The Central Bank warns banks about the risks when issuing mortgages

The Central Bank and Dom.RF warned banks that when issuing mortgages in shared construction using schemes with letters of credit or bypassing escrow accounts, some of the loans may be classified as unsecured and reserves will have to be created for them. According to experts, about 15% of mortgage loans are accompanied by such schemes; additional reserves could cost banks tens of billions of rubles.

In an information letter published on Monday, April 1, the Bank of Russia warned banks that a pledge of the rights of claim of a participant in shared construction can be classified as security of category II quality only if funds are placed in escrow accounts to pay the price of shared participation agreements (PPA). If the funds provided under the mortgage are not even partially credited to the escrow account, the pledge of claims “cannot relate to the collateral taken into account when forming the reserve.” Such a loan cannot be considered secured and can only be included in a portfolio of other loans.

At the same time, as Kommersant’s sources note, last week Dom.RF sent letters to banks, which reported on the mechanisms identified jointly with the Bank of Russia for the purchase of housing under DDU using letters of credit in payments between the parties (a special account in which funds frozen until the terms of the transaction are met). “Dom.RF” reminds that the law “On participation in shared-equity construction of apartment buildings…” does not provide for other methods of calculating the DDU, except for the use of escrow accounts. “If the license is revoked from a bank in which the funds are on a letter of credit, the person may lose them, while still owing the mortgage loan to the lender, without acquiring rights to the residential premises, since the LDU in fact has not been fully paid,” draws attention “Dom.RF”.

In addition, the letter from Dom.RF notes that the Bank of Russia in March 2024 identified cases where developers during the construction stage sell housing to affiliated parties, concluding a DDU with them at a price several times lower than the market price, and these funds are placed in an escrow account .

“When transferring (assignment), a person already pays the real market price, but along with the rights of claim under the DDU, he receives an escrow account, which contains only the original (lowered) price of the apartment,” notes the letter. Dom.RF warns that if the developer fails to fulfill its obligations, this will lead to the loss of the difference between the actual price paid upon purchase and the amount in the escrow account.

As the Central Bank explained, the letter of credit nature itself does not affect the category of loan quality, but worsens the regulatory assessment of the collateral. “So, for example, if for a regular mortgage loan in a portfolio of homogeneous loans without overdue payments the reserve may be less than 1%, then for an unsecured loan – at least 3%,” the Central Bank explained.

Market participants note that both of these schemes are subject to the Central Bank’s letter and the regulator may begin to require additional creation of reserves from banks using them. As a source in the banking market explained to Kommersant, the scheme with letters of credit, to which the bank transfers funds from the borrower’s mortgage loan, has existed for about two years. “It is beneficial for the bank, because the funds on the letter of credit are free, it does not have to make contributions to the DIA fund,” explains Kommersant’s interlocutor. At the same time, according to him, the flow of clients in this case increases, which, in turn, is beneficial to the developer. “However, in this scheme, the client’s funds are not insured by the state, and in the event of a bank bankruptcy, they will fall into the bankruptcy estate,” he says.

Experts believe that the change in reserving may force banks to reconsider their work with letters of credit. Irina Nosova, senior director of the ACRA group of financial institution ratings, believes that banks will move away from the letter of credit scheme, despite the free liability. Managing Director of the Expert RA rating agency, Yuri Belikov, indicates that the volume of such issues does not exceed 15% of the total amount. “If for mortgage loans issued using letters of credit, it is prohibited to take into account the value of collateral by reducing the actually formed reserves relative to their original calculated value, additional reserves will likely amount to several tens of billions of rubles,” he estimates.

Maxim Builov