Housing problems in Turkey have been thriving as a result of overpopulation, migration from the rural side of the country to cities, and high rental rates when combined with unlicensed settlements. Turkey has been struggling with unplanned urbanization in addition to the need for approximately 300,000 new residences each year. However, business in general is expected to expand in an environment with the decrease of inflation and interest rates, the support of the recent economic developments, the housing financing by banks and the mortgage banking system.
Statistics show that although the total volume of housing financing provided by banks in Turkey increased by 300% through 2002 to 2004, only 3% of the housing financing is obtained from banks in Turkey. While the size of the American housing financing market is around 53% of the GNP, 40% in Europe and 5-15% in developing countries, the ratio still remains close to 0% in Turkey.
Leaving aside financial impediments for the development of the system in an emerging market like Turkey, such as high interest rates increasing the cost of funding, there are legal issues that have a negative effect on the growth of the existing mortgage banking business. For this system to develop into a fully-fledged mortgage banking market comparable to European standards, the following issues need to be addressed:
- There is no specific regulation of mortgage banking in Turkey, e.g. there are no tax benefits.
- The foreclosure of a mortgage might take considerable time, i.e. up to two years.
- According to the Consumer Protection Law where payment is made in instalments, possession of the real estate should be delivered to the consumer within 30 months.
- The applicable statute of limitations for defective goods in relation to real estate financing is five years.
- The Consumer Protection Law does not allow the application of a floating interest rate. All interest rates must be fixed.
- The Consumer Protection Law allows pre-payment and states that in case of pre-payment, the creditor is obliged to decrease the interest rates and fees applicable.
- The Consumer Protection Law prohibits imposing pre-payment penalties on the consumer.
- The Consumer Protection Law states that the lending bank shall, subject to certain conditions, be jointly and severally liable together with inter alia the seller of the financed goods, i.e., the real estate for defects.
Supported by the recent economic developments in Turkey, regulatory authorities and market players have commenced the necessary efforts to establish the legal framework for the development of the mortgage banking business, launched upon an initiative of the Capital Markets Board (“CMB”) endorsed by the government. It is expected that the legal framework for mortgage financing would be in place by the end of 2005.
In order to share the work and research undertaken to date for the development of mortgage banking in Turkey and to benefit from the experiences of developed and developing countries in this market, the CMB organized a conference in Istanbul in November 2004. Many international and national experts in mortgage banking, international investors, banks and other credit institutions participated in the conference. The presentations of the participants concentrated on the basic mortgage banking models in developed countries, examples of the primary and secondary markets in developing countries, the infrastructure required for efficient mortgage banking, the current situation in Turkey and the legal, regulatory, tax, accounting and general macroeconomic issues (e.g. demographic information, homeownership data, domestic debt, inflation and interest rates, etc) that have to be improved.
The CMB also prepared a draft law (“Draft Law”), for amendments suggested to various pieces of legislation, e.g. Execution and Bankruptcy Law, Capital Markets Law, Consumer Protection Law, Corporate Tax Law, Income Tax Law, Expenditure Taxes Law, Fees Law, Stamp Tax Law, Banks Act, Financial Leasing Law, and the Law on Regulation of Public Financing and Debt Management.
The Capital Markets Law already refers to “Mortgage Based Capital Markets Institution” as a capital markets institution, but does not further define or explain such institution. The Draft Law changes such term in the Capital Markets Law to mortgage financing institution (“Institution”) and defines the Institution as a capital markets institution established as a joint stock corporation for the purpose of supporting individuals to own their residences by increasing the financial opportunities in relation to the purchase, renovation and development of residences and extending the terms of such financing facilities.
In an effort to improve the legal issues currently hindering the growth of the mortgage banking business, the Draft Law also proposes to introduce, among others, the following amendments to current legislation:
- Tax benefits to be provided to individuals as well as to the Institution (e.g. the Institution and the earnings from mortgage fund units would be exempt from corporate tax, earnings received from sale of securities issued by the Institution would not be subject to income tax, transactions of the Institution would be exempt from stamp tax, etc).
- Valuation of the real estate to be made by persons/institutions authorized by the CMB in order to facilitate the lengthy mortgage foreclosure procedures.
- Foreclosure procedures not to be limited to mortgage foreclosures, (i.e. existence of the mortgage will not prevent the Institution from commencing legal proceedings by attachment, which is not currently allowed).
- Security to be deposited by the borrower to suspend the foreclosure of the property to be increased (40% instead of the current 15%).
- Floating interest rate to be allowed.
- If fixed interest rate is determined, pre-payment fees to be allowed.
- The obligations of the Institution (up to 400 million YTL) to be guaranteed by the Treasury.
The proposed amendments may facilitate the growth of the mortgage banking market as well as other secondary markets such as real estate, construction, and insurance markets. However, the proposed amendments may not suffice to promote the mortgage banking system if the financial developments, particularly the macroeconomic stability, decrease in inflation and interest rates along with further developments in the legislation, are not maintained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.