapse during the Great Depression and fueled a housing boom after World War II. Fannie Mae was converted into a for-profit, shareholder-owned company in 1968 and Freddie Mac was created in 1970 to give it competition. Both were bailed out for $187.5 billion after the financial crisis and later more than repaid the government.

Rapid expansion

Fannie and Freddie together own or insure almost half of the U.S. mortgage market. AHML's strategic target foresees it expanding its share of new residential mortgage securities to 45% by 2020. The agency argues it will be able to keep risk under control thanks to the underdeveloped Russian market and tight rules that usually require at least a 20% down payment.

Such a rapid expansion could require up to a fivefold growth of AHML's asset base over four years, according to Olga Gekht, senior vice president at Moody's Investors Service. Before that happens, investors will need to learn more about how to model the business if securitization becomes a significant factor in the Russian mortgage market, she said.

"The success of the program depends on investors, and up until now the market has been dominated by state-owned companies," Gekht said. "For the market to be self-perpetuating, you need more to join."

Khrushchev buildings

The debt's quasi-sovereign status and the fact that it's backed by apartments will make it attractive to local and emerging market funds, although they need time to "get on the radar of investors," according to AHML. Foreign investors account for 28% of the market for domestic Russian bonds and will make up an important part of the investor base for the notes, it said by email.

"Given the currency risk and sovereign risk, traditional ABS investors may stay away, but there will always be appeal for investors such as hedge funds that are willing to consider the relative risk," said Gordon Kerr, London-based head of structured finance research at credit ratings company DBRS. "It will likely be a niche product rather than a panacea."

The push to expand access to residential loans comes amid shifts in where Russians live. Putin in February gave his blessing to a plan to move 1.6 million people to Moscow — the country’s largest mortgage market — from pre-fabricated buildings constructed under Soviet leader Nikita Khrushchev more than half a century ago.

So far, the mortgage factory's roll-out has been cautious, with a single pilot issue of 2.1 billion rubles late last year intended to ensure the mechanism worked. In addition to the Sberbank and VTB plans, several of Russia's biggest private lenders have agreed with AHML to issue paper using the program, including Bank Otkritie FC and B&N Bank. The agency says it has registered a bond program of up to 100 issues to place a maximum of 600 billion rubles with the central bank.

Suchkov, who worked in the 1990s with a U.S.-funded program at the newly created AHML to develop a post-communist mortgage market for Russia, said he's hopeful the program will succeed.

"You have to be an optimist in the mortgage business," he said. "Otherwise you wouldn't hand out a loan for 30 years."

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