Ukraine Creates Secondary Mortgage Market
Experts view the creation of a secondary mortgage market to be a major objective for development of Ukraine’s financial system. The successful placement of Ukrgazbank’s pilot mortgage covered bond—in the amount of 50 million UAH, at 10.5 percent over three years, and which was oversubscribed—signals Ukraine’s entry into the $2 trillion European mortgage-covered bond market. It is the result of 18 months of intensive work by the USAID-funded Access to Credit Initiative (ATCI) and its counterparts, and represents the culmination of fours years of preparation by USAID that began with passage of Ukraine’s mortgage law.
In March-April of this year, seven additional sales of mortgage covered bonds occurred on Ukraine’s stock exchange, the PFTS, which were valued at about UAH 73 million or nearly 1.5 times the volume of the original issue. These trades are representative of the high liquidity of the bond, and demonstrate that investors understand the secure features of the mortgage covered bonds and are prepared to accept lower yields in exchange for lower risk. Based in this success, Ukrgazbank has decided to issue a second covered bond of UAH 500 million in October -November 2007. The yield is expected to be below 10 percent.
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Yuriy Kamenetskiy, Director of Investment Department of Ukrgazbank, shares the success story of pilot mortgage covered bonds
Photo Credit: ATCI |
A mortgage-covered bond market now provides the opportunity for financial institutions to make liquid in excess of $4 billion in outstanding mortgages currently held in portfolios throughout Ukraine. It also creates a much needed low-risk financial instrument for the domestic market appropriate for investment by pension funds and insurance companies, who are forecasted to have investment requirements in excess of $150 million a month beginning in 2009, when implementation of second pillar pension reform begins.
With the objective of developing an effective mortgage lending sector in Ukraine, ATCI prepared for the Ukrgazbank issuance by drafting implementing regulations for the covered bond law and securing their adoption by Ukraine’s Securities Commission (SSMSC) and subsequent registration by the Ministry of Justice. ATCI then selected banks willing to participate and prepared their software to produce the required fields of data; performed duration analysis with differing pre-payment scenarios; and selected mortgages with optimal characteristics suitable for the first pilot, such as favorable loan-to-value ratios, seasoning (history of payments), currency mix, and regional distribution of credits to harmonize risk.
The Ukrgazbank issue featured the use of a bond manager—in this case, the well known German bank and auditor HVB—adding a layer of oversight for investors that exceeds any scrutiny traditionally exercised by a regulator.
ATCI expects that within the next five years this pilot will have precipitated covered mortgage bond trade in the billions of dollars, resulting not only in lower lending rates and increased availability of credit but in the expansion of tradable securities for the domestic fixed-income market.
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