1. Economic Outlook in 2012
2. Creation of a Mortgage Refinancing Agency
3. Challenges Facing Banks
4. Role of Securitization
5. Attractiveness of Mortgage Bonds for Investors
6. Investors have a right to claim the collateral in case of default.
7. Solution: Centralized Issuance of Mortgage Bonds

Economic Outlook in 2012

According to bankers, the economic situation in 2012 is expected to worsen compared to 2011. The country has exhausted the inflow of cheap resources brought in recent years by European banks eager to enter the Ukrainian market. Some of these financial institutions have already partially or completely scaled down their operations in Ukraine, while the others are unable to provide significant support to their subsidiaries due to serious problems in their home markets.

Creation of a Mortgage Refinancing Agency

Despite the negative outlook, the government is moving forward with plans to establish an agency for mortgage refinancing. This agency will be created by state-owned banks Oschadbank and Ukreximbank, as well as government-controlled Ukrgazbank and Bank of Kyiv. Oschadbank will hold the largest share in its authorized capital, amounting to 70.85%.

Challenges Facing Banks

Serhiy Volkov, Advisor to the Chairman of Oschadbank's Board, highlighted several challenges currently facing banks in Ukraine:

1. Dependence on External Funding Sources:This dependence has led to excessive dollarization of the market and credit portfolios. Individuals have assumed risks not suited to their financial situation, resulting in increased credit risks.

2. Lack of a System for Refinancing Mortgage Creditors:Unlike most other countries, Ukraine lacks a system to refinance mortgage creditors through a market for mortgage bonds. This results in banks relying heavily on deposits to fund long-term housing loans.

3. High Interest Rates on National Currency Loans:Despite the recent decline in real estate prices, high interest rates continue to make home ownership unattainable for many. Banks' direct funding of loans through deposits drives up interest rates on both deposits and loans. In contrast, in developed markets, institutional investors such as pension and insurance funds provide capital at lower interest rates, which in turn determines rates for long-term housing loans.

Role of Securitization

4. Securitization:Volkov emphasizes the benefits of securitization, which allows banks to issue long-term loans while retaining servicing revenues. Through securitization, banks can raise funds in the securities market and use them to issue additional loans. This process also opens up new sources of funding through institutional investors seeking long-term returns.

Off-Balance Sheet Securitization:This innovative financing mechanism allows for the securitization of mortgage loans by transferring their rights to an independent company or special purpose vehicle (SPV). The SPV then issues debt instruments to finance the acquisition of these assets. Off-balance sheet securitization has gained significant traction in the United States, Australia, the United Kingdom, and other countries.

Balance Sheet Securitization:This method involves issuing mortgage-backed securities secured by both the asset itself and the underlying rights. These securities remain on the issuer's balance sheet. Germany and Scandinavian countries commonly use this model, which is often supported by guarantees from central banks or governments.

Attractiveness of Mortgage Bonds for Investors

Mortgage bonds offer several advantages for investors:

Special legislation regulates their issuance and limits who can acquire them.

The underlying assets are protected by a separate pool and subject to rigorous audits and regulatory oversight.

Investors have a right to claim the collateral in case of default.

Challenges in the Ukrainian Mortgage Bond Market
The Ukrainian mortgage bond market faces unique challenges:

Lack of Restrictions on Issuers:Anyone can issue mortgage bonds, regardless of their financial strength or market experience.

Non-Compliance with Accounting Requirements:Despite regulations mandating separate accounting for mortgage coverage, no such mechanism has been developed by the National Bank of Ukraine.

Unclear Default Mechanisms:The process for recovering collateral from a bankrupt issuer remains uncertain.

Weak Legal Protection for Investors:The legal system often fails to adequately protect the rights of investors.

Solution: Centralized Issuance of Mortgage Bonds

To address these challenges, Volkov proposes the creation of an interbank financial company (SPV) that would centralize mortgage loans on its balance sheet. This would allow for stricter underwriting standards and provide investors with multiple layers of protection:

1. Coverage Ratio:The SPV would use varying coverage ratios based on the financial health of participating banks.

2. Credit Quality:Only high-quality loans would be eligible for inclusion in the securitization pool.

3. Proper Appraisal:Mortgaged properties would be accurately appraised to ensure their value covers the underlying debt.

4. SPV Capital:The financial company itself would have sufficient capital and special deposits to cover potential losses.

Central Bank Support:Central banks can provide preferential treatment to such bonds through reserves and other economic regulations, making them attractive investments for institutional investors.

Finans