Attempting to set up an American style home lending system in Russia

Housing and mortgage industries can be quite different across countries. While many Americans might be quite used to our system (even though the system of 30 year mortgages we know now was a product of the mid-twentieth century), what happens when you try to apply the American system to another context? A sociologist looked at how this worked out in Russia after the collapse of the Soviet Union:

The new government tried to create a housing market by replicating the American housing system, essentially using the Federal National Mortgage Association, or Fannie Mae, as a template to encourage Russians to take out mortgage loans.

“This was all designed by USAID, one of their biggest foreign aid programs ever,” Zavisca said. “It was an American model of what a housing market is: home ownership and securitized mortgages.”

Supposedly all of that privatized housing and wealth would spur the natural development of a housing market. Those who felt they had more housing than they needed would look to trade down and use the leftover money for other things. The private sector would emerge to produce housing for those who had been left out.

“That didn’t really happen,” Zavisca said.

Housing construction declined by 70 percent from 1992 to 2002, the first decade after the Soviet era. The construction industry in Russia has evolved to cater to wealthy and well-to-do middle class clients who could pay with cash, but there is a lack of trust by both contractors and consumers. No one wants to pay up front and wait, or deal with credit.

Unlike Americans who for decades have willingly taken on 30-year mortgages to buy housing, Russians have largely balked at the notion. Even when young families were offered a $10,000 credit, roughly a year’s wages and the equivalent of $60,000 in the U.S., toward the down payment for a house, Zavisca said there was little interest.

“Few Russians are willing to take out mortgages because the risk of foreclosure is unacceptable, and because they view interest payments – which they call overpayments – as unfair. As one Russian put it: ‘To enter into a mortgage is to become a slave for 30 years, with the bank as your master.'”

That hasn’t stopped Russians from going into debt, though. They may be averse to mortgages but they love credit cards, small consumer loans and point-of-purchase store credit.

“In my interviews, people there often compared credit card debt favorably to mortgages, the inverse of here in the U.S., where mortgages are viewed as virtuous and responsible.

“Russia is completely the opposite. It may be a legacy of Soviet entitlement to housing, where housing is viewed as a right to them. Even thought the Soviet government owned the housing, people thought of it as their own and had the right to pass it down to their children, or swap with someone who wanted to trade with you.

“It was a kind of quasi-marketplace. It just wasn’t financialized.”

She said Russians find it odd that Americans call themselves “homeowners” from the day they close on a mortgage loan. For Russians, ownership only begins after all debts are paid off.

This suggests that our system may be more cultural than anything else. It goes beyond just being used to a particular set of economic and financial tools regarding homeownership; these instruments are backed by a particular set of cultural values that sees mortgages, and working hard to reach the point where one can afford a mortgage, as acceptable. The Russians may have a point here: one doesn’t technically own a home until the mortgage is paid and with the high rates of American mobility (moving roughly every 5-6 years on average), many homes are never truly owned.

It would be interesting to hear how Americans, in USAID or elsewhere, explained why this didn’t work in Russia. Have we tried implementing similar policies elsewhere and if so, how did those situations work out?

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