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Libraries Linking Housing and Capital Markets in the Former Soviet Bloc Linking Housing and Capital Markets in the Former Soviet Bloc: The Status of Residential Mortgage Bond and Secondary Markets in the Czech Republic, Hungary, Poland and Russia By Douglas S. Lloyd M.C.R.P./M.Arch. Iowa State University of Science and Technology B.A., Economics College of the Holy Cross Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development at the Massachusetts Institute of Technology September, 2001 @2001 Douglas S. Lloyd All rights reserved The author hereby grants to MIT permissi to reproduce and to distribute publicly paper and electronic copies of this thesis docume in hole or in part. Signature of Author I -(Z -. , S ae Ahepartfent of Urban Sftudies and Planning July 18, 2001 Certified by Henry 0. Pollakowski, Ph.D. Visiting Scholar, MIT Center for Real Estate Thesis Supervisor Accepted by Willia-m C. Wheaton, Ph.D. Chairman, Interdepartmental Degree Program in Real Estate Development MASSACI4SSINSTITUTE OF TECHNOLOGY LIBRARIES LINKING HOUSING AND CAPITAL MARKETS IN THE FORMER SOVIET BLOC: THE STATUS OF RESIDENTIAL MORTGAGE BOND AND SECONDARY MARKETS IN THE CZECH REPUBLIC, HUNGARY, POLAND AND RUSSIA By DOUGLAS S. LLOYD Submitted to the Department of Urban Studies and Planning on July 18, 2001 in partial fulfillment of the requirements for the Degree of Master of Science in Real Estate Development ABSTRACT Since the collapse of the Soviet Union in 1991, the Russian Federation ("Russia") and former soviet satellite countries and republics of Central and Eastern Europe ("Soviet Bloc") have struggled with privatizing housing and establishing market-based residential mortgage systems. This thesis addresses the recent efforts of three former Soviet Bloc countries (the Czech Republic, Hungary and Poland) to fund residential mortgage lending through the use of mortgage bonds and capital markets (wholesale lending). This European lending market is different and, in many ways, a competitor to residential mortgage securitization, an American method of accessing capital markets. For comparison, this thesis addresses efforts to connect Russia's residential mortgage markets to domestic and international capital markets. The thesis concludes that the residential mortgage markets in these four countries remain in the early stages of development and that the current benefits of mortgage bond and mortgage-backed securities in such stages remain unclear. Thesis Supervisor: Henry 0. Pollakowski, Ph.D. Title: Visiting Scholar, MIT Center for Real Estate TABLE OF CONTENTS Page CH APTER ONE: INTRODUCTION .................................................................................. 5 Problem Statem ent..................................................................................................................... 5 Literature Review ...................................................................................................................... 7 H ypothesis Statem ent .............................................................................................................. 15 M ethodology ............................................................................................................................. 15 CHAPTER TW O : FINDING S ........................................................................................... 18 M ethods of Capital M arket Access .................................................................................... 18 Traditional Bausparkassen and M ortgage Banks ............................................................. 18 Pfandbriefe in Central Europe ........................................................................................... 22 *Czech Republic........................................................................................................................ 24 ....................................................................................................................................Hungary 29 Poland...................................................................................................................................... 32 +Summary of Mortgage Bank and Bond Activity in CEEC Study Countries ...................... 35 Liquidity Facilities in Russia ............................................................................................... 36 *Liquidity Facilities in the United States .............................................................................. 36 +Liquidity Facilities in Russia................................................................................................ 39 +Summary of Secondary Mortgage Market Programs in Russia........................................... 43 CHAPTER THREE: ANALYSIS AND CONCLUSIONS ............................................. 45 Prim ary M ortgage M arket Developm ent ........................................................................... 45 +Cultural and Econom ic Issues ............................................................................................. 46 +Legal and Transparency Fram ework.................................................................................. 51 Long-Term M ortgage Lending Developm ent ....................................................................... 53 +Competing Housing System s in the CEEC Study Countries ............................................. 53 *M ortgage Bond Financing in the CEEC Study Countries................................................... 58 Page +Liquidity Facility V iability in Russia.................................................................................. 63 *Em erging Institutional Investm ent ...................................................................................... 67 *Domestic Rating Agency Development ............................................................................. 76 +Sovereign R atings D ilem m a................................................................................................ 78 +C redit E nhancem ents...............................................................................................................8 1 The Future of Secondary Markets and Securitization .................................................... 84 *O bstacles to European Securitization ................................................................................................. 86 *Possibilities for European Securitization ............................................................................. 88 C onclusions............................................................................................................................... 92 LIST OF TABLES AND FIGURES TABLES Table 2.1 - Czech Mortgage Loan Activity......................................................................... 27 Table 2.2 - Czech Mortgage Bond and Contract Savings Activity: 1996 - 1999...............28 Table 2.3 - Mortgage Bank and Bond Activity in the CEEC Study Countries.................... 35 Table 2.4 - Summary of Russian Bank Secondary Mortgage Market Programs .................. 44 Table 3.1 - Housing Mortgage Characteristics in the CEEC Study Countries..................... 45 Table 3.2 - Financial Intermediation-to-GDP Ratios ........................................................... 68 Table 3.3 - Pension Reform and Mortgage Investment....................................................... 71 Table 3.4 - Agency Ratings for CEEC Study Countries and Russian Debt......................... 78 FIGURES Figure 3.1 - CEEC Study Country: Percent Change in GDP, 1993 to 2001....................... 47 Figure 3.2 - CEEC Study Country: Percent Change in Consumer Prices, 1993 to 2001........ 48 Figure 3.3 - Russia: Percent Change in GDP, 1993 to 1998................................................ 48 Figure 3.4 - Russia: Percent Change in Consumer Prices: 1993 to 2001 .......................... 49 Figure 3.5 - Exchange Rate: Domestic Currency vs. U.S. Dollar: 1993 to 2001 .............. 89 Figure 3.6 - Exchange Rate: Domestic Currency vs. Eurodollar: Jan., 2000 to Jan., 2001 ... 89 APPENDICES Appendix I - Description of Rating Agency Credit Ratings..............................................100 5 CHAPTER ONE: INTRODUCTION Problem Statement Since the collapse of the Soviet Union in 1991, the Russian Federation ("Russia") and former soviet satellite countries and republics of Central and Eastern Europe ("Soviet Bloc") have struggled with privatizing property and establishing free market systems. Under the former communist system, property, including housing, was for the most part held by the government. Over the past decade, these countries have continually searched for housing policies that balance the benefits of the private property markets with the need to guarantee some level of housing to their citizens, most of whom still remember the guaranteed housing of the communist past. In many of these countries, the result has been a reliance on government housing subsidies and programs, which many experts argue slow down the development of private residential real estate markets. As in the United States and other countries, there will always be a need for some level of subsidized and public housing in Russia and the former Soviet Bloc countries for certain segments of their populations. However, the encouragement of a stable, private residential mortgage market is crucial to fostering market mechanisms, supporting private housing and strengthening overall democratic ideals among the middle
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