Mortgage risk mitigation: expert opinion
Risks arising from mortgage lending may be considerably mitigated by mechanisms which have proven effective in international practice and were adjusted to the Russian environment. Andrei Yazykov, Advisor at the Bank of Russia’s Service for Consumer Protection and Financial Inclusion, and Alexander Tsyganov, Department Head at the Financial University under the Government of the Russian Federation, study these opportunities in their article, ‘Considerable Risk Factors of Mortgage Lending’, published in the August issue of Money and Credit journal.
In particular, the authors reckon that creditors’ rights are usually better protected by law that the rights of mortgage borrowers. This disparity motivates banks to engage in risky lending, while borrowers are provided loans they can hardly pay off. In such cases banks expect to cover their risks through foreclosure. This practice must evidently be revised to guarantee equal protection of both creditors’ and borrowers’ rights and prevent social tensions.
A variable-rate mortgage developed and introduced by the Agency for Housing Mortgage Lending in early 2016 is proposed as a new product which not only protects borrowers from unpredictable growth of the debt burden but also reduces banks’ interest rate risk. The interest rate is a variable which depends on the Russian consumer price index, and monthly payments on loans are fixed when the loan is issued.
Due to the nature of the mortgage market, not all methods applicable to problem debt typical of regular retail lending are feasible. Household mortgage debt often amounts to
The analysis made by the authors is aimed at encouraging mortgage lenders to introduce risk management strategies based on additional collateral enhancement with mortgage insurance, and various debt restructuring programmes that allow borrowers to cope with a temporary loss of income.
