STORM OF MORTGAGE LOANS
If the forecasts of some financial analysts are considered, the aggregate volume of mortgage credits extended to citizens, will exceed that of consumer loans in the next year or two.
In end-August 2005, the financing which natural persons received against a mortgage of a real estate, totalled BGN1.66BN, but it was twice less than the amount of extended consumer credits - BGN3.73BN. At the same time, mortgage loans rose 66% within the first eight months of the year, or twice quicker than consumer loans, which went up by 33% within the same period.
The shares of the participants in the mortgage credits market are changing with its development. In end-2004 DSK Bank was controlling 38% of the mortgage loans, United Bulgarian Bank (UBB) - 19.7%, BULBANK - 10.8%, First Investment Bank (FIB) - 6.5%, Post Bank - 5.7%, HVB Bank Biochim - 4.9%, Raiffeisenbank (Bulgaria) - 2.6%, and DZI Bank - 2.4 per cent. Six months later - in end-June 2005, the situation looked quite different. DSK Bank's share went down to 34.3%, UBB's - to 17.2%, and that of HVB Bank Biochim - to 4 per cent. FIB maintained its market positions and was controlling 6.7% of the mortgage credits, while BULBANK expanded them to 11.3%,, Post Bank - to 6.7%, and DZI Bank - to 2.9 per cent.
Banks prefer to extend mortgage credits for several reasons. One of them is
the lower risk
This type of loans are the only ones which are evaluated by risk amounting to 75% of their value. This allows banks (other conditions equal) to launch more mortgage credits than consumer loans. Moreover, these credits are guaranteed by a real estate, which is difficult to be stolen, wasted, or hidden, and not by a word of honour and goodwill of the guarantor. In addition, real estate prices (flats or houses) are presently quite high, especially in cities and holiday villages.
As a rule
mortgage credits are long-term
which means that the money invested in them bring steady proceeds to the banks for a long period of time. And their managers are therefore considerably facilitated in planning the money flows and in drafting the credit institutions' annual budgets.
The loans, guaranteed by real estates are much easier securitized. In other words, banks could issue bonds, guaranteed by their receivables from these credits and by the mortgaged property. The money from the marketing of these securities are again used for financing future operations. Mortgage bonds are less expensive to be serviced by their issuers, as they are considered less risky because they are backed by the respective real estates.
The fact that mortgage credits will enable banks to avoid some
limitations in the future law on consumer loans
should not be ignored either. As the BANKER weekly has already written, the bill under draft stipulates very severe terms for launching such credits. And while the drama of Bulgarian banks regarding consumer loans is still ahead, the European Union is already considering a special directive on mortgage crediting. Its preparation will be probably a long and painful process, which according to people acquainted with the European bureaucracy will take at least two or three years. Until then local banks may take advantage of the situation and evade the restrictions in the future law on consumer credits by transforming them into mortgage loans. For that reason, probably, as soon as the Economy Ministry announced it was ready with the draft bill on consumer loans, most banks started cutting down the interest rates on mortgage credits.
In two weeks alone
promotional interest rates
accrued in the first year of the mortgage loans redemption fell from over 5 to 1.75 per cent. Banks adopted another tactics, too - they now offer fixed rates between 5 and 6% for the first three years of the credit payment. Some financiers predict that in just one year these will be the rates accrued on this type of loans for the whole redemption term. Once the country joins the EU, they will very soon become equal to the interests in the member states.
A research ordered by HVB Bank Biochim and conducted in early October 2005, right before the interest levels started their sudden fall, indicates that according to 46% of the inquired the interests on mortgage loans are high. Only 11.2% of them replied they were acceptable.
About 83% of the people who took part in the research claimed that in case of an interest level reduction the amount of mortgage loans launched will go up. Moreover, these are not people who intend to use these credits just to buy a home. More than 40% of the participants in the inquiry said they had used or were planning to use a mortgage loan even in order to grow their own business or acquire luxurious goods, as well as for other purposes.
Bankers expect that the reduction of the interests will make the number of customers borrowing credits secured by property for business purposes or acquisition of commodities grow considerably. They also say that this type of financing will gradually transform from goal to universal one. In fact, the banks' mortgage loan conditions allow that these loans be used not only for the purchase and repair of flats but for anything else, too. Including for refinancing other obligations of the customer. However, the possible sudden growth of mortgage loans is related to
dangers in the future
for the commercial banks. Currently, credits secured by flats and estates hold a small share of the total amount of credits launched. According to information provided by the Bulgarian National Bank (BNB) for the first half of 2005, they do not account for more than 10% of the assets of the banks. There are only two exceptions - DSK Bank in which individual loans secured by property account for 13% of the assets and UBB in which the ratio is about 11 per cent.
According to BNB analysts, even if all mortgage loans are delayed, that
will not result in serious shakings
of the financial sector as the banks have the necessary capital to cover the losses. But in the next year or two the share of mortgage credits in their assets will keep growing, and so will the related risk of growing delayed payments. When the market saturates with this type of credit, banks will be faced by the collateral price issue and the danger of a property market stagnation which will impede them from gaining back their money through cashing down the mortgages. Of course, all these risks may be reduced if one day the banks create specialized subsidiary institutions to which they would transfer a great part of the mortgage loans. These companies will be financed by issuing mortgage bonds and the money gained will be used to pay the banks the receivables on mortgage credits they have obtained. Therefore, the risk of possible aggravation of credits secured by property will be transferred to the specialized subsidiaries. In fact, this scheme has long been used in West European countries and will probably be applied in Bulgaria soon, too.