Diary of Diplomacy
Hendrickson, Thomas R., Mortgage Banking
"If people get together, so eventually will nations." Those words, spoken by President Dwight Eisenhower at People-to-People's founding in 1956, have since become the motto of that non-profit group, whose mission is increasing understanding among people of all nations through "one-on-one" diplomacy and group travel worldwide.
To Eisenhower, living almost four decades ago in a world bound by the constraints of cold war, those words may have represented only a wistful dream. But to those who took part in last fall's Mortgage Bankers Association of America (MBA)/People-to-People Mission to Russia and Eastern Europe, the words invoke a strong image of hope. They clearly describe the feeling of giving that we experienced as we traveled across the greatest "red line" ever known to meet with our would-be counterparts in the former communist countries of Russia, Poland and Hungary.
Last year's mission was not the first such experience with People-to-People diplomacy for a delegation of MBA officials. That occurred in 1983, when a group of mortgage banking representatives met with real estate lenders from Western Europe. Memorable learning experiences and strong bonds of fellowship emerged from that trip. It was not surprising, then, that several members of that earlier group, including the delegation leader and then-MBA President Jim Wooten, of Lomas Mortgage USA, Dallas, chose to participate again in this year's program. Other returning participants echoed Wooten's sentiments when he said, "We had such a marvelous experience of friendship and learning in 1983 that we wondered if it could possibly occur again. Happily, it did."
Another veteran of the 1983 trip was this year's delegation leader, Angelo Mozilo, 1992 president of MBA and president and CEO of Countrywide Funding Corporation, Pasadena. Countrywide's CEO was not only the traveling group's official spokesman and leader, he also played an important part in planning the mission. "When MBA Executive Vice President Warren Lasko and I began planning the trip," Mozilo says, "we had a twofold objective. First was to observe and learn from the unprecedented renaissance that was taking place in Russia, Poland and Hungary. And, second was to determine if we, as mortgage bankers and as concerned Americans, could share our knowledge and experience with the citizens of these countries."
It turned out to be all unforgettable experience. For approximately half of our group, the experience began with two days of meetings and briefings with MBA and U.S. Department of State staff in Washington, D.C. For the rest of us, who'd chosen to participate in an optional four-day cultural visit to St. Petersburg prior to the start of the official meetings in Moscow, the beginning was less formal. Connecting flights from throughout the states routed us all to the Frankfurt Airport. There, we assembled piecemeal at our gate, happily greeting old friends and introducing ourselves to those we did not yet know.
The Lufthansa flight to St. Petersburg, over Germany, Northern Poland and the Baltic Republics, was relatively short. Most of us slept, exhausted by the jet lag from our just-completed transatlantic flights. After passing through customs at St. Petersburg's aged airport terminal, we could see that capitalism's seeds had already sprouted in "Mother Russia." A five-piece brass band, its members adorned by baseball caps and with instrument cases open to receive gratuities, played tunes ranging from "The Star-Spangled Banner" to "Home on the Range Freedom of expression had come to Russia. And so had we.
As we rode the bus to our hotel, we felt as if we'd traveled back in time. The buildings of the former czarist capital of St. Petersburg, though often beautiful, were uniformly old. Virtually all appeared to have been constructed prior to the Russian Revolution, 75 years earlier. Since that time, while the city was known as Leningrad, maintenance also appeared to have been deferred.
Within half an hour, we arrived at our hotel, the Astoria, a grand old building located o a historic square between an expansive czarist palace and the massive dome of St. Isaacs' Cathedral. History surrounded us; but there were very few people visible on the streets. We were almost too tired to notice.
After collapsing in sleep and waking the next morning, we undertook a three-day exploration of Russia's second-largest and most classically beautiful city. Led by knowledgeable guides, both Russian and American, we traversed the palaces, museums, churches and historic monuments with passion. Highlights of our days were visits to Petrodvorets, the czars' summer palace on the shore of the Gulf of Finland, a boat ride on the canals that earned the city the nickname "Venice of the North" and, of course, the Hermitage. The museum and palace of czars and czarinas, including Catherine the Great, the Hermitage houses one of the world's finest art collections. Less classical, but just as enjoyable, were visits to shops and street vendors, giving us opportunities to visit individually with the Russian people, while seeking bargains. Prize purchases ranged from traditional "Matryoshka" nesting dolls to the hammer-and-sickle shorts bought by Howard Levine, chairman of ARCS Mortgage, Inc., Calabasas, California.
