Mortgages for all?: There is vast potential for home loans to grow

Change in government has not affected the state’s “100,000 homes” scheme to provide affordable housing to low- and mid-income earners. With roughly 60% of Ulaanbaatar residents – or some 700,000 people – in ger districts comprising large traditional tents, building sufficient new homes and making loans affordable will be a challenge. According to M.A.D. Investment, given current construction, land and infrastructure costs, the provision of 100,000 new homes would require total investment likely larger than Mongolia’s 2011 GDP. Bankers expect some 24,000 new mortgages would be required under the scheme, or roughly the same amount as outstanding mortgages in mid-2012, yet a variety of options for capping mortgage rates were still being discussed in late 2012.

LIMITED GROWTH: The number of borrowers has nearly doubled from a low base of around 16,500 between 2007 and 2009 to 26,491 in 2011, while total debt quadrupled on the back of rising Ulaanbaatar property prices, from MNT164.6bn ($115.2m) to MNT656.5bn ($459.6m), according to the Mongolian Mortgage Corporation (MIK). “The majority of mortgage borrowers are in the capital, with a smattering in Darkhan City and Erdenet City,” James France, the chief financial officer of MIK, told OBG. The Bank of Mongolia (BoM) enacted the Regulation on Mortgage Loan Operation in 2008 just as it began publishing a quarterly housing price index with the National Statistical Office in an attempt to harmonise the loan writing process. While this has simplified commercial banks’ entry to the segment, the terms of mortgages continue to vary. Commercial mortgage tenors range from three to 10 years, with average maturities of 9.5 years in mid-2011, according to the BoM, while interest rates in mid-2012 fluctuated between 15% and 18% in Mongolian tugrik and around 8% in dollars. Mortgages accounted for 11% of total bank loans in the first half of 2012, according to the Trade and Development Bank (TDB). The value of total outstanding mortgages has risen from MNT164.6bn ($115.2m) in 2007 to MNT747.4bn ($523.2m) by July 2012, or a rise of debt per mortgage-holder from MNT10.1m ($7070) to MNT26.59m ($18,613). Growth in the mortgage market has not been matched by non-performing loan ratios, which have stayed below 1%, rising from 0.44% in April 2012 to 0.66% in the five months thereafter, according to MIK.

The squeeze on liquidity since the end of 2011 has caused down payments to increase to 30% of house value, up from many banks’ required 10% at the start of 2011. With mortgage interest rates rebounding to 15.49% in July 2012 after a drop from 17.73% in 2009 to 14.8% in 2011, client acquisition has slowed since April. Yet outstanding debt has continued to rise, reflecting the indebtedness of new borrowers.

THE MORTGAGE CORPORATION: With mortgages virtually non-existent in 2003, the Asian Development Bank (ADB) launched a housing finance project to develop the sector. In 2006 MIK was set up with 10 commercial banks to develop a secondary market for asset-backed securities (ABS), aiming to create a pool of long-term funds. Granted a €4.8m ($6.34m) line of credit by Germany’s KfW banking group in 2009, MIK also signed an agreement with USAID’s Development Credit Authority to guarantee half the value of up to $4m of mortgage revenue bonds issued. Including MIK bonds on the list of central bank collateral in 2008 and passing an ABS Law through parliament in 2010 was intended to unlock homeownership for more Mongolians.

BOND FUNDING: By mid-2012 MIK had floated MNT6.3bn ($4.4m) in bonds of one-, three- and five-year maturities. Acquiring mortgages off the books of 10 banks, the vast majority of these bonds were then sold back to the banks writing the mortgages in the first place. Rather than selling securitised mortgages to third-party investors, MIK’s mortgage-backed bond issuance has not effectively spread the risk to a greater number of investors. With little other debt, large enough to be securitised, the original purpose of the 2010 ABS Law remains unfulfilled. Yet MIK was in discussions with the European Bank for Reconstruction and Development, the Dutch development agency and commercial banks in late 2012 to boost funding and seek alternative mortgage securitisation methods, such as floating an offshore bond to finance further mortgage acquisitions, an option it has been studying with Dutch bank ING.

