This page updated regularly deals with securitization developments in Latvia. If you have any data, developments or contributions to make to this page, please write to me. Your contribution shall be acknowledged with credit to you.

Recent Market developments (Dec 2004)

In Dec 2004, a notable residential mortgage backed transaction originated from Latvia, with the support of International Finance Corporation, Washington.

An IFC press release says that the International Finance Corporation has invested $7.1 million to support the issue and placement of $63.5 million in mortgage-backed securities by the Baltic-American Enterprise Fund (BaLAEF). These are secured by mortgage loans originated in Latvia by the company’s mortgage program. The transaction is the first securitization in Latvia, and the first residential mortgage-backed securitization ever to be issued in Central and Eastern Europe. IFC has actively participated in structuring the transaction and has also supported the issue by investing $2.1 million in the subordinated (Class B) certificates. The issuance of the B certificates provided credit support to the $60.5 million senior (Class A) certificates; the A certificates, rated Aa2 by Moody’s Investor Services, were placed with institutional investors in Europe and the United States. IFC also supported this issuance by purchasing $5 million of the senior notes. The issuance is backed by a pool of dollar-denominated residential mortgages in Latvia.

BaLAEF will use the proceeds of the transaction to originate new mortgage loans in the Baltics, helping the company achieve its growth plans and increasing the availability of funding for the housing finance in the region. IFC was instrumental in supporting the company’s plans for this international issuance when it provided BaLAEF with a $50 million warehousing line in early 2003, helping expand its mortgage lending operations and prepare for secondary mortgage market activities

Legal and regulatory framework:

In Eastern European countries, securitisation has developed more from the viewpoint of German pfandbriefe or mortgage-bonds tradition, than taking the US CMO or pass-through structure. This applies to Latvia also.

The total mortgage loans in Latvia as of April 1st , 1999 was 52 million Euro, including 6.5 million Euro with the Mortgage Bank, with the average interest rate 14.4%. In 1998, the total mortgage loans amounted to only about 1% of the GDP (in many countries it is as much as 60 to 90 %, for example, in Czech Republic, housing loans alone make 10% of the GDP).

The most important precondition for the development of mortgage lending in Latvia is appropriate financial resources. In order to ensure the security of the attracted resources and their purposeful usage (i.e., capitalisation in real estate), the Cabinet of Ministers adopted a special concept of creating a mortgage lending system. In accordance with this concept, the Cabinet prepared and the Saeima passed in 1998, the Law on Mortgage Bonds that is aimed at the protection of investors, as the security of investments is the major factor that may promote the decline of interest rates on mortgage loans.

The most important feature of the system that distinguishes it from those of several other countries (like Germany and Denmark) using mortgage bonds as a financial instrument in the mortgage lending system, is that any bank complying with the provisions of the law, not only specialised mortgage banks, has the right to issue mortgage bonds. Banks have the right to issue mortgage bonds if they comply with the following rules:

  • capital not less than 8 million Euro;
  • all financial transactions without restrictions allowed;
  • approved rules of mortgage transactions submitted;
  • rules of mortgage bond cover register approved of by the Bank of Latvia;
  • ensured management of cover in the register separately from other assets.

The full text of the Latvian mortgage bonds law is reproduced on our securitisation laws page – click here