The Turkish parliament last week approved a bundle of mortgage-related amendments to current laws. The idea is to promote mortgage origination, which has lost steam since mid last year, and give rise to a viable secondary market. The changes will take effect once they are published in the official gazette following ratification by President Ahmet Necdet Sezer, according to sources. New reports indicated that there were no compelling challenges to final approval.
When the amendments will lead to a genuine RMBS market is anyone's guess, but everyone agrees they form a necessary first step. "It will be a while before you'll see activity," said one London-based banker, expressing a pervasive sentiment. Another banker envisioned, down the road, a nascent market where differentiated transactions would define the RMBS and covered bond landscape. "Transactions will be esoteric, other than one size fits all," he said.
One of the main features of Turkey's new legislation is a nod to floating rate mortgages, which aren't allowed under the current system. This might help oil the rusted wheels of origination, according to sources. A jump in local interest rates in May 2006 frayed banks' mortgage books since payments couldn't adjust upward on the fixed-rate loans. Many banks are now funding mortgages at a loss, according to one banker.
Origination plummeted after rates took flight and hasn't recovered to anywhere near the pace of growth witnessed early last year. In the second half of last year, Turkish origination was roughly $200 million a month, a fifth of the $1 billion a month banks were cranking out prior to May. Outstanding mortgages amount to $16 billion, 95% of which is in Turkish Lira.
Also beneficial to lenders, the legislation introduces a prepayment penalty of 2% on fixed-rate mortgages, according to local press reports. As off press time, however, it was unclear if this was actually the case, since at least one government official was apparently saying that existing borrowers would not be subject to the penalty if they crossed over to the new regime.
The package also includes amendments that target the lengthy foreclosure process. "Foreclosure in Turkey currently takes two to two-and-a-half years; some amendments seek to decrease that process to under a year," said Burak Cerrahoglu, an analyst in structured finance business development at Moody's Investors Service.
While there was speculation that the law would feature a tax deduction for mortgage payments, it didn't make it into the legislation. News reports said that government budgetary concerns, prompted partly by IMF targets, were responsible for killing the deduction.
The legislation sets up a two-pronged system of housing finance corporations and mortgage finance corporations. In broad terms, the HFCs are banks and non-bank institutions that are allowed to grant mortgages starting six months after the mortgage law appears in the official gazette. MFCs are companies that are authorized to pool mortgages and craft them into either RMBS or covered bonds. "Banks can still issue by themselves, but second tier wouldn't have enough volume," Cerrahoglu said, adding that that's where the MFCs come in.
Finally, the legislation also aims to elevate standards in the appraisal process. Currently there are 350 individuals in Turkey who have passed the appraisal exam. Cerrahoglu said that banks often have an in-house person appraise a property. Under the new system, a covered bond or RMBS pool can contain only mortgages on homes valued by licensed appraisers. For a foreclosure, both licensed and unlicensed appraisers can value houses for the period of three years.
Borrowers with outstanding loans can choose to stay under the old system or adopt the new one. While there isn't clarity on whether a prepayment penalty has been instituted, the new regime is understood to drop the banking, insurance and deposit tax (BMSV), a not-too-be-sneezed-at 5% on every mortgage payment. This would provide a clear incentive for current borrowers to cross over.
While market players welcome the changes, they might not go far in improving the presently grim economics of a potential RMBS or covered mortgage bond, players said. One banker pointed to a hopeful sign that major Turkish banks have recently begun lowering their mortgage rates. But bringing borrowers back in the numbers posted prior to May would require even more attractive rates, the banker said.
In addition, the financial tremors that turned markets across the world into whirling dervishes rattled Turkey as well, an unwelcome echo of last May's gyrations. As it did then, further pressure on the currency could pass through to interest rates or, at the very least, prevent them from easing down.
Should market conditions improve, mortgages might not be the only existing asset game in town. One banker said that Turkish banks might be able to secure the best terms in lira funding by securitizing non-mortgage assets such as leases. "There's potential for that," he said, adding that an offshore SPV should allay doubts about the suitability of local legislation in governing a non-mortgage ABS.
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