In the hotel that week, our dinners were informal, giving us a chance to share impressions and develop relationships with fellow delegates. One special night we attended a performance of the Kirov Ballet. Once home to Nureyev and Baryshnikov, the Kirov is considered by many, the finest ballet company, in the world. We saw why.
ARRIVING IN MOSCOW
Then, too soon, our time in St. Petersburg was over, and we were on an Aeroflot flight to Moscow, where our intense schedule of meetings was about to begin. Our base of activity in Moscow was a total contrast with our setting in St. Petersburg. Instead of an old, crystal-chandeliered "grand hotel" in the center of the city, we stayed in the spacious new Pullman Hotel. It is a French-Russian joint venture of polished-marble, open-atrium design, located in the suburbs, nearly an hour from the heart of Moscow.
When we arrived, we found that the , rest of our group had arrived hours earlier, on a flight from Washington, D.C. Those of us who'd been "in country" in St. Petersburg for a few days were now rested and accustomed to the time difference; the new arrivals were not. From the "new" group, Fannie Mae Executive Vice President Mike Smilo was present to greet us as we arrived. Most of the rest were getting much-needed sleep.
Our formal professional meetings began promptly the next morning and consumed virtually all of the next few days. With just an evening at the Bolshoi Ballet, and a few midday or short morning slots left for the exploration of Red Scluare and the Kremlin, we were now dedicated to our official mission: to meet and exchange ideas with the emerging leaders of Russia's real estate finance industry, and with those government officials faced with the incredible challenge of transforming their economy along free-market principles. All of us looked forward to our meetings; few of us really knew what to expect, until the meetings were well underway.
THE FIRST MEETING
Our opening session was held at Moscow's prestigious Institute for United States and Canadian Studies. Once a "think tank" with the mission of analyzing intelligence data on the United States, the institute ironically was now the site of our discussions with the new capitalists of Russia. Leaders of both the MBA and Russian delegations opened our first meeting formally speaking to members of both groups who were interspersed around a large conference table.
U.S. delegation leader Mozilo and MBA Executive Vice President Warren Lasko maintained a fine balance between careful protocol and warm expressions of friendship, as they greeted our hosts and began outlining the functions of residential and commercial mortgage lending in the United States. Dr. Edward Ivanian, director of the institute, spoke o behalf of the Russians. Then, members of both groups gradually began to respond to each other's questions, creating the less formal give-and-take that prevailed during the next several days' meetings. As each person spoke, an interpreter followed every pause with an immediate translation: Russian-to-English or English-to-Russian.
During the next few days, we met repeatedly with Russian lenders and government officials at several locations, including our hotel, the House of Journalists and Moscow's City Hall. During these meetings, the Russians' questions most often related to the day-to-day functioning of our lending systems, particularly the secondary mortgage market. We asked about their economy rates of interest and inflation and development of private land ownership.
RUSSIA'S MAJOR HURDLES
Though many members of our group had hoped and even anticipated that we would be able to help our Russian counterparts design and implement a system of real estate finance like our own, it was soon apparent that major economic progress is needed before such hopes can become reality.
In an exchange with a group headed by Jacob Dubinetsky, president of the Bank for Industry and Construction of Russia, Art Splenhido, the former head of Colonial Mortgage of Blue Bell, Pennsylvania, before its acquisition by GMAC Mortgage, succinctly outlined the development of residential lending the United States and recommended a government-backed system similar to the Federal Housing Administration (FHA) as a good first step for Russian policymakers. But when a Russian delegate said, "The problem here is our...interest rates are anywhere from 45 percent to 75 percent," we realized what challenges they face. "High interest rates also bring our housing expansion to a halt," said Angelo Mozilo. "With rates that high, our system wouldn't work either."
In another meeting, Konstantin Bouravlyov, first deputy premier of the Moscow City government, outlined one more critical problem. "As you know, we do not have private property laws, as yet...Mr. Yeltsin failed to get an ownership law passed this year. He claims that if it doesn't pass next year, he will take the issue to the Constitutional Court. The deputies in Congress are holding back progress. We must have ownership laws," he said. We saw that our Russian hosts realized, and rightly so, that Russia needs to stabilize its economy and currency and to establish a land registry that shows current ownership of property before a real estate finance system similar to that of the United States can be realized.
