The new mortgage law in Turkey sets new standards for the housing finance system and introduces new capital market instruments.
The lack in Turkey of a proper housing finance system, and the consequential high occurrence of irregular and unqualified housing in the country has forced the Turkish government to take action. For that purpose, the Law Amending the Laws Related to Housing Finance ("Mortgage Law") has been prepared and adopted by the Turkish Parliament. The Mortgage Law's aim is to improve the infrastructure in the field of property finance. It will do this by promoting a primary mortgage market, creating a secondary mortgage market - by introducing legislation regulating the trade of domestic mortgage-backed securities - and providing alternative funding mechanisms to primary lenders. These steps will necessarily improve building standards as only qualified housing will be eligible for such financial backing.
Only Authorised Properties
It is estimated that more than 50% of residential property in Turkey lacks proper licensing as a result of unqualified urban planning and illegal urbanization. This substantially diminishes the portfolio of eligible assets available for securitisation. The Mortgage Law explicitly provides that only housing finance loans for property having occupancy permits qualify as eligible receivables for a fund pool.
Although there exists no restriction in the scope of the law in relation to the type of the property, an overview of the Mortgage Law clearly demonstrates that only "authorized" properties may be subject to mortgage-backed housing finance.
Finance Leases for Housing Finance
Under the Mortgage Law, "housing finance" is defined as the extension of loans to consumers: (i) to acquire houses; (ii) for the leasing of houses to consumers through finance leases; and (iii) for the extension of loans to consumers where such loans are secured by the houses that the consumer owns. In addition loans extended for refinancing the above-mentioned loans are included in the scope of housing finance. There are two key methods of providing housing finance under the Mortgage Law:
- Loan Extension
The housing loans offered by Turkish banks have already been used by many consumers, and the number of people using such loans is increasing rapidly.
Until now, Turkish people have largely had to rely on inter-family borrowing or expensive short-term unsecured loans from banks. The extension of housing loans, as the primary method of financing housing requirements, will be the most significant change of the new system. It should be noted that the Mortgage Law applies to loans granted by Turkish banks also prior to the Mortgage Law which are therefore also affected by the changes.
- Finance Leasing
After the adoption of the Mortgage Law, it is likely that finance lease agreements will play a major part in the housing finance system. For this reason, the Mortgage Law introduces new provisions for finance lease agreements entered into with the aim of financing housing needs.
New Players in the Housing Market
Under the Mortgage Law, housing and mortgage finance institutions were introduced as new capital market institutions.
Housing finance institutions will operate as liquidity providers in the primary mortgage market by financing the purchase of eligible real property. Banks, financial lease companies and consumer finance companies will be qualified to operate as housing finance institutions.
In addition, secondary market institutions are defined as "Mortgage Finance Corporations". These corporations will be able to buy home loans from housing finance institutions, hold them in their portfolio, sell them, issue bonds secured by the housing loans (and the mortgages) and also securitise these loans through housing finance funds.
Housing Finance and Asset Finance Funds
"Housing finance funds" are defined under Article 12 of the Mortgage Law as: "the providers of securitisation of receivables arising from housing finance through mortgage-backed securities." The aim is to provide easier methods for third parties to purchase and sell those securities which give participation rights in the fund portfolio. Accordingly, housing finance funds will contribute by providing liquidity and ultimately reduce the end cost of funds provided for mortgage finance.
"Asset finance funds" issuing asset backed securities are also regulated under the Mortgage Law. They are authorised to securitise receivables arising from sources other than through the housing finance "special purpose vehicle" structure.
The Mortgage Law introduces legislation that will govern domestic mortgage-backed securitisations and the Capital Markets Board is expected to issue secondary legislation regarding mortgage covered bonds in the near future.
From the banks’ point of view, the new Mortgage Law will allow for new funding mechanisms, such as asset-backed securitisations and covered bond issues, which are currently uncommon in Turkey.
New Production and Development Opportunities
It is true that neither consumers, nor experts are entirely satisfied with the measures introduced by the Mortgage Law, but such efforts can be seen as the first steps in improving the system. The Mortgage Law has been hailed as the "saviour" of the housing sector, and many believe that it will improve the economy by providing new production and development opportunities, ensuring substantial tax revenues and increasing employment in many sectors of the economy. It will also accelerate the flow of foreign capital into Turkey, a process which the Turkish government is already encouraging by providing other incentives to foreign investors.
It is therefore without question that the scheme for housing finance and mortgages created by the Mortgage Law will rapidly become part of daily life, and create significant opportunities for multi-national corporates/investors seeking new investment opportunities.
Guner Law Office was established in 1996 and has since grown into one of the major corporate, M&A, banking, litigation, energy and TMT practices in Turkey. Guner Law Office is headed by Ece Guner and works with international law firm Denton Wilde Sapte.
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.