Buying in: As part of a new programme, potential homeowners are snapping up mortgages at concessionary rates

In June 2013 the Bank of Mongolia (BoM), the country’s central bank, introduced a new mortgage scheme, which is widely expected to boost home ownership rates substantially in the coming years. Under the new framework interest rates on mortgages for qualifying buyers have been set at a fixed rate of 8%, plus or minus one point depending on inflation. This represents a decrease of more than 50% in some cases, from rates as high as 27% as of early 2013, according to the World Bank. A lack of affordable financing options has been one of the major hurdles to the development of Mongolia’s housing sector. The new programme, which is being implemented by the BoM, the Mongolian Mortgage Corporation (known by the Mongolian acronym MIK) and a handful of other public organisations, was designed to boost access to housing, and has the potential to transform and improve the living situation of a large percentage of the population. “The intended purpose [of the mortgage programme] is to support the middle class, and support long-term sustainable economic growth by increasing the savings of the middle class,” S. Bold, senior economist at the BoM, told Bloomberg when the programme was launched.

Background

The first mortgages in Mongolia were offered under the umbrella of the Asian Development Bank’s Housing Finance Sector Programme, which ran from 2001 through 2008. This initial round of financing was carried out despite the fact that Mongolia’s legal environment vis-à-vis property financing, ownership and registration was relatively underdeveloped and only intermittently enforced at the time. In 2006 the BoM and nine commercial banks jointly established the MIK, which was launched with a mandate to develop both the primary and secondary mortgage market. The market improved further in 2008, when the central bank and the National Statistics Office of Mongolia jointly launched a national housing price index. As a result, access to mortgages at commercial banks improved, though in general home financing remained available only at relatively high interest rates.

As of the end of 2012 the situation had changed very little. According to M.A.D. data around 12 commercial banks offered housing loans. Interest rates varied from 13% to 22%, depending on the length of financing and other variables, and most institutions required a down payment of at least 30% of a given piece of property’s value. These requirements meant that mortgages were well out of reach of the great majority of the population, despite rising per-capita incomes and the emergence of a nascent middle class. These issues have also been exacerbated by the rapidly changing demographics of the country. Soviet urban planners’ original plan for Ulaanbaatar was developed with a population of less than 500,000 in mind; as of the end of 2012 the city was home to some 60% of Mongolia’s total population of 3m people, according to data from the Ministry of Construction and Urban Development. Around 45% of the capital’s population lives in traditional gers (portable felt tents) in a series of informal neighbourhoods on the edges of Ulaanbaatar proper, the majority of which are not connected to the capital’s power, sewage, water or heating networks.

The mortgage programme that was launched in June 2013 is not the first time the authorities have worked to reduce the cost of home financing. In November 2011 the government announced a 6% mortgage plan, which was established largely in order to subsidise the cost of housing built under the government’s “100,000 houses” project launched in 2010. Under the 2011 programme, first-time purchasers that met a handful of eligibility requirements were set up with a 25-year, 6% loan for apartments that were less than 50 sq metres in size, with the government footing the bill for the interest rate subsidies. The plan, which was rolled out just a few months prior to a round of national parliamentary elections, was widely criticised as a political ploy, and an unsustainable one to boot. Indeed, the programme was shut down soon after the elections.

The Current Programme

The current mortgage initiative is part of a raft of funding put forward by the government in late 2012 and 2013. In addition to the mortgage scheme, the government recently launched the Price Stabilisation Programme, under which the state is working to control the domestic prices of four major products, including construction materials (see Construction overview). Under the new mortgage programme the BoM will provide MNT1.13trn ($675m) in financing to participating commercial banks at a 4% interest rate. The project will be funded by a handful of government institutions, including the BoM itself and the Social Insurance Fund (SIF). The financing will be lent onward to individual borrowers at a rate of between 7% and 9% – depending on inflation – in the form of a 20-year mortgage, with a 10-20% down payment. To be eligible for the programme citizens must have a permanent job, and must earn at least MNT1m ($600) per year. The mortgages may only be issued for apartments that are 80 sq metres or smaller. Homeowners with preexisting mortgages that meet these requirements are allowed to refinance under the new deal.

The project has been implemented quickly. As of mid-September 2013 some 76% of the total financing for the programme had been utilised, with 40%, or MNT448bn ($268.8m), going towards refinancing existing home loans, and 36%, or MNT411bn ($246.6m), going towards new mortgages. As of mid-September just over half of the country’s overall loan portfolio carried the new lower interest rate. The remaining 24% of the financing allocated under the programme was widely expected to be utilised before the end of 2013. Three-quarters of the programme’s total financing will likely go towards refinancing existing mortgages.

While the mortgage issuance component of the project is expected have the greatest impact on the day-to-day lives of ordinary Mongolians, another key part of the initiative involves the packaging of mortgages into residential mortgage-backed securities products, which, according to the plan, will be listed on the Mongolian Stock Exchange. As of the end of September 2013 this component of the plan had yet to be implemented, and, according to the World Bank, it would “likely require substantial legal, regulatory and institutional efforts” to be effectively put in place in the near future, considering the deficit of other sophisticated financial instruments on Mongolia’s capital markets.

Challenges

While the initial disbursement portion of the mortgage programme has been carried out quickly, a number of long-term challenges remain. The sheer complexity and size of the plan is widely expected to put pressure on Mongolia’s legal and financial framework, for example. A variety of government and private sector organisations and institutions are involved in the programme in various capacities – in addition to the BoM, this list includes the MIK, the SIF, the Financial Regulatory Authority of Mongolia, and the Ministry of Construction and Urban Development (MCUD), as well as a handful of other ministries and, finally, the commercial banks themselves, which are responsible for maintaining the 7-9% rate over the length of the mortgages, albeit with government support. This last issue represents a major potential challenge. The commercial banking sector’s inability to maintain the 6% interest rate under the state’s previous mortgage policy was a key point of weakness in that scheme, though local banks are quick to point out that the primary cause of the cancellation of the 6% programme was ultimately the government’s unwillingness to continue subsidising the low-rate mortgages.

According to some local players, the large amount of financing on offer under the plan might also eventually put pressure on Mongolia’s banking sector as a whole and, consequently, the country’s commercial housing market. According to the World Bank, the value of the mortgages offered at the new subsidised rate exceed the value of Mongolia’s existing mortgage portfolio by around 32%, and the volume of new loans issued under the programme is equivalent to five to six years of total issuance at the market’s previous pace. With these figures in mind, long-term risks of the programme include rapid and substantial price appreciation in Mongolia’s housing market and, potentially, downward pressure on banking sector profitability. Many of these issues contributed to the eventual breakdown of the state’s previous 6% mortgage programme.

Planning Ahead

According to the government, the current mortgage initiative was designed with these challenges in mind. “The primary reason the previous plan was cancelled was that it relied entirely on the federal budget, which made it unsustainable in the long-term,” G. Mergernbayar, the director-general of MCUD’s strategic policy and planning department, told OBG. “The current plan has two major sources of funding, namely the central bank and the SIF, both of which are committed to the long-term success of the project.”

According to Mergenbayar, mortgages under the current plan are only being offered to potential homeowners that pass a stringent credit check. “MIK carries out extensive background checks on all applicants to the programme,” he told OBG. “Plus, the government is currently in the process of developing new legislation to ensure that the programme runs smoothly.”