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Cheap mortgage deals? Forget it

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MOSCOW. (RIA Novosti economic commentator Yelena Zagorodnyaya) - The recent slide on the U.S. mortgage market has hit hard at the global financial markets.

Those affected include about one million Russians who invested their savings in unit funds, and millions of other Russians who were waiting for mortgage rates to go down.

Last Tuesday, everyone thought the blackest days for the global financial markets were over. Late last week, the central banks of the largest countries spent more than $250 billion to stabilize the markets.

But the cash injection, four times larger than that administered during the crisis provoked by the 9/11 terrorist attacks, has not helped. The Asian markets, which survived the financial shocks of previous weeks, collapsed on August 15. The chain of landslide falls has reached the Russian market, which closely follows the trends of Asian and Western exchanges, and continued towards Europe and the United States.

These developments have a direct influence on the Russian mortgage market, although the blow has reached it in a roundabout way.

Everything began with mortgage lenders in the U.S. The procedure for taking out a mortgage there is extremely simple, because banks are fighting tooth and nail for clients. Seeking to win over more clients, banks and mortgage brokers granted loans to anyone who wanted one, including many who could not repay them.

But this is a problem for the creditor banks, you say. Wrong. To secure their financial situation, creditor banks issued bonds with mortgage loans as collateral. Investors all over the world bought these bonds readily, but mostly they issued derivatives secured by the bonds, for sale to other investors.

All the financial institutions in the world were involved in these transactions, including the largest players on the market.

When the volume of bad loans reached a critical mass, U.S. mortgage companies folded, pulling investment banks all over the world along with them. Next investors, disappointed with the financial sector, started selling the securities of banks and insurance companies. Stock markets have been in the red for days.

Major international financial establishments are loath to part with their money in such situations. Therefore, interest rates on loans are on the increase in every country, and Russian banks can no longer receive cheap money.

The first Russian bank to take out a long-term foreign loan to finance mortgage projects was VTB (July 2006). Other Russian banks soon followed its example, borrowing on a large scale against the collateral of their mortgage portfolios.

Now that money has grown at least 1% in its value all over the world in a matter of days, it has become unprofitable for Russian banks to take out loans on foreign markets. They can borrow funds abroad, of course, but the interest rate has become prohibitive.

On August 15, Andrei Kostin, head of the VTB Group, said his bank would not raise mortgage rates.

Quite possibly, but what a huge bank like VTB can do is beyond the capacity of smaller banks. The Moscow-based Moscommertsbank commercial bank has announced an increase in its mortgage rates due to the grim global situation.

Other banks will do the same, especially since banks and companies dealing in U.S. mortgage bonds will have to report their results for the first nine months in October.

We may see several loud bankruptcy cases, and the value of money will resume its growth, along with mortgage rates.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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