Bonds (mortgage) in Russia: where do banks get money for mortgages?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Bonds (mortgage) account for more than 80% of all real estate transactions in the US, in Russia - less than 10%. The prospects of the securities are obvious. However, many do not only know what mortgage-backed bonds are, but also the basic concepts.

Basics

Bonds are securities that give the right to receive a fixed guaranteed profit.

They come in two types:

1. On presentation - bought cheaper, sold more expensive.
2. Fixed interest - assumes an income (coupon) for the investor after a certain time.

Bonds are debt securities. The return is guaranteed by the rating of the company. The more stable the enterprise, the more likely it is to receive the promised income.

What are bonds (mortgage)?

A mortgage bond is a debt security that refinances investments in real estate loans.

For example, the AAA bank issues loans for the purchase of housing. He has capitalnaturally limited. With 1 billion rubles, a bank can issue, for example, 1,000 loans. Naturally, the real estate market will stop when the credit institution runs out of funds.

Who benefits?

The issuance of mortgage bonds is beneficial to all market participants:

• To the bank - increases the amount of mortgage loans issued.
• Investor - invests money in an asset, which, depending on housing prices, should grow.
• To the Borrower - sky-high mortgage rates are reduced by 1.5-2%. Of course, the numbers are small, but in terms of a large loan amount, the benefit is obvious.
• Builders - construction companies do not "freeze" their facilities, but continue to work.
• Government - taxes from development and sale.
• Workers - they are not laid off for lack of work.

How are debt obligations secured?

Now about how this market works. AAA Bank issues a loan for the purchase of property in the amount of 5 million rubles. On them, he issues bonds (mortgage) and sells them on the stock exchange. Money from investors goes to new loans. Securities are secured by mortgage payments of citizens.

Alternatives

Bonds (mortgage) are not the only instrument for investors in this market. There are alternatives:

• Mortgage certificate of participation - a share of the loan amount for the purchase of an asset. The investor is en titled to real estate profits.
• Mortgage - a security that confirms the right to receive money fromborrower. The difference from a bond (mortgage bond) is that the mortgage collateral is an acquired property.

Features of securities in Russia

Of course, an idea that comes from the US can bring positive things to our market. However, mortgage bonds in Russia raise many questions among both investors and specialists. The term "stability" is not applicable to the development of the economy of our country, especially the real estate market. Over the past 1.5-2 years, it not only stopped growing, but also fell significantly. Bonds (mortgage) cannot generate income from the real estate market if it does not grow.

The second problem is the high cost of securities. Private commercial companies and ordinary citizens will not be able to become investors for this reason. All hopes are pinned on non-state pension funds, banks that have free funds, which allegedly do not know where to invest them.

The third problem is the lack of a well-thought-out legislative framework.

We can summarize: the high cost of securities, the instability of the mortgage market, as well as an ill-conceived legal framework are unlikely to allow this type of securities to develop in Russia.

Why did mortgage bonds cause the system to crash in 2008?

The crisis in 2008 began precisely with mortgage-backed bonds (CDOs). The fact is that many investors began to purchase securities, knowing that the real estate market is constantly growing. This influenced the strategy of banks, which were indifferent to the solvency of their customers. The main thing is that they are. There have been cases where mortgages for $500,000 were issued to people who did not have a regular income. For the bank, the risks are minimal - they received this money on stock exchanges from the sale of mortgage bonds.

Also, banks issued credit swaps, that is, insurance if the debt was not paid.

But the pyramid spun so much that they started issuing bonds (synthetic CDOs) under them. Since the analytical companies did not know what it was, they relied on the data of the investment companies that issued them. Some knew, but were afraid of losing big clients. From bonds of the risky level BBB, they made an even more problematic asset, but its degree of threat was already equal to AAA (like US government bonds), that is, absolutely safe. This allowed investors holding millions of dollars to invest in unsecured securities plus raise funds from pension funds that are prohibited from investing in assets less than this rating. Naturally, such a pyramid sooner or later had to collapse when housing prices begin to fall. This is what happened. Large investment companies, investors and insurance agents went bankrupt.

Investors capitalized on this by betting on mortgage swaps, that is, mortgage-backed real estate insurance, which were sold at low prices. That is, having invested a million dollars in them then, it was possible to get several hundred million, since no one simply believed in a default.