Housing problems in Turkey have increased as a result of overpopulation, migration from rural areas to cities, and high rental rates combined with unlicensed settlements. Turkey has been struggling with unplanned urbanization and demand for about 300,000 new residences each year. However, housing business in general is expected to expand with the decrease of inflation and interest rates, the support of recent economic developments, 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 housing financing was obtained from banks in Turkey. The size of the US housing financing market is around 53% of the GNP, 40% in Europe and 5% to 15% in developing countries, but the ratio still remains close to 0% in Turkey.
Leaving aside the financial impediments to the development of a mortgage banking system in Turkey's emerging market, for example, high interest rates increasing the cost of funding, there are legal issues that have a negative effect on the growth of the existing market. 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, for example, there are no tax benefits.
- The foreclosure of a mortgage can take up to two years.
- According to the Consumer Protection Law, where payment is made in installments, 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 is, subject to certain conditions, jointly and severally liable together with the seller of the financed goods, that is, the real estate, for defects.
Supported by the recent economic developments in Turkey, regulatory authorities and market players have started to establish the legal framework for the development of mortgage banking, launched upon an initiative of the Capital Markets Board (CMB) endorsed by the government. It is expected that a legal framework for mortgage financing would be in place by the end of 2005.
To benefit from the experiences of developed 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. Participants' presentations 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 situation in Turkey and the legal, regulatory, tax, accounting and general macroeconomic issues (for example, demographic information, homeownership data, domestic debt, inflation and interest rates) that need improvement.
The CMB also prepared a draft law for amendments suggested to various pieces of legislation.
The Capital Markets Law already refers to a mortgage-based capital markets institution as a capital markets institution, but does not further define or explain this type of institution. The draft law changes this term in the Capital Markets Law to mortgage financing institution and defines such institutions as capital markets institutions established as joint stock corporations 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.
To address the legal issues hindering the growth of the mortgage banking business, the draft law also proposes to introduce, among others, the following amendments to legislation:
- Tax benefits to be provided to individuals as well as to mortgage financing institutions (for example, 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, and transactions of the institution would be exempt from stamp tax).
- Valuation of the real estate to be made by persons/institutions authorized by the CMB to shorten the lengthy mortgage foreclosure procedures.
- Foreclosure procedures not to be limited to mortgage foreclosures, (that is, the mortgage will not prevent the institution from commencing legal proceedings by attachment, which is not currently allowed).
- Security deposited by the borrower to suspend the foreclosure of the property will be increased (40% instead of the current 15%).
- Floating interest rate will be allowed.
- If fixed interest rate is determined, pre-payment fees to be allowed.
- The Treasury will guarantee an institution's obligations (up to YTL 400 million.
The proposed amendments might facilitate the growth of the mortgage banking market as well as other secondary markets such as real estate, construction, and insurance markets. However, the amendments might not be enough to promote the mortgage banking system if financial developments, particularly macroeconomic stability, and decrease in inflation and interest rates, are not maintained.