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MORTGAGE AS AN ELEMENT OF THE REAL ESTATE LENDING MECHANISM
17.10.2022 22:24
[2. Економічні науки]
Автор: Zharikova Оlena Borisovna, Сandidate of Economic Sciences, Associate Professor, Associate Professor of the Department of Banking and Insurance, National University of Life and Environmental Science of Ukraine, Ukraine; Pashchenko Oksana Vasilivna, Candidate of Economic Sciences, Associate Professor of Chair of Economic Theory, National University of Life and Environmental Sciences of Ukraine, Ukraine; Zharikova Anna Leonidivna, Student Faculty of Law, National University of Life and Environmental Sciences of Ukraine, Ukraine
Mortgage market implementation in Ukraine is among the crucial issues that need to be addressed immediately. Ukrainian mortgage lending has lagged behind that of the countries of Eastern and Central Europe which negatively affects the pace of the country development and solving socio-economic problems. The revival of the mortgage institution and the mortgage market establishment in the country is an objective necessity caused by the need to introduce housing construction lending mechanisms instead of its budget financing. The mortgage housing market is to create a multiplier effect of accelerated development of many sectors of the economy, the domestic market, increasing effective demand and sustainable growth of the national GDP. The mortgage market is a developed form of mortgage relations that has emerged in foreign countries in recent decades. The mortgage market is a pattern of modern economy though the institution of mortgages was not recognized in the Soviet times.
The bank's lending activities are among the key sources of raising funds in the national economy and its optimal functioning support. In addition, banks’ lending operations increase the activity of the state as well as the business sectors of the economy. However, current bank lending needs to be improved. The same is true for the formation of the loan portfolio, which is a key position in the commercial banks priorities as it allows to more clearly develop the banks strategy and tactics and identify opportunities for lending money to customers and business development. An efficient and high-quality loan portfolio helps to maximize the profitability of both an individual bank and the overall performance of the banking system. Research on this topic is quite relevant and appropriate at the current stage of Ukraine's banking system development since compared to the past, Ukraine's economy has changed radically due to its political and economic independence, as well as its transition to a market economy.
Currently, the leading Ukrainian investment and construction companies and banks have accumulated positive experience in implementing mortgage financing mechanisms for housing construction. This have had a positive impact on the economic development of many regions, the pace of solving the housing problem, the financial condition of economic entities.
The results of lending activities of a commercial bank directly depend on the quality of the bank lending process structuring, as well as on the degree of clearness of the process main stages tasks definition and the functions of employees in charge of lending operations. Determining the creditworthiness of customers is, undoubtedly, one of the stages of the credit process and the defining essential condition of loan relations since its reliability significantly affects both the results of specific loan agreements and the bank’s loan activities efficiency as a whole. The accuracy of the assessment is also important for the borrower as it predetermines the decision on granting a loan and its volume limit.
Irregularities in assessing the borrowers’ creditworthiness can result in the loan portfolio quality deterioration which makes the bank increase the cost of additional provisions. At the best, this causes a deterioration in the financial condition of the bank, at the worst - its bankruptcy.
To avoid such a disappointing prospect, a single scientifically sound methodology for assessing the creditworthiness of borrowers should be developed and applied. However, the unified scientifically sound methodology (or even an approach) can not be considered due to the fact that there is no single scientifically sound definition of the very concept of creditworthiness.
The creditworthiness of the borrower is the ability of an individual to fully fulfill obligations to the lender within the period specified in the loan agreement. The borrower creditworthiness has been one of the main criteria for the feasibility of establishing a credit relationship between the lender and the borrower. In addition, creditworthiness is inextricably linked to the borrower's personal qualities (reputation, integrity, reliability, sincerity, etc.), their social status (place of work, type of employment, qualifications, marital status, etc.), availability of capital (property owned by the borrower).
We recommend using the method of assessing creditworthiness, based on the analysis of the following seven credit factors aimed to minimize the risks of the lender on credit operations through determining the creditworthiness of the borrower. These include:
- assessment of the legal status of the borrower;
- assessment of personal qualities of the borrower;
- assessment of the social status of the borrower;
- assessment of the borrower's capital;
- assessment of the borrower's security;
- assessment of the borrower's income;
- assessment of the borrower debt coverage.
The use of this method by the lender can establish the following:
- whether the borrower can get a loan at all;
- whether the borrower can get the desired loan amount;
- the loan limit the borrower can get.
The recommended method of assessing the borrower's creditworthiness is implemented in the form of a scoring model of the borrower's creditworthiness assessment.
The scoring model allows assessing the borrower's creditworthiness, assessing the credit risks of the lender based on the calculation of quantitative indicators (economic creditworthiness) and qualitative characteristics (personal creditworthiness) of the borrower.
The essence of this scoring model involves assigning points to the borrower based on the analysis of special forms and questionnaires developed by the lender and filled out by the borrower.
Based on the results of the points scored, the recommended scoring model allows the lender to make a conclusion about the appropriateness of lending money to the borrower and determine their class:
A class - the borrower is recommended to be issued a loan. Issuing a loan to the class A borrower carries minimal risk for the lender;
B class - the borrower may be issued a loan. Issuance of a loan to the class B borrower carries a tolerable risk for the lender;
C class - the borrower may be issued a loan. Issuing a loan to the borrower carries a medium risk for the lender;
D class - the borrower is not recommended to be issued a loan. Issuing a loan to the borrower carries the maximum risk for the lender;
E class - the borrower is not recommended to be issued a loan. Issuing a loan to the relevant borrower carries a critical risk for the lender.
