We are talking mainly about using a letter of credit when buying new buildings, which allows you to reduce the mortgage rate for a certain period
With demand for housing declining, developers and banks are forced to look for tools to boost sales. Recently, the Central Bank has revealed new schemes for the sale of new buildings — these are sales through letters of credit and the sale of apartments with an understated price to affiliated persons. The regulator called both mechanisms risky for the buyer.
Together with experts, we are looking into whether there are many such schemes in the market of new buildings and what other tools are used today to attract a buyer.
What kind of schemes are we talking about
1. Letters of credit
According to the Central Bank, now some banks and developers offer borrowers contracts for participation in shared construction (DDA), under which part of the funds are placed not on an escrow account, but on a letter of credit. Due to this, the bank receives additional profitability, part of which is provided to the buyer of new buildings in the form of a mortgage discount for the duration of construction. As the Central Bank warns, the letter of credit, unlike the escrow account, is not insured, which creates additional risks: in case of revocation of the license from the bank, the buyer will not be able to return part of the funds that were placed on the letter of credit.
The letter of credit can also be used for installments, says Alexey Novikov, director of the Est-a-Tet Mortgage Lending department. “With an installment mortgage, credit funds are credited to a letter of credit and lie there for a certain period agreed upon by the parties,” he explained. As a rule, the expert adds, this is from six months to three years. During this period, the borrower has a preferential rate (from 0.1% per annum), which significantly reduces the monthly payment. The bank, in turn, can use the money that is on the letter of credit as funds on deposits, adds Alexey Novikov.
2. Understating the price
The second scheme, which was mentioned by the Central Bank, is associated with an underestimation of the price of new buildings. We are talking about a situation where developers sell housing at the construction stage to affiliated persons, concluding a contract with them at a price several times lower than the market, and these funds are placed on an escrow account. Then these apartments are sold to the final buyers by assignment and the developer can use the funds received before renting the house.
The danger of such a scheme is that in the event of a default by the developer, the buyer will lose most of the money paid — the difference between the real price paid at the time of purchase and the amount of funds in the escrow account, the Central Bank warns.
How popular are these schemes and why
According to experts interviewed by RBC-Real Estate, letters of credit have been used in the market of new buildings before, but against the background of restrictions imposed on mortgages, which also affected preferential programs, their popularity began to grow. As for the second mechanism, which was mentioned by the regulator, it is poorly developed, market participants note.
Now the use of a letter of credit is popular among large developers and banks, says Tatyana Reshetnikova, deputy head of the mortgage department of the federal company Etagi. “If we talk about the options for sale by developers through affiliated companies, then there are very few of them on the market — no more than 1%. But with a letter of credit, the number of offers is growing and now stands at about 10-15%,” said Tatyana Reshetnikova. In her opinion, an alternative to letters of credit could be a phased disclosure of escrow as construction readiness increases, which would help reduce the financial burden on developers and increase the availability of loans.
Alexey Novikov also confirms the growing popularity of letters of credit — according to him, the option with a preferential rate for six months is especially popular. “Different banks are now involved in the process of working on this product, transactions are being conducted. Of course, it cannot be said that in large numbers, nevertheless there is a certain percentage. In our company, for example, such transactions amount to 3-5%,” said the director of the mortgage lending department of Est—a-Tet. In the market as a whole, the share of various options for using a letter of credit can reach up to 20-25%, he believes. According to such schemes, large banks operate, the expert adds.
Now the use of a letter of credit is popular among large developers and banks. Thanks to them, the buyer receives a discount on the mortgage rate, the Central Bank considers such schemes risky. (Photo: Sergey Malgavko/TASS)
Recently, the popularity of letters of credit has increased due to a decrease in the profitability of banks from preferential loans, says Sergey Gordeyko, head of the analytical center “Russipoteka”. “The situation is quite opportunistic, and if the key rate or the amount of compensation paid to banks for concessional loans changes, the offer of letters of credit will return to its usual niche,” Gordeyko believes.
A decrease in the number of mortgage banks, a shortage of limits, stricter underwriting of mortgage applications, a sharp increase in the number of applications with a full package of documents — all this leads to the search for new lending schemes, added the development director of Deal.Russian Federation” Olga Sidorenko. “At least, we saw this in January and February. New restrictions lead to an increase in the cost of mortgages for the end user and make the same underestimation a sought—after product that developers are forced to use,” the expert explains.
In general, there are more alternative options for buying real estate (special offers, promotions, promotions, discounts) this year, continued Tatyana Reshetnikova, deputy head of the mortgage department of the federal company “Floors”. According to the company’s estimates, last year such offers were no more than 70% of the total volume, now about 90% of the objects can be purchased through various kinds of special offers from developers and banks.
A decrease in the number of mortgage banks, a shortage of limits, stricter underwriting of mortgage applications, a sharp increase in the number of applications with a full package of documents — all this leads to the search for new lending schemes. (Photo: Semyon Likhodeev/TASS)
The risks of new schemes and the fight against them
The central Bank has voiced the risks of these two schemes, they are quite real in case of bankruptcy of the developer or the bank that issued the loan, or revocation of his license — this is a loss of funds, said Tatyana Reshetnikova, deputy head of the mortgage department of the federal company “Floors”. “In the case of a letter of credit, there is no insurance of these funds, and in the case of undervaluation, only a part of the funds is insured,” the expert noted.
Formally, the scheme with a letter of credit is legal and based on the use of completely legal instruments, explains Alexander Tsyganov, head of the Department of Housing Mortgage Lending and Financial Instruments of the real Estate Market at the Financial University under the Government of the Russian Federation. There is a financial benefit for the buyer here, but at the same time the risks of losing funds are growing and there is no mechanism for making claims against the developer in case of failure of construction deadlines, the expert noted. “It should be understood that in the event of bankruptcy or revocation of the bank’s license, and there have already been such cases in 2024, it will not be possible to claim compensation from the DIA, since letters of credit are not included in its perimeter,” Alexander Tsyganov warned.
Accordingly, the risks can be reduced when applying for a mortgage in a large bank and buying an apartment from a reliable developer, concludes Tatyana Reshetnikova.
To prevent new risky schemes in the mortgage market, the Central Bank plans to take measures in the near future. (Photo: Shutterstock)
What measures does the Central Bank plan to apply?
To prevent new risky schemes in the mortgage market, the Central Bank plans to take the following measures in the near future:
