Interview with Khashchuluun.Ch, Professor of Department of Economics, Studies of Economics of National University of Mongolia.
- It is noteworthy that mortgage lending has dropped dramatically and MIK has become the subject of political scrutiny. In my opinion a structure like MIK is needed, especially for Mongolia as a low-income country where most of the people live in ger districts. Is there any organization similar to MIK in other countries?
- Every country, at a certain stage in its development, faces a large problem. This problem is providing housing for its people. This problem is not just restricted to us. Countries such as Korea, Japan and the U.S. had to find a solution to affordable housing for low-income people. In 1934, the American government passed a law that made way for the first Mortgage Corporation. This entity was the same for us as Hypothec Corporation. After World War II, many countries adopted this idea and created such a company that resolved the issue of housing their population. Since 2000, Mongolia began researching this field. The Millennium Challenge Account focused on housing the ger districts in Mongolia. There is something unique in our case. At the time when housing issue was strongly talked about, we faced the problem of housing middle-class households, rather than ger district. By middle-class households we are talking about those whose salaries are drawn from the state budget via government owned companies.
- At the time, mortgage interest rates were high?
- Yes, interest rates were between 15 and 18 per cents. As well as high housing prices.
Thus, since 2003, the Government focused on housing and approved the 40,000 Household Houses Program. Under this policy MIK was incorporated. MIK’s history can be noted in 3 phases. First phase, MIK implemented the 40,000 Household Houses Program. Issues arose during 2009-2012, to finding a solution to housing problem, with the development of the mining sector. Solving this issue was MIK’s Second phase. MIK’s third phase in development began in 2013. To clarify, the eight-per cent mortgage loan program was initiated to result in a sizable achievement. Currently, statistics indicate that approximately 60,000 households were housed through this program. This program has not limited to Ulaanbaatar city, but also encompassed the provinces.
- There are indications that in the coming years, the scope of mortgage loans will tighten. Was is required to stop the housing program temporarily due to the economic crises?
- I don’t think so. We are facing a problem of promoting the mortgage market in the very near future, 2018 and 2019. Over the past decade, the support of sales was given focus this is becoming a problem. As said before, mortgage was introduced to the U.S. due to urgent need. For us, mortgage loan have become an even urgent issue than that of U.S. Latest statistics show that 79 per cent of population live in settlement areas of Mongolia, which is a historical high concentration of population. If the centralized population does not live in apartments, the country will face social issues, such as air and soil pollution. We have already started to feel the impact of air and soil pollution. The reason for the inability to solve air pollution over the past decade, is due to the constant concentration of the population. The number of urban settlements has increased and the ger district has expanded due to continuous movement from provinces to central city.
-Let us continue the interview to discuss MIK’s responsibilities, and whether this structure is inevitable.
- The MIK’s supplies securities to the market, a unique security which are called Residential Mortgage Backed Securities. The sole institution for issuing RMBS is MIK. Here is a simple example of why securities need to be issued. Let’s imagine that the bank has MNT 100 million. Dick and Jane submit a request for a loan at the bank. The bank’s cash will be completely depleted when the bank provides loan of MNT 100 million to Dick and Jane. But, there are a lot more people that need the loans. The bank can’t supply all these demands. This problem has been resolved worldwide, by way of raising fund through the recirculating of funds obtained from issuing securities based on a loan pool. This mechanism allows for the other borrowers to obtain loans. This is a unique system that has been used for many years in the global market. Countries use this system to house many households with low rates. In Mongolia, this role is undertaken by MIK.
One of the important goals of Government policy is housing. If mortgage loans are provided with commercial rates, there will be no one who complies with requirements. Along with high rates, many apartments will be unsold, and a bankruptcy issue will arise to local high capacity industrial enterprises of cement and construction materials due to market shrinkage. If these companies go in bankruptcy, the state loans provided will be ineffective and air pollution could be increased due to inability of housing.
- Mortgage loans are considered as good loans; its repayments are usually made in a timely manner. Therefore, could MIK’s securities be considered as a product to attract investors?
- Yes, it could be. Mongolians have a special feature compared to other countries which is that most people buy apartments once in their lives and all their household income is set aside for mortgages. This is the reason behind the responsible payment of the mortgage loan. The mortgage loan is repaid by family income, not only individual income. Therefore, the mortgages are highly unlikely to become non-performing. Also, the securities can be inferred to be are guaranteed, as strict control is taken by commercial banks on mortgage lending.
- There is criticism over State support to mortgage. But, the State provides a considerable amount of subsidies to several sectors, such as farming and agricultural sector. What is the difference between the subsidies provided to mortgage from others?
- As you have said, the State provides subsidies to several sectors. For example, there is a large amount of subsidy given to wheat every year. Housing subsidies largely differ from such supports.The state subsidy to flour is given in order to supplying the domestic market fully, however flour factories do not absorb the wheat produced by farmers due to the quality of the wheat. There has been a constant issue with the quality of domestic wheat and its high prices.
Housing loan is totally different, Choices are abundant. The focus is aimed towards the development of the middle-class. This is why the issue of housing finance will continue to be an issue. To maintain this support, MIK’s securities are highly important.
- Citizens who wish to obtain mortgage loans with low rates are numbered by the thousands. To house them, MIK should exist. But I think, it should be independent from politics. What are your thoughts on this?
- Housing of its citizens should take longer than 20, 30 years, it should continue till 2050, if we expect the ger district to disappear. MIK should exist, especial in times of where citizens are unable to purchase apartments. In other words, the mortgage loans will face difficulties without state participation. So, it is important to MIK being dependent on State.
The 60,000 households mean that there are 200-300 thousand people behind this program. Furthermore, there are young families, low-income households and female-headed households who all what to own homes that needs to be considered. We have to support these groups. The state budget will not be able to facilitate the direct funding to these people and family, the income of these people are need to support this program. Mongolians have a tendency to obtain mortgage loans rather than rent houses. Therefore, government policy of housing citizens should not be politicized, while the succession of the policy should be fulfilled. In 2011, Mongolian people’s party implemented the six-per cent mortgage program and the following government initiated the eight-per cent program. State has been focusing on low-rate mortgage loan program not only in the last few years.
- What do you think the Government should do on the mortgage program?
- There are three essential issues to be solved by Government. Currently, the production capacity of building materials is high, and demand is high. Housing should be continued using this opportunity. Secondly, MIK is a main participant in the housing finance system therefore, MIK’s governance should be resolved. The Bank of Mongolia promoted MIK through its implementation of Price Stabilization Program and now, it is be transferred to Government. Therefore, the Government needs to determine which ministry will be assigned to support MIK.
The third issue is to bring MIK closer to international markets in relevance to its management and ownership. The Asian Development Bank actively participated in the initial development of this system in Mongolia. Based on report prepared by Asian Development Bank in 2015, MIK was incorporated through participation of Government, Bank of Mongolia and commercial banks. Therefore, it is necessary to create an environment for attracting investment from international and domestic markets. If the mortgage loan are not to be supported from State budget according to requirements taken by International Monetary Fund, it should be open to attract investment opportunities in international market.
There was a medium-term program called “New Development” program approved by State Great Hural (Parliament) of Mongolia in 2010. Under this program, the 40,000 Household Houses Program was implemented and completed in 2016. The Minister, Byambatsogt.S, worked actively to approving the program. Since it is clear that Mongolia’s economy will improve in the future, it is possible to start the second phase of the “New Development” program.
Interview with Khashchuluun.Ch, Professor of Department of Economics, Studies of Economics of National University of Mongolia
- It is noteworthy that mortgage lending has dropped dramatically and MIK has become the subject of political scrutiny. In my opinion a structure like MIK is needed, especially for Mongolia as a low-income country where most of the people live in ger districts. Is there any organization similar to MIK in other countries?
- Every country, at a certain stage in its development, faces a large problem. This problem is providing housing for its people. This problem is not just restricted to us. Countries such as Korea, Japan and the U.S. had to find a solution to affordable housing for low-income people. In 1934, the American government passed a law that made way for the first Mortgage Corporation. This entity was the same for us as Hypothec Corporation. After World War II, many countries adopted this idea and created such a company that resolved the issue of housing their population. Since 2000, Mongolia began researching this field. The Millennium Challenge Account focused on housing the ger districts in Mongolia. There is something unique in our case. At the time when housing issue was strongly talked about, we faced the problem of housing middle-class households, rather than ger district. By middle-class households we are talking about those whose salaries are drawn from the state budget via government owned companies.
- At the time, mortgage interest rates were high?
- Yes, interest rates were between 15 and 18 per cents. As well as high housing prices.
Thus, since 2003, the Government focused on housing and approved the 40,000 Household Houses Program. Under this policy MIK was incorporated. MIK’s history can be noted in 3 phases. First phase, MIK implemented the 40,000 Household Houses Program. Issues arose during 2009-2012, to finding a solution to housing problem, with the development of the mining sector. Solving this issue was MIK’s Second phase. MIK’s third phase in development began in 2013. To clarify, the eight-per cent mortgage loan program was initiated to result in a sizable achievement. Currently, statistics indicate that approximately 60,000 households were housed through this program. This program has not limited to Ulaanbaatar city, but also encompassed the provinces.
- There are indications that in the coming years, the scope of mortgage loans will tighten. Was is required to stop the housing program temporarily due to the economic crises?
- I don’t think so. We are facing a problem of promoting the mortgage market in the very near future, 2018 and 2019. Over the past decade, the support of sales was given focus this is becoming a problem. As said before, mortgage was introduced to the U.S. due to urgent need. For us, mortgage loan have become an even urgent issue than that of U.S. Latest statistics show that 79 per cent of population live in settlement areas of Mongolia, which is a historical high concentration of population. If the centralized population does not live in apartments, the country will face social issues, such as air and soil pollution. We have already started to feel the impact of air and soil pollution. The reason for the inability to solve air pollution over the past decade, is due to the constant concentration of the population. The number of urban settlements has increased and the ger district has expanded due to continuous movement from provinces to central city.
