The initiative of the Prosecutor General’s Office, although it will help borrowers, may worsen mortgage conditions in the future, experts say
The Prosecutor General’s Office has developed a document according to which the mortgage debtor, if his home is sold at auction for less than the market value, will not be obliged to return the difference to the bank, Rossiyskaya Gazeta writes with reference to the State Duma Committee on Construction and Housing and Communal Services.
If the person who took out the mortgage, as a result, could not pay it off, then his apartment is put up for auction. There are nuances in this process. For example, with the lender’s only home, the rules will be different. Basically, apartments at auction are much cheaper than the market. This is influenced by several factors, the main one is the bank’s desire to get rid of real estate as soon as possible and repay its debt. As a result, it turns out that the mortgagee, who sold the apartment at auction, still has to return a significant amount to the organization, and there are not always funds for this. The Prosecutor General’s Office proposes to write off this debt.
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But it is also possible that an apartment will be sold at auction for more than the market value. In this case, the remaining funds will be returned to the borrower. But the probability that this will happen is extremely low. What else affects the low cost of an apartment at auction and will banks like it? Ivan Stasyuk, Advisor to the RKT Consulting Group, comments:
Ivan Stasyuk, advisor to the RKT consulting group, “This is possible at auctions, because buyers often understand and know the object worse at auctions compared to a regular sale. It is not always possible to even inspect it: some of the debtors resist, that is, they must also be evicted from there, sometimes this must be done forcibly. Most often, such apartments are bought for investment purposes, that is, by those who are then ready to incur the costs of eviction, resale. If the borrower cooperates — he checked out himself, moved out himself, shows the apartment himself — then it has a very good chance, at a more or less market price it will be possible to sell. It turns out that this is all in the interests of those who resist, resist and hinder implementation. I am not sure that this bill will be passed, because for sure there will be significant objections from the banks regarding its adoption.”
In 2023, mortgages in Russia broke a record: housing loans in the country were taken out for more than 7 trillion rubles. This is 21% more than the record of 2021. Preferential programs are becoming the drivers of the market. They are also driving up housing prices, experts say. And, probably, the Prosecutor General’s Office fears that not all borrowers will be able to repay their debt to banks, believes Alexey Kaminsky, president of the self-regulatory organization of appraisers “Expert Council”, honorary member of the Russian Guild of Realtors:
Alexey Kaminsky, president of the self-regulatory organization of appraisers “Expert Council”, honorary member of the Russian Guild of Realtors, “Mortgage loans were taken by people who, for a number of reasons, could not expect that they would be able to close these loans. A separate question is why the developer is the Prosecutor General’s Office. This should be alarming. Apparently, this is due to the fact that massive non-payments of mortgage loans are expected.”
The borrower can still refuse to repay the remainder of his mortgage debt. But to do this, he needs to go through bankruptcy proceedings. Now this measure is proposed to be extended to all debtors. So, probably, another goal of the initiative is to prevent an increase in the number of bankrupts. The year 2023 was also a record year for this indicator. However, some administrative changes have also affected here. But the result of innovations may be a deterioration in mortgage lending conditions, banks will be more attentive to issuing loans, said Vyacheslav Kosakov, managing partner of Novator Legal Group:
Vyacheslav Kosakov, Managing Partner of Novator Legal Group, “Banks will overestimate the criteria for mortgaging property. For example, the object costs 15 million rubles, and they will issue a loan for only 10 million rubles. Now it would be 12-13 million at a cost of 15 million. Of course, this will limit the possibility of acquisition for borrowers. It will be a little easier for the state in the framework of bankruptcy cases of individuals, because, in my opinion, about 300 thousand bankruptcy applications were filed in 2023. There is a feeling that there is a fairly high percentage of mortgagees who could not repay the mortgage in full, they did not even have enough to meet the requirements of the bank if they sell the mortgage object.”
The discount from the sale of an apartment through auctions can be 30-40% of the original cost, experts say. To this, it is worth adding the difference in prices for primary and secondary housing. Due to low interest rates on preferential mortgages, new buildings are on average 15% more expensive than secondary ones. That is, the apartment becomes cheaper already at the time of purchase, and then again — when trying to sell it at auction.
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