While acknowledging these major hurdles, the Russian representatives still looked to our contingent for assistance and counsel for the future. Then incoming MBA President Herb Tasker, chairman and CEO of All Pacific Mortgage Company, Concord, California, assured them that "MBA is very interested in a Russian affiliation, and in sharing our educational materials with you Angelo Mozilo voiced further support for such efforts and discussed providing MBA instructors as faculty members at a new conceived Russian School of Mortgage Banking. And, perhaps most significant: MBA affiliated with Russia's International Union of Economists. At a ceremony in that group's Moscow office, Mozilo and Lasko accepted MBA of America's election as an associate member of that advisory group of the chief economists of the central banks of the former Soviet Union.
Following that ceremony and a farewell dinner attended by virtually all of the two dozen Russian leaders and government officials who had participated in the week's meetings, we were off via a morning Aeroflot flight to Warsaw, Poland. To many of us, Poland was the biggest question mark prior to our trip, and the most pleasant surprise once there. The people we met in Warsaw conveyed the same feeling of resilience as did their physical surroundings --Warsaw was carefully rebuilt from total destruction after World War II by a people who obviously cherished their national heritage. The present-day Poles quickly earned our respect and friendship.
IN THE 'POLISH WHITE HOUSE'
The first meeting in Warsaw was in Lech Walesa's home and executive office the "Polish White House There, delegation leaders Mozilo and Lasko were greeted by Andrzej Kozakiewicz, undersecretary of state and assistant to President Walesa for economic affairs. In that meeting, Kozakiewicz frankly discussed Poland's economic challenges after 50 years of living without free-market principles, central banking or much private ownership. He cited the developing Polish-American Mortgage Bank as one example of how international cooperation can help Poles help themselves as they seek to reenter the world economy.
A visit to that new mortgage firm was on the next day's agenda. A joint venture project supported by the Polish-American Enterprise Fund and strongly aided by MBA member-firm Key Bancorp of Albany, New York, the new company is emerging as a working example of American-style lending functioning in an Eastern European environment.
Other activities in Poland included a visit to the construction site of a Polish-American joint venture between the Davis Construction Company of Indianapolis and Curtis International of Warsaw. Together, they are building "American-style" townhomes.
GRAPPLING WITH SPECIFICS
We also had more traditional meetings with our Polish counteryarts. In those, we learned that Poland is much closer than Russia to having an economic system that would allow a market economy similar to ours to function. However, social constraints--as well as economic ones--have limited the development of a mortgage banking system. Audrzej Bratkowsky, Poland's deputy minister of construction and physical planning, told us "There is a lack of confidence among our society. Our people believe that mortgages are only for the rich. They do not understand the benefits of ownership."
Foreclosure also presents social barriers in Poland aid in other former communist countries. Dr. Henryk Jedrzjewski, director of housing economy, explained that a foreclosure and eviction process has recently been added to Polish law. But, he added, the traditional view that use of property emanates from the state as a right, combined with the peoples' strong attachment to their homes, makes foreclosure remedies "socially problematic."
One advantage Poland has over neighboring countries, however, is a more established registry of land ownership. Minister Irena Herbst, a cabinet-level official, told us that "Poland is in a different situation from other formerly communist countries. Our mortgage laws are still in effect, and over 90 percent of rural land and...over 30 percent of urban flats were in private hands before World War II." So, although there is still much work to be done, Poland is far ahead of its neighbors in moving toward viable national registry of title.
In our meetings, we learned that the real estate lending that is now being done in Warsaw is largely the domain of market-leader PKO, the State Savings Bank. A publicly supported, massive institution, PKO lends to the 10 percent of Poles who can afford mortgages. It currently charges 41 percent interest on residential loans, to stay even with inflation. "How can a person pay 41 percent, when our borrowers are hard pressed to pay 8 percent!" asked Al Siegal, chairman of The Leader Mortgage Company, Cleveland. "Payments over 25 percent of the borrower's income are subsidized by the state," replied Jedrzjewski, "with up to 40 years to pay Thus, the role of the state in housing finance is still strong, but private lending is emerging in Poland.
For two members of our delegation, Sandra Stevens-Miller and Al Miller, CEO and president, respectively, of Pinnacle Mortgage Investment Corporation, Lancaster, Pennsylvania, Poland had special meaning. Al and Sandra granted working internships at their company to several young Polish college students, who were to travel to the United States to spend much of the following year learning the mortgage banking business. This experience will produce a living tie between our countries and help export valuable knowledge of our system that will be of great value to the Polish people as they refine their housing finance system.
