A Russian reform hits home: mortgages

The hopes and prayers of the Zherebtsov family are bound up in a new apartment that has not yet been built.

Drawn by utopian billboard advertisements on the northern edge of Moscow - and an urge shared by millions of Russians to move out of crumbling Soviet-era apartments - the family decided to buy a three-room flat across the street from a school.

Family members are cobbling together 30 percent of the expected $80,000 price tag, but the rest will be paid by a mortgage - a radical concept for most Russians. Four years ago, only 7 percent of the population even knew the word.

But today mortgages are becoming a presidential priority to spread Russia's wealth and rev its already humming economic engine. The growth of such loans to average Russians signals an unprecedented long-term economic confidence.

For families like the Zherebtsovs - who hope to have the keys to their new flat in two years and to pay off their debt in a decade - a mortgage is helping create a Russian version of the American Dream.

"It's a very big dream for us," says Igor Zherebtsov, a preacher at a popular Protestant church in Moscow. "You can compare it to the American Dream, which is part of my dream, too. We hope, we wish, for stability."

"It's not a fact that [the loan] is going to happen," cautions Igor's wife, Oksana, "because we are here, in Russia." But she can't stop smiling at the prospects for the couple and their two sons, in an area spread with pine trees, good neighbors, and away from the capital's pollution.

In the turbulent aftermath of the collapse of the Soviet Union, which culminated in an economic meltdown in 1998, few Russians dared to believe that long-term borrowing to buy real estate would ever be possible.

But President Vladimir Putin - reelected last week to a second term - is presiding over a new era of relative economic calm. On Friday he ordered his cabinet to halve within three years the number of Russians living in poverty, now at 20 percent.

Part of Mr. Putin's campaign focused on mortgages, and the need for a "legislative package that could 'launch' an affordable housing market." The problems must be "addressed without delay" in the spring parliamentary session, Putin said, because "only a free man can ensure the state's prosperity."

The budding market has now loaned $400 million to $500 million by some counts, with an average mortgage of $18,000, paid back over seven to 15 years. The Association of Russian Banks, says Georgy Gangus, expects the market to quadruple during the next three years, toward a potential volume of $30 billion.

But bringing mortgages to Russia has not been easy. Though seeds of a mortgage system were sown in the late 1990s, legal and psychological hurdles persist. The law enabling lenders to foreclose on the property of defaulters remains untested, for example, so lending banks have been cautious.

And while most Soviet-era apartments were simply given to those who were resident in them when the communist regime fell apart, laws defining land ownership were only passed in 2001.

In a demand-driven real estate market - where prices in some better Moscow areas soared 40 percent last year - many families can't afford to move without a loan. Until recently, tax and finance laws were also in flux; often borrowers have little collateral other than their jobs.

"[Lending] is impeded by the fact that there are no credit histories in Russia, no credit rating agencies, and no credit bureaus," says Gerald Gaige, the head of Real Estate and Valuation Advisory at Ernst & Young, who has worked in Russia for 10 years.

Among the laws expected to be passed this spring is one that smooths the process now prohibiting banks and financial institutions from sharing credit information, Mr. Gaige says. Only now are assets such as buildings and property in Russia beginning to be valued and "monetized," he adds; new rules in the works will also create mortgage-backed securities, to make more cash available to lenders.

So far there are only "thousands, not millions" of mortgages in Russia, a figure that Gaige expects to "accelerate" since some 100 banks and institutions are already geared up to make such loans.

Many questions remain, though, along with ingrained fear among both borrowers and lenders. And interest rates are high, at 10 to 15 percent. For most, the idea is nothing short of revolutionary.

"Russians aren't used to having credit and taking a big loan, so they are afraid of it," says Yevgeny Mikhalenko, head of marketing at the Inkom Mortgage Agency, one of the three largest in Moscow. "And banks are afraid of giving a lot of money to people, so they put so many conditions to take the credit. Right now it is very hard."

The idea of mortgages started from scratch. A poll in 2000 found that nearly half the respondents wanted improved housing conditions, but just 7 percent knew the meaning of the word for "mortgage." Only 3 percent could accumulate enough cash to buy a new place. But another poll found that only 1.7 percent of Russians trusted mortgages at all.

While the learning curve has been steep, analysts say the post-World War II example of the US - where government-backed credits, loans, and mortgages for GIs transformed the American economy for decades - is a lesson for the Kremlin.

"It's a huge effect [on] releasing spending power into the economy," says Gaige of Ernst & Young. In the past, "the money people needed to buy a house would have been taken out of the economy ... and their spending power would have been reduced" before and after the purchase by the effort to collect that money.

Another result also ties in with Kremlin strategy: to distribute wealth more equitably. Russia has produced 25 billionaires - the third largest group of any nation, according to Forbes magazine.

"One of the big goals has been to try to spread the wealth, to increase the living standard of the average person here," says Gaige. "It's one of Putin's stated goals and visions to accomplish. And here is an obvious way to do that."

Buoyed by high oil prices in recent years, Russian economic figures are strong. Last year the economy grew 7.3 percent - the fifth consecutive year of growth. Officials estimate a further 5.8 percent growth for 2004. Such figures have helped keep Putin's approval rating above 70 percent, permitted an unaccustomed sense of long-term economic stability, and fed hopes for a better mortgage system.

"We never thought about it before, because we never had the money," says Igor, as he talks of his future home. "In our state, neither side has had any rights. The person who takes the money is never sure he can repay it. The one who gives the loan is never sure it can be paid off."

Igor and Oksana have one advantage over many other Russians. Their organization has always declared full earnings, and they have paid full income taxes. Russia's culture of not paying taxes - despite a low flat income tax of 13 percent - means that few Russians declare full earnings. Some banks offer to "compromise" on this, when issuing a mortgage, by lending smaller amounts.

"The real estate market is very unstructured, and the cost of transactions is very high," says Victoria Kochetkova of Delta Credit, one of the largest lenders in Russia, which conducts a mortgage education campaign. "And people are still afraid of the banking system."

In his job, Igor says he sees many lower-middle class Russians, many of whom would like to change their lives with new homes. "In the past, people didn't have this idea of a mortgage at all," says Igor. "But as it emerges, it is gaining momentum, and more and more people will do it."