A DECENT BET: PROPOSED OPIC FINANCING FOR FIRST

UNCLAS YEREVAN 000400

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/CARC
PLEASE PASS TO OPIC SENIOR INVESTMENT OFFICER JAMES GALE

E.O. 12958: N/A
TAGS: EINV ECON AM
SUBJECT: A DECENT BET: PROPOSED OPIC FINANCING FOR FIRST
MORTGAGE

REF: STATE 36310

Sensitive but unclassified. Please protect accordingly.

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SUMMARY:
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1. (SBU) The following information, provided per reftel,
concerns OPIC's proposal to provide a USD 5 million loan to
First Mortgage Company (FMC). Post believes that FMC is a
strong prospective partner and that there is significant
potential within the Armenian mortgage market. Any loan
agreement, however, should reflect that perfectibility of
mortgage loans in Armenia is largely untested and that
successful foreclosure in the event of default would be
extremely difficult at best. Additionally, recent amendments
to the Armenian currency law are ambiguous in their
application to the mortgage market. Due to FMC CEO David
Atanessian's recent political activities, OPIC should
consider delaying awarding the loan until after Armenia's May
12, 2007 parliamentary election. Post's ability to vet
company representatives named in reftel was limited by the
lack of biographical data, but we are not immediately aware
of any negative information. END SUMMARY.

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A DYNAMIC MORTGAGE MARKET
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2. (SBU) Armenia's mortgage market is growing rapidly and is
currently estimated to include USD 75 million in outstanding
loans. The mortgage market has effectively doubled since
2006, but long-term funding remains scarce and is largely
provided by the German assistance group KfW through an Euro
18 million assistance package. There are 15 banks and credit
organizations offering mortgages in Armenia, but only FMC and
Washington Capital specialize in mortgages.

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CONSTRUCTION BOOM (AND MAYBE BUBBLE)
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3. (SBU) Much of the mortgage market is connected to
Armenia's booming construction sector. Construction has been
the leading driver of Armenia's impressive double-digit GDP
growth for the past five years. The residential construction
industry includes both new construction and refurbishment of
existing homes and buildings. Much of the new construction
is beyond the price range of the local population.
Premium-priced housing is marketed especially to affluent
ethnic-Armenians living permanently abroad, who may spend
several months per year in Armenia, though this market is
finite and risks being over-supplied. Some observers,
including members of the Armenian Central Bank and the local
representative of EBRD, have voiced concerns about a possible
housing bubble, particularly within the capital, Yerevan.
The less conspicuous, but probably much more stable long-term
business prospects are for mortgages aimed at Armenia's
steadily growing middle-class, which remains seriously
undeserved by the existing housing stock and by financial
instruments that could help put moderate-priced new homes (or
major existing-home renovations) within reach. Local demand
for housing remains strong.

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PERFECTIBILITY UNCERTAIN
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4. (SBU) Thanks in part to assistance from USAID, the state
land cadastre (deed registry) is recognized as a reasonably
solid institution and legal land title is well established.
The Armenian judiciary remains underdeveloped however, and,
because the mortgage industry is relatively new to Armenia,
the legal perfectibility of mortgage loans is essentially
untested. In other words, it remains to be seen whether the
Armenian legal system and legislative framework is truly
ready to enforce mortgage agreements. There no clear
precedent for foreclosure cases and foreclosure in the event
of default would be extremely difficult at best, and might
well prove to be impossible.

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SIGNIFICANT FOREX RISKS
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5. (SBU) Recent amendments to the Currency Control Law have
posed a challenge to the mortgage market. The law requires

that all consumer loans be issued in the local currency
(drams) but is ambiguous on whether mortgage loans are
considered "consumer loans." Many mortgage companies,
including FMC, complained about this ambiguity in the law
saying that mortgage companies which source their funds in
dollars and are required to make loans in drams are forced to
assume an unreasonable currency risk. The 18.9 percent
appreciation of the dram in 2006 underscores the potential
gravity of their concern. The Central Bank of Armenia (CBA)
issued a clarification stating that mortgage loans are not
consumer loans for the purposes of this law, but CBA
clarifications are not binding on other government bodies,
can be changed at any time and are not legally enforceable.
FMC and the American Chamber of Commerce in Armenia have
called for amendments to the currency law to resolve this
ambiguity, but there is no evidence that such amendments are
under consideration. As a matter of prudence, we expect that
FMC will likely issue loans in drams and will have to adjust
their lending rates to account for the foreign exchange risk.

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A POLITICAL QUESTION MARK
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6. (SBU) FMC was established in 2004 as a "universal credit
organization" under the banking laws of Armenia. Unlike
banks, universal credit organizations, are not required to
make public company financial information. FMC, however,
enjoys a strong business reputation, is already in
partnership with the German Development Bank KfW, and is
under consideration for a future partnership with USAID. CEO
David Atanessian is widely respected within the business
community and is an active member of the American Chamber of
Commerce in Armenia, and Chairman of the British Alumni
Association (an association of student who studied in the UK
thanks to assistance from the British Embassy). Recently,
Atanessian helped found the United Liberal National (or
"MIAK" by Armenian acronym) political party. This small
group of western-oriented Armenians (mostly alumni of British
or American universities) has yet to have a significant
impact on the Armenian political arena. Atanessian's vocal
support for an anti-corruption agenda, however, may cause him
problems in the run up to the May 12, 2007 parliamentary
elections.

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POSSIBLE USAID-FMC PARTNERSHIP
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7. (SBU) USAID is considering a development credit authority
grant to FMC whereby USAID would guarantee FMC bonds issued
on both the local and international markets. Under this
agreement, which is still in the due diligence phase, FMC
would be able to raise capital to support non-traditional
mortgage lending, including smaller loans (approximately USD
5,000) to rural Armenians seeking to renovate existing
properties. Due to the ambiguity in the currency law, USAID
is planning to contractually require the FMC make its loans
in drams.

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COMMENT: A DECENT BET
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8. (SBU) Given the strength of the Armenian mortgage market
and FMC's business reputation, the proposed loan appears
reasonable. OPIC should be careful to clarify in which
currency FMC plans to offer its loans and to ensure that the
rate of return is sufficient to cover the foreign exchange
risk. OPIC should also be aware that there is virtually no
precedent for successful foreclosure and, in the event of
default, foreclosure might well prove to be impossible. We
urge OPIC to delay approval of the loan until after Armenia's
May 12 parliamentary elections to avoid any appearance of
political motivation.
GODFREY