Even for the rest of us, the time in Warsaw was special, and it was not consumed entirely by meetings. We enjoyed a dinner and folk dancing celebration with our Polish counterparts, a night at the opera and an unforgettable final evening at the Royal Palace that included a Chopin concert and dinner beneath the massive chandeliers of the grand ballroom. Then, after just four days, we said goodbye to Poland and were off by plane to Budapest.
ON TO HUNGARY
"Hungarian Rhapsody" is how most of us would describe our time in the beautiful twin cities along the Danube. Castles, ramparts and church spires loomed from the hills of Buda on one side of the river. The lowlands of Pest on the opposite bank of the river showcased the ornate architecture of the Parliament buildings, the narrow maze of downtown pedestrian shopping streets and our riverfront Intercontinental Duna Hotel. Our first afternoon there was left open. Most of us spent it together on a riverboat historical tour of the Danube. Following late suppers of Hungarian goulash eaten in small groups dispersed among an assortment of charming neighborhood restaurants, we returned to our hotel, ready to commence our meetings with Hungarian lenders the following morning.
We learned that mortgage lending in Hungary, though plagued with problems, is now closer structurally to the Western model than in the other formerly communist countries we'd visited. Dr. Marta Klemencsis, deputy general director of the Hungarian Ministry of Finance, told us that "during the 40 years of socialism, housing was state controlled, and all homebuyers were entitled to borrow from the National Savings Bank at the subsidized rate of 3.5 percent That system was abandoned from 1988 to 1990, as Hungary moved closer to a free-market economy. Borrowers' existing 3.5 percent loans were cut in half. Fifty percent of each borrower's principal balance was forgiven; the other 50 percent was brought to market rates. However, inflation drove those rates high to a level of 32 percent by late 1992. At these prices, few Hungarians can afford to buy a home; many have difficulty making payments on their existing reduced balances. Dr. Agnes Balazs, general director of the National Savings Bank, cited an "increase in residential mortgage delinquency from 4 percent to 20 percent as a result of the 'payment shock' of adjustments to current levels." Furthermore, foreclosure is a social problem in Hungary, as in other countries. "The problem is, where do people go when foreclosed upon?" she asked.
"Hungarians have been innovative in seeking solutions," Balazs explained. They have developed many new mortgage instruments, including a two-tiered adjustable loan that defers payment shock by using negative amortization. Their long-term hope, however, is for lower inflation, bringing lower rates and affordability. That may come soon, because Hungary is moving toward economic stability more quickly than many of its neighbors. When economic stability comes, Hungarians will have a modern mortgage banking system in place and ready to function.
Our visit to Budapest was too brief. It ended with a farewell banquet with our Hungarian hosts in a castle complete with moat. The next morning, we traveled by bus for a final three days in Vienna. This was a "transition" stop on our way home. Austria is a country with an economy that had not been bound by communism. We met with representatives of the Association of Mortgage Bankers of Austria and with representatives of several Austrian banks. Before leaving, we also had the opportunity to see some historical sights, from the Hapsburg palace, to the Lippizaners of the Spanish Riding Academy, to the spires of Saint Stephen's Cathedral. Then we were bound for home.
Did the group accomplish what it had hoped for? In Mozilo's words, "All of the members of our delegation came away from the People-to-People experience with a greater sense of understanding of the plight of those emerging nations, with a higher level of compassion for their citizens and with a commitment to do whatever possible to assist them through their difficult transition. More importantly the members of the delegation developed a strong and permanent bond with one another, which has enriched each of our lives."
People-to-People's one-on-one diplomacy was now a part of our lives. By no means had we single-handedly rolled back communism or brought free-market economies to Eastern Europe, but in our own small individual ways, we had offered a glimpse of what is possible in opening by housing to free people everywhere.
We were in a place where history was happening. One person at a time, one contact at a time, one smile and one handshake at a time, we each contributed to erasing the red line. And that was what the trip was all about. For, "if people get together, so eventually will nations."…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Diary of Diplomacy. Contributors: Hendrickson, Thomas R. - Author. Magazine title: Mortgage Banking. Volume: 53. Issue: 6 Publication date: March 1993. Page number: 53+. © 2009 Mortgage Bankers Association of America. Provided by ProQuest LLC. All Rights Reserved.
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