Turkey 2007: Don't hold your breath.
The passage of a Mortgage Law this March was greeted with much excitement by bankers eager to see the development of a covered bond market for Turkey. But deals may be longer coming than the optimists imagine. Paul Farrow reports.
In March this year Turkey passed its first Mortgage Law. The legislation, which had been in the works for several years, regularises the law relating to mortgages, related collateral and bankruptcy, and sets out a framework for the development of a secondary market in mortgages, the precursor to the creation of a covered bond market.
But a survey of bankers and lawyers in Istanbul suggests that optimism about the prospects for covered bond issuance in the relatively short term is misplaced. To turn the framework into reality will require action from several government bodies to pass regulations – and that could be a tough call in an election year.
The genesis of the new law lies in the push to modernise Turkish financial markets in the 1990s, mortgages being just one area where the country lacked the trappings of a developed economy.
“The Mortgage Law merely regularises the previous situation, creates a framework and ends the uncertainty. But that doesn’t mean that we will see covered bond or RMBS issues tomorrow,” said Tolga Egemen, head of corporate banking at Garanti Bank.
"Why have a Mortgage Law at all?" asks Emre Derman, who heads the Turkish practice at White & Case. "After all, the concept of collateral and bankruptcy enforcement existed before. The new law has eased the enforcement of collateral for banks, which should encourage such lending, and allows financial leasing in respect of housing; this used to be limited to high tech capital goods. But there is nothing favourable for consumers, so the Law is not likely to increase demand."
"Now the Capital Markets Board, which regulates the capital markets, the BRSA, the banking regulator, have to issue regulations to follow on from the Law," he added.
For example, the BRSA will have to set out how financing companies qualify for a licence to sell mortgages, while the CMB will issue regulations about how the new securities will trade.
“The new Law sets new standards for the housing finance system and introduces new capital markets instruments. The lack of a proper housing finance system in Turkey and the high occurrence of building without approvals have forced the Turkish government to take action. The new Law should improve infrastructure, promote a primary mortgage market and also create a secondary mortgage market and provide alternative funding sources to the primary lenders," said Brett Hailey, partner at Denton Wilde Sapte’s Istanbul office.
“But there are still problems. A lot of land in Turkey is not zoned, so unauthorised housing cannot be refinanced through new mortgage-backed securities or mortgage covered bonds referred to in the Law. The Law should encourage more authorised construction, but that will take time.”
In terms of developing a secondary market, the Law creates a new entity that can take on collateral and related mortgages for the subsequent issue of covered bonds. The pool is not separate from the originator, so this arrangement would not be suitable for securitisation. The issuing entity would issue participation certificates that paid a coupon representing a share in the underlying collateral.
The CMB has been quoted as saying that it expects to see the first covered bonds from Turkey in early 2008, but that depends in significant measure on the CMB itself and other government agencies. Their record is not impressive.
DWS’s Hailey warns that in an election year it may take longer than initially expected for the relevant bodies to pass the regulations necessary to turn the Law into reality from a capital markets perspective.
Other lawyers complain that for securities issues the CMB is often unclear about what it requires in order to approve a deal.
“There is a lack of sophistication on the part of the CMB, and frankly the legislation is often not very clear. Put the two things together, and you end up with a very cautious, defensive stance from the CMB,” said one.
For all the hype, it is important to get the Turkish mortgage market into perspective. Outstanding mortgage loans total TL24bn (US$17.2bn), so this is still small.
The rate of growth in mortgage loans has slowed appreciably in recent months. It was roughly 25% in Q1 2007, a big reduction on the 85% recorded for full-year 2006, or 353% in 2005 – admittedly from a small base. Following the rate hike in Spring 2006, borrowers have less appetite to borrow, and banks less interest in lending, given that they were lending at fixed rates and were caught out by the rate jump. In addition, as property prices rocket – doubling in the last two years, while inflation has been less than 20% – questions of affordability also arise.
The new Law does not make mortgage lending or borrowing substantially more attractive than before. According to Erdal Aral, the treasurer at Is Bank, the new law offers only one advantage to borrowers, namely that they are no longer liable for the 5% banking and insurance tax previously charged on total interest payments.
“There was disappointment that there was no tax relief on interest payments, but this will have to come if the mortgage product is going to achieve penetration among the general public,” he said.
Given the combination of demographics – a growing, young population – and economic growth, in the long term there seems little doubt that the Turkish mortgage market will grow, and that a secondary market in mortgage-related securities will develop.
In a recent report, Merrill Lynch analysts said that they “could easily see Turkish mortgage debt double as a share of GDP within the next five years". And asset managers are confident that covered bonds will become an attractive investment for domestic investors, especially pension funds. But don’t hold your breath.