Another possibility would be for MIK to issue covered bonds rather than ABS, an option covered by the 2010 ABS law. “While many buyers could afford current interest rates of around 15%, banks’ conservative regime of requiring up-front payment of 30% of the unit’s value exceeds many would-be borrowers’ ability,” James France, the chief financial officer of MIK, told OBG. “Establishing mortgage insurance could significantly expand access.”

DIRECT STATE INTERVENTION: State Bank, established as a bridge bank for failing banks in November 2009, has emerged as another option for directly writing mortgages at the retail level. Originally due for privatisation by 2014, the lender has aggressively built up its position in retail and SME banking over the past two years. With assets nearly doubling from MNT130bn ($91m) at inception to MNT250bn ($175m) by the end of 2011, the bank’s loan book grew from MNT62.7bn ($43.9m) at the end of 2010 to MNT102.1bn ($71.5m) a year later, according to data from brokerage Frontier Securities. While commercial bankers think the institution should be privatised for somewhere in the region of $50m to $60m, this option seemed off the table as of late 2012.

FUNDING: Funding from the Development Bank of Mongolia (DBM), which raised 20m through a private placement in November 2011 and $580m through a Euronote issued in March 2012, has supported some growth in State Bank’s mortgage writing during the year. While most DBM funds remained in the central bank at the end of the 2012 construction season, the wholesale bank made some $30m in six-month loans available to State Bank in the second quarter of 2012. Capital Bank had also indicated its willingness to participate in the scheme in August 2012, although it did not receive DBM funding by late 2012. The aim was for the government lender to write longer-maturity mortgages of between 15 and 20 years, capped at 6% interest. Surprisingly, the Ministry of Finance guaranteed State Bank’s borrowing from DBM, despite DBM debt already benefitting from a sovereign guarantee, while the short repayment period of six months on DBM loans led to concerns of a maturity mismatch. Funding via the Chinggis Bond has also received consideration from a number of officials, though any funding would likely come via the DBM.

The BoM, meanwhile, has raised concerns over the mixing of deposit-taking and government-backed mortgage origination by State Bank. In October 2012 the state-owned lender announced it would stop writing new mortgages pending a clarification of the longer-term financing structure of the government’s programme. The incoming administration has made clear its intent to carry through the “100,000 homes” programme, although it remains unclear whether the MIK scheme will be resuscitated or whether the state will intervene directly through its financial intermediary. “We expect to use part of the proceeds of our upcoming offshore bond issue to purchase mortgages from commercial banks, either through MIK or another institution,” O. Chuluunbat, the deputy minister of Economic Development, told OBG.

PRIVATE-SECTOR RETICENCE: While banks have remained open to all options in public, no commercial lender has yet taken part in the government scheme. “We see the risk in the government’s 6% mortgage scheme as concerning,” S. Batzaya, director of business development at Khan Bank, told OBG. “The ceiling of MNT50m ($35,000) per mortgage is too low for most units in Ulaanbaatar, where prices far outstrip disposable income.”

Sceptical of State Bank’s more aggressive stance in retail banking and citing examples of past mismanagement by state-owned banks, bankers have continued to focus on market-rate mortgages for more affluent clients. With dollar-bond funding in the range of 8-9% in 2012, bankers only expect commercial mortgage loans to drop to 12-15% over the medium term. “Mortgage banking has a lot potential, but its development is not only down to the banks as it is also linked to government participation and the strategy for promoting the segment,” D. Bat-Ochir, the CEO of XacBank, told OBG. “Liquidity is the major concern, as is the cost of financing.” While banks such as TDB see the potential for mortgages to triple to MNT2trn ($1.4bn) by 2015, should the government cover interest rate spreads between commercial rates and their 6% cap, the means of financing the programme and the question of who will pay the subsidy remain unanswered. The potential costs of the programme appear ambitious, with Mongolia likely to raise large amounts of foreign funds through a combination of institutions.