Something has come to my attention about the financial crises in Russia and while I was drinking my morning cup of coffee. There is another issue that is hitting people who have taken out loans for mortgages in Russia.
I call it “Currency Suicide”:
In Russia as in many countries it seems to be common procedure to take out a credit in another currency other than the home currency. This is an issue that I never had to face having been raised in the USA. I have never until coming to Russia to live long term ever thought about anything but dollars.
After talking to my wife, I have come to the understanding that Russians look at taking a loan out in another countries currency as normal practice. The example I will use, is in the video that you see at the top of the article. In this video a woman has a credit for her flat financed in Yens. Now when she got the financing the Yen was weaker against the Ruble. Now the Ruble has weakened against the Yen.
Guess what? She can not make the payment any more because of currency exchange rates!
Why do they do this? The answer to that is multifaceted and has more underlaying reasons than I can put into one simple post, but the main reasons are.
1. Banks steer (turn) customers to a loan package that makes the bank the highest percent yield.
2. Customers see a few dollar savings on their total loan at time of taking out loan.
3. Knowledge of financial systems is lacking, so people do not know what they are doing.
4. A form of currency speculation. **
5. Culturally accepted practice of not keeping all your eggs in one basket.
6. Last but not least: Greed!
As one bank that has a very strong policy against these type of loans, Sberbank Senior Vice President, Denis Bugrov, says that wasn’t a very intelligent move by people.
Many Russians took out mortgages in foreign currencies – lured by exceptionally lower interest rates than on Ruble loans.
Denis Bugrov says, “This shows the level of financial education in our country. Having income in Rubles, people considered its right to have liabilities in other currencies. This was profitable when the Ruble was strong, now it’s the other way round.”
Sberbank says only 6% of their mortgage portfolio was in foreign currencies. Many other banks strongly promoted those loans and have as high as 80 – 90% in their portfolio, making huge profits by borrowing cheap and lending high. While knowing that their customers would suffer from currency fluctuations and speculations.
I remember ARM (Adjustable Rate Mortgages)*** loans in America. I learned my lesson about what I call “loans of stupidity.” (interest only mortgage, the negative amortization mortgage, and the balloon payment mortgage.)
I watch the video and thought about it this way: She would not be upset if she had her loan in Rubles because now compared to other currencies she would have a bargain on her loan payment. So there would be no story.
So now another huge issue of the financial crises has swung into view. People have set them selves up for “Currency Suicide”.
** Currency speculators, who buy and sell currencies to profit from fluctuations in the value of those currencies. Speculators have posted record earnings from such buying and selling since the crisis began last summer.
*** An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices.
Kyle & Svet
comments always welcome.