05BUCHAREST1461 / 2005-06-29 13:06:00
Embassy Bucharest
                UNCLAS SECTION 01 OF 02 BUCHAREST 001461 
E.O. 12958: N/A 
TAGS: EAID, OTRA, EINV, EFIN, RO, Credit, Economic Assessment 
1.  This is the Embassy-USAID/Romania's response to OPIC Action 
Request dated June 16, 2005. 
2.  Summary: The Mission believes the addition of resources to 
expand mortgage lending in the country is essential for long- 
term sustainable growth in the industry.  Currently, the legal 
framework for the primary market is strong on fundamentals. 
Reform of administration and registration is slow but proceeding 
and non-judicial foreclosure is an accepted principle, which was 
tested by the micro-lending activity and found to work 
reasonably well.  The creation of the secondary mortgage market 
is in an incipient phase.  With USAID technical assistance, a 
Mortgage Legislative Package has been developed waiting for 
Parliament's approval.  It may be concluded that from the 
legal/regulatory point of view, no real barriers impede Domenia 
Credit's growth, and the development of the secondary mortgage 
market will create new opportunities in the longer term. End 
Establishment of Domenia Credit 
3.  In 2000, USAID proposed to establish a sustainable finance 
company that would increase the access to mortgage loans to 
Romanian citizens.  In September 2001 the Romanian Mortgage and 
SME Program was launched as a joint effort between Shorebank 
Advisory Services (SAS) and the Romanian-American Enterprise 
Fund (RAEF) with grant funding from USAID in the amount of $1.5 
million for start-up costs.  SAS provided management support and 
staffing, while RAEF provided the initial SEED capital of $3 
million to the new company.  During the start-up phase, RAEF, 
SAS, and USAID acted as anchor investors that provided the 
needed credibility for other investors that came later-on and 
invested in this company, as well as mitigated the start-up 
risk.  This allowed the company to further develop by attracting 
new sources of capital by itself. 
Current Status of Housing and Mortgages in Romania 
--------------------------------------------- ------ 
4.  A successful middle class is emerging, comprised of business 
owners, professionals and entrepreneurs, who have relatively 
high and stable sources of income, from $400 to $800 a month. 
Many of these people wished to build, buy a house or an 
apartment, or upgrade their current residences.  The mortgage 
market is a relatively new industry, but is very attractive to 
investors as it is rapidly expanding and providing high profit 
margins.  Moreover, the Romanian market displays tremendous 
growth potential.  Based on the experience of the other 
transition economies, we may infer that the potential growth of 
the market within the next 5 years is over 7% of the GDP (which 
would imply a $7 billion over the next 5 years).  The risk of 
mortgage loans is very low, as it has both strong collateral - 
the house itself - and strong morale value, as Romanians always 
have traditionally valued homeownership. 
5.  High entry barriers, however, make this sector difficult for 
smaller finance companies to enter and compete in the market. 
The competition has continued to increase.  With the exception 
of two mortgage companies, only banks offer mortgage loan 
products, which vary in terms of interest rate, procedures, 
paper work, documents required, and time to process and approve 
the credit, utilization fees, initial payment, and conditions to 
be met by borrowers.  One element that delayed mortgage market 
growth was limited access to long-term resources.  The situation 
has been improved beginning in 2003, when banks had access to 
longer-term financing from EBRD and outside financing from 
international financial markets.  The other issue faced by the 
banking system that impedes mortgage lending growth is the 
bureaucratic procedures required by the National Bank of 
Romania's requirements. 
6.  After a slow start in 2001, the mortgage portfolio of 
banking system doubled in the following two years, to around 
$200 million in 2002, and $400 million in 2003.  Based on the 
latest National Bank of Romania's report, the mortgage market at 
the end of April 2005 reached $1.34 billion.  It is believed 
that growth might have been even higher if existing lenders 
would have had greater access to long term capital. 
Domenia Credit 
7.  Domenia Credit's vision is to become a leader on the 
mortgage market and the first company to offer secondary 
mortgage market services to banks by issuing mortgage-backed 
securities and bonds, therefore differentiating its services 
from its very strong competitors, the banks, which offer 
mortgage products, among other banking services. 
8.  The loan products, underwriting and processing procedures, 
and technology that were developed by Domenia Credit, were made 
available to other mortgage lenders in Romania in an effort to 
standardize the mortgage products and prepare the basis for the 
secondary mortgage market's development.  Due to its top 
management active involvement in legislation improvement for 
both primary and secondary mortgage markets, the company has 
obtained its recognition as having a professional and 
knowledgeable team.  Domenia's lending products cover all 
surface related to residential property finance: home 
acquisition, home improvement and home finishing, home 
construction and acquisition of land for construction purposes. 
The size of its outstanding portfolio was $15.7 million at the 
end of April 2005; the weighed average term to maturity was 
11.09 years; and the average loan size was $26,600.  By the end 
of April, 2005, Domenia's lending portfolio was arrears free, 
with a 0% default rate. 
9.  Until 2003, Domenia was active only in Bucharest.  In 2004 
it opened branches in Timisoara and Cluj, and early 2005 in 
Iasi.  Currently, Domenia is considering opening a branch in 
Constanta.  The only factor that impeded more rapid geographic 
expansion is the capital available for lending.  On March 2005 
Domenia Credit moved its headquarters to a new, larger location 
in Bucharest.  The company has a strong team of professionals, 
young, dynamic, very well trained, offering professional 
financial services.  Currently, Domenia Credit employs 46 
people, out of which 15 are loan officers.  Domenia Credit knows 
that its human resources are a key competitive advantage, 
therefore, twice per year, devotes to its young loan officers 
thorough training programs. 
10.  The company has not yet reached the break-even point. 
Based on its projections, this will be attained by the end of 
calendar year 2006 at $77 million.  Domenia also projects that 
in October or November of this year, it will need new funds to 
keep up with the strong demand.  Therefore, it is critical to 
assure funds for Domenia's expansion plans. 
11.  Domenia Credit is well positioned on the mortgage market 
due to its two key elements that differentiate its services from 
its competitors: speed and excellent financial consulting. 
Because of these factors, the company succeeded to maintain a 
higher interest rate than the market's average.  Its experts are 
known throughout the industry to provide excellent services to 
potential clients and they continue to assist them, even if they 
are not eligible for Domenia's mortgage products.  However, this 
advantage will eventually be eliminated as more competition 
enters the market.  The company faces the following threats: (i) 
Increased competition in the market that forces the company to 
differentiate its services from its competition; and (ii) 
Limited resources that will be completely lent by November 2005. 
Romanian-American Enterprise Fund 
12.  The Romanian-American Enterprise Fund (RAEF) is a private 
U.S. corporation whose mission is to promote free enterprise and 
entrepreneurship in Romania through investments in and loans to 
small and medium size enterprises.  Established by the President 
and the U.S. Congress in 1994, RAEF is capitalized by a $61 
million grant from USAID.  RAEF was actively involved in seeking 
additional capital for Domenia, it has a seat on Domenia's 
Board, and it is the main engine pushing Domenia's development, 
its expansion of operations in new regions of Romania, and 
actively supporting its growth. 

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