-Let us continue the interview to discuss MIK’s responsibilities, and whether this structure is inevitable.
- The MIK’s supplies securities to the market, a unique security which are called Residential Mortgage Backed Securities. The sole institution for issuing RMBS is MIK. Here is a simple example of why securities need to be issued. Let’s imagine that the bank has MNT 100 million. Dick and Jane submit a request for a loan at the bank. The bank’s cash will be completely depleted when the bank provides loan of MNT 100 million to Dick and Jane. But, there are a lot more people that need the loans. The bank can’t supply all these demands. This problem has been resolved worldwide, by way of raising fund through the recirculating of funds obtained from issuing securities based on a loan pool. This mechanism allows for the other borrowers to obtain loans. This is a unique system that has been used for many years in the global market. Countries use this system to house many households with low rates. In Mongolia, this role is undertaken by MIK.
One of the important goals of Government policy is housing. If mortgage loans are provided with commercial rates, there will be no one who complies with requirements. Along with high rates, many apartments will be unsold, and a bankruptcy issue will arise to local high capacity industrial enterprises of cement and construction materials due to market shrinkage. If these companies go in bankruptcy, the state loans provided will be ineffective and air pollution could be increased due to inability of housing.
- Mortgage loans are considered as good loans; its repayments are usually made in a timely manner. Therefore, could MIK’s securities be considered as a product to attract investors?
- Yes, it could be. Mongolians have a special feature compared to other countries which is that most people buy apartments once in their lives and all their household income is set aside for mortgages. This is the reason behind the responsible payment of the mortgage loan. The mortgage loan is repaid by family income, not only individual income. Therefore, the mortgages are highly unlikely to become non-performing. Also, the securities can be inferred to be are guaranteed, as strict control is taken by commercial banks on mortgage lending.
- There is criticism over State support to mortgage. But, the State provides a considerable amount of subsidies to several sectors, such as farming and agricultural sector. What is the difference between the subsidies provided to mortgage from others?
- As you have said, the State provides subsidies to several sectors. For example, there is a large amount of subsidy given to wheat every year. Housing subsidies largely differ from such supports.The state subsidy to flour is given in order to supplying the domestic market fully, however flour factories do not absorb the wheat produced by farmers due to the quality of the wheat. There has been a constant issue with the quality of domestic wheat and its high prices.
Housing loan is totally different, Choices are abundant. The focus is aimed towards the development of the middle-class. This is why the issue of housing finance will continue to be an issue. To maintain this support, MIK’s securities are highly important.
- Citizens who wish to obtain mortgage loans with low rates are numbered by the thousands. To house them, MIK should exist. But I think, it should be independent from politics. What are your thoughts on this?
- Housing of its citizens should take longer than 20, 30 years, it should continue till 2050, if we expect the ger district to disappear. MIK should exist, especial in times of where citizens are unable to purchase apartments. In other words, the mortgage loans will face difficulties without state participation. So, it is important to MIK being dependent on State.
The 60,000 households mean that there are 200-300 thousand people behind this program. Furthermore, there are young families, low-income households and female-headed households who all what to own homes that needs to be considered. We have to support these groups. The state budget will not be able to facilitate the direct funding to these people and family, the income of these people are need to support this program. Mongolians have a tendency to obtain mortgage loans rather than rent houses. Therefore, government policy of housing citizens should not be politicized, while the succession of the policy should be fulfilled. In 2011, Mongolian people’s party implemented the six-per cent mortgage program and the following government initiated the eight-per cent program. State has been focusing on low-rate mortgage loan program not only in the last few years.
- What do you think the Government should do on the mortgage program?
- There are three essential issues to be solved by Government. Currently, the production capacity of building materials is high, and demand is high. Housing should be continued using this opportunity. Secondly, MIK is a main participant in the housing finance system therefore, MIK’s governance should be resolved. The Bank of Mongolia promoted MIK through its implementation of Price Stabilization Program and now, it is be transferred to Government. Therefore, the Government needs to determine which ministry will be assigned to support MIK.
The third issue is to bring MIK closer to international markets in relevance to its management and ownership. The Asian Development Bank actively participated in the initial development of this system in Mongolia. Based on report prepared by Asian Development Bank in 2015, MIK was incorporated through participation of Government, Bank of Mongolia and commercial banks. Therefore, it is necessary to create an environment for attracting investment from international and domestic markets. If the mortgage loan are not to be supported from State budget according to requirements taken by International Monetary Fund, it should be open to attract investment opportunities in international market.
There was a medium-term program called “New Development” program approved by State Great Hural (Parliament) of Mongolia in 2010. Under this program, the 40,000 Household Houses Program was implemented and completed in 2016. The Minister, Byambatsogt.S, worked actively to approving the program. Since it is clear that Mongolia’s economy will improve in the future, it is possible to start the second phase of the “New Development” program.
