Mortgage backed securities as an option for housing problems in Mongolia

Mar 21 • Construction, Economy, News, Opinion, State Affairs • 1506 Views • No Comments on Mortgage backed securities as an option for housing problems in Mongolia

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Within the 100,000 housing unit program, Mongolian Housing and Finance Corporation (MHFC) and Mongolian Development Bank has been giving out a 6% AER loan through State Bank to the young families and also to those who are purchasing apartment for the first time. The actual cost of the loan is 10%-11% which government subsidizes the rest. It is a fact that taxpayers are paying the other eligible purchasers for their housing problems. It is partly a solution for the disastrous growing air pollution in Ulaanbaatar (not Ulan Bator) that comes from burning mostly low quality brown coal and other materials for heating in yurt or ger areas.

The capital city is in desperate need for solving its’ air pollution problem that has been growing worse after numerous air pollution reduction programs and policies. It had tried to implement programs such as efficient subsidized furnaces and high quality coal etc. The outcome is not showing any progress to this day. The Mayor Mr. Batu-Uul.E campaigned in the city election to build infrastructures to ger areas and turn them into town-houses with running water and central heating. It is a romantic idea far from being realized, at least for two decades.

The MHFC  in the other hand keen on raising debt as sovereign bond to fund the housing projects. It seems like a viable solution after the Chinggis Bond has been oversubscribed by 10 times last year on capital markets. It is a macroeconomic statement that if more households live in apartments they will have to work-hard (encourage people to seek work) to pay the mortgage, and will have less time spending on fending and maintaining gers. The downpayment for an apartment loan from a regular local bank is as much as 30%-40% in before engaging them into in 1.2%-1.7% monthly ‘mortgages’. Effectively the families are paying annual rate of 15%-22%.

It is a life-time investment for Mongolians to have a centrally heated apartment with running water as 70% of the city’s population live in ger areas. The population is young and keen to work hard for a reasonable rate to live in apartments (instead of luxurious half a million dollar mansions which is nearly impossible for the majority). Growing economy, high inflation, and demand for luxurious apartments are biting the lower and middle income families’ chance to become the new middle-class. High growth in economy invited international real estate investors and companies to invest in the city’s newly built shiny offices and apartments for the prospect of Mongolia’s mining boom. When the economy is in real-estate bubble, it is an option for the construction companies to earn a quick profit.

If we could pool the mortgage securities and arrange them into appropriate tranches and create CMOs (collateralized mortgage obligations), we will have lower mortgage rates and systemized long term payment to fulfill the international capital market requirements. The MHFC mentioned in the meeting with SGK’s Committee on Petitions yesterday that the repayment percentage of the mortgage holders from State Bank is 99.6% with some late payments, and zero percent defaults.

The Ministry of Construction and Urban Development is stating that the price of apartments’ one square meter can be as lower as 1 million MNT and still be profitable for construction companies. Again, it is a possible option to solve the housing problems after The Chingis Bond that had an oversubscription by 10 times at the time when it was issued. Currently the apartment per square meter ranges from 1000$-5000$ (1.4 million MNT – 7 million MNT)

We will also have take into account the environmental, water, heating and electricity issues. The infrastructure must be there to support the new housing development and make it socially and economically feasible. There is a lot of work to be done. However we are closer than we were 10 years ago.

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