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ASIM ERDİLEK
a.erdilek@todayszaman.com |
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The emergence of the Turkish mortgage market
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| Global financial markets have been in turmoil recently due to the subprime mortgage crisis in the United States. Subprime mortgages refer to housing finance loans made to borrowers with poor credit rating who have low or unreliable incomes. |
As many of these borrowers have been unable to service their loans, both the financial institutions that issued those loans in the primary market and those that hold the securities backed by those loans in the secondary market have faced a deepening crisis. This crisis, which has already bankrupted many mortgage finance institutions and hedge funds, is in some ways similar to the savings and loan crisis of the 1980s that cost US taxpayers billions of dollars. In both cases widespread fraud on the part of both borrowers and lenders, fuelled by greed, as well as excess liquidity, and undetected initially by the regulatory agencies has played a major role.
In reacting to the subprime mortgage crisis, Turan Erol, chairman of the Capital Markets Board (SPK), has declared that "there is no problem in Turkey's mortgage market" since there are no subprime mortgages in Turkey, as those who take out housing loans are not low income citizens who would be likely to have high default rates. He added that there would be no subprime mortgages in the future. Many observers have concluded that the increasingly global subprime mortgage crisis is likely have indirect but powerful negative economy-wide effects, through greater risk aversion and tighter credit, on Turkey similar to those on other emerging markets.
What is the current state of the Turkish mortgage market? In fact, is there really a mortgage market to be concerned about? The Turkish mortgage market (e.g., in terms of mortgage loans to GDP ratio) is still very underdeveloped relative to other OECD countries. The secondary market for securitized mortgages does not exist. In the absence of a mortgage system, Turkish banks have given out medium-term housing loans as consumer credit. They have financed these loans by borrowing short term, creating maturity mismatches in their portfolios. Less than 5 percent of housing finance has been provided by banks as consumer credit, most of it coming from inheritance or self-financing. Bank mortgage lending, below 10 percent of total consumer credit, has been structured with maturities less than five years, high fixed rates and low loan to value ratios. The Housing Development Administration (TKIB) has provided multi-family housing for low and middle-income families, but its resources are inadequate for this task.
The demand for housing in Turkey is high -- the current demand for housing is about 350,000 units per year -- and will continue to grow given the age structure of the population: 70 percent of the population is under 30, with population growth of 2 percent a year. It is estimated that at the present 55 percent of the housing stock is in shantytowns (slum dwellings called "gecekondu" that are illegally built overnight on private or public land, unrecorded and untaxed by the state), 70 percent of households own their own houses and 40 percent of the housing stock needs renewal. About 10 million housing units will need renewal during the next 10 to 15 years.
The obstacles to the emergence of the mortgage system in Turkey have included: (1) high and unstable inflation until 2002; (2) still high and volatile real interest rates; (3) inadequate deposit base of bank to finance housing credit; and (4) a lack of standardization of the title and appraisal systems. For the last few years, as Turkey's economic and stability increased, there has been increasing interest in the emergence of a national housing finance (mortgage) system. This system was expected to: (1) stimulate the construction sector directly and the entire economy indirectly by increasing investment and employment; (2) enable low and middle-income families to become homeowners; (3) attract foreign portfolio and direct investment; and (4) help the fund flow of builders, as they get paid in full by the home buyers at the time of sale, enable them to build inventory, maximizing their economies of scale, and smooth their project scheduling. The Parliament, which had been expected to enact in 2006 the required mortgage market legislation that was being drafted by the SPK starting in mid-2004, did so in early 2007.
According to the Turkish mortgage law (Law 5882, called the "Law Amending the Laws Related to the Housing Finance System"), enacted on Feb. 21, 2007 and signed by the President on March 6, 2007 (http://rega.basbakanlik.gov.tr/eskiler/2007/03/20070306-1.htm) (for the English translation of the law see http://www.cmb.gov.tr/housingfinance/mortgage_law.pdf), the national mortgage market will officially come into existence in January 2008. However, the present housing loan market is already regarded as a mortgage system because all the existing home loans taken out before Law 5882 went into effect became automatically eligible for its coverage during a three-month grace period. The law, which provides the broad legal and institutional framework for a new housing finance system, contains numerous provisions that clarify issues relating to mortgage contracts, foreclosures, protection of borrowers, securitization to create a secondary market for mortgages and taxation and define the role of different financial institutions affected by these issues.
In summary, the law (1) defines "housing finance" as loans, including their refinancing, to buy houses; the leasing of houses through financial leasing; and loans where such loans are secured by houses that the borrower owns; (2) specifies the conditions, such as prepayment penalties and foreclosures, governing mortgage credit contracts with fixed or variable interest rates; (3) authorizes and specifies the conditions governing the issuance of mortgage-backed securities and asset-backed securities; (4) authorizes and specifies the conditions governing housing finance institutions, such as banks, that operate in the primary market to finance the purchase of eligible real property, and mortgage finance corporations that operate in the secondary market by buying home loans from housing finance institutions and securitizing them to hold them in their portfolios or to sell them to other investors; (5) authorizes and specifies the conditions governing housing finance funds, which raise funds in return for mortgage-backed securities, and asset finance funds, which raise funds in return for asset backed securities, both based on the principle of fiduciary ownership; (6) allows only eligible housing units with valid permits to have access to mortgages; (7) does not allow for the tax deduction of mortgage interest payments, which is allowed in the United States. Although the mortgage law has enabled the issuance of domestic mortgage-covered bonds by banks or mortgage finance corporations, and mortgage-backed securities by housing finance funds, the SPK has yet to introduce secondary legislation governing them. Draft legislation can be found on the SPK's Web site (http://www.cmb.gov.tr/housingfinance/draft_bylaw_mcb.pdf and http://www.cmb.gov.tr/housingfinance/draft_bylaw_mbs.pdf).
Some people, including real estate experts, have criticized the proposed mortgage market system as premature and unlikely to take off until Turkey's economic and political stability is more securely established and the still very high double-digit real interest rates drop significantly. Moreover, the Turkish public seems not yet adequately informed about the mortgage market. According to a recent public opinion poll taken in 16 large cities, 61 percent of respondents had heard about it but only 11 percent knew what it really was. The emergence of the Turkish mortgage market has been a very slow process, and its establishment is likely to take some time as well.
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