Property that is the subject of the pledge and remains in the possession and use of the mortgagor, must be insured in favor of the Bank, in accordance with the requirements of the Regulations on the Insurance system of the JSC "State Savings Bank of Ukraine".
If the subject of the pledge is real estate or a vehicle, the pledge agreement must be notarized (real estate - at the location, vehicles - at the place of іts registration).
The pledge of real estate is subject to state registration in accordance with the current legislation of Ukraine (the pledge agreement must provide for the imposition of a ban on alienation).
Issuance of credit funds is carried out in accordance with the terms of the loan agreement.
Loans are provided in non-cash form by paying for settlement documents for goods and services or its transferring to current accounts on the basis of the borrower's instructions, the loans can be provided in cash as well.
In order to reduce the risk, loans for construction are provided through concluding a non-revolving credit line agreement, which provides for the gradual loan drawdown, i.e. in the course of the credited activity implementation. In this case, the provision of credit funds begins after the borrower confirms the costs incurred at the expense of own funds provided for financing this event. Each subsequent tranche of credit funds is provided after the borrower submits a report on the use of the previously received loan amount.
Therefore, bank mortgage lending has great сapacity to ensure significant qualitative changes in Ukraine's economy, as it is considered an effective form of attracting long-term cheap financial resources to invest in the development of the real sector of the economy. However, the liberalization of credit policy in the face of intensifying competition threatens to increase the level of credit risk borne by banking institutions. That is why, nowadays it is necessary to pay special attention to the formation of an effective mechanism of bank mortgage lending, taking into account the peculiarities of the institutional environment of Ukraine. International experience and its adaptation to the domestic legal framework, taking into account the conditions inherent in the modern economy of Ukraine, including lack of long-term resources and increased risks are significant factors in the formation and development of the mortgage lending mechanism. Based on this, it is justified that the development of the mortgage lending system should start with investment in housing since housing construction implies much shorter period from the beginning of investment (mortgage) to the completion of construction compared to industrial lending.
References:
1. Law of Ukraine "On Banks and Banking" Law of 07.12.2000 № 2121-III // Bulletin of the Verkhovna Rada of Ukraine. - 2001, N 5-6, p.30.
2. Law of Ukraine "On securing creditors' claims and registration of encumbrances" // Law of 18.11.2003 № 1255-IV // Bulletin of the Verkhovna Rada of Ukraine (BVR), 2004, N 11, p.140.
3. Law of Ukraine "On Pledge" // Law of 02.10.1992 № 2654-XII // Bulletin of the Verkhovna Rada of Ukraine (BVR), 1992, N 47, p. 642.
4. Law of Ukraine “On the Deposit Guarantee Fund of Individuals” of September 20, 2001 (as amended) № 2740-III. URL: https://zakon.rada.gov.ua/laws/show/4452-17.
5. Law of Ukraine “On the Deposit Guarantee Fund of Individuals” of September 20, 2001 (as amended) № 2740-III. URL: https://zakon.rada.gov.ua/laws/show/4452-17.
6. Zharikova O.B., Cherkesenko K.I. Integration of banks and insurance company’s activities in Ukraine https://doi.org/10.33445/sds.2021.11.2.5 DOI: 2.33445 / sds.2021.11.2.5.
7. Pashchenko O.V., Zharikova O.B. Increasing the competitiveness of Ukrainian dairy products in line with European standards. International Journal of Scientific and Technological Research www.iiste.org. [435-441]. - 2018. Vol 4. No 10.
8. Zharikova O.B., Cherkesenko K.I. Banc assuance: new challenges and prospects for development in Ukraine //О.B. Zharikova / Scientific Journal "Bioeconomics and Agrarian Business". NUBiP. Issue 4. №3. 2020 pp. 76-87. http://dx.doi.org/10.31548/bioeconomy
9. Zharikova Olena, Pashchenko O.V. Financial and economic activity of agribusiness according to international standards // Zharikova Olena / Scientific Bulletin of Kherson State University. Series «Economic Sciences». №42 / 2021 P.64-72. https://doi.org/10.32999/ksu2307-8030/2021-42-10
10. Pashchenko O.V., Zharikova O.B. (2021). Differentiation of household incomes in modern conditions of economic development. Scientific Journal "Bioeconomics and Agrarian Business" NUBiP. Iss. № 2. 2021. P.45-55.
http://journals.nubip.edu.ua/index.php/Bioeconomy/article/view/15420
11. Yukhymenko, P., Sokolska, T., Arbuzova, T., Paska, I., & Zharikova, O., Khakhula, L., Zhytnyk, T. (2021). Formation of the model of state support for the Ukrainian agrarian sector in the market economy: change of the approach. Economic Annals-XXI, 187 (1-2), 75-81. https://doi.org/10.21003/ea.V187-07
12. Yut R.A. Use of scoring model in credit risk management / R.A. Yut // Proceedings of the International correspondence scientific practical conference of students, graduate students and young scientists "Modern problems of risk management". Perm, 2010.
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