agency for housing mortgage lending 2007 annual...

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AGENCY FOR HOUSING MORTGAGE LENDING

2007

ANNUAL REPORT

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About AHML

1.1 History

1.2 Mission

1.3 Goals and Objectives

1.4 Management Bodies

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ABOUT AHML

The Annual Report of the Agency for Housing Mortgage Lending (hereinafter, the Agency, AHML) is prepared pursuant to the information disclosure provisions set forth by the Russian federal laws On Joint-Stock Companies, On Mortgages (Pledges of Immovable Property), On Mortgage-Backed Securities and other enactments.

This document reports on the AHML performance in 2007.

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1. ABOUT AHML 1.1. AHML HISTORY 1.2. AHML MISSION

AHML History AHML Mission

AHML Background

The Open joint-stock company “The Agency for Housing Mortgage Lending”(hereinafter, the Agency, AHML) was founded in 1997 pursuant to the Russian Government Resolution No. 1010 dated 26 August 1996 to facilitate the establishment and development of the Russian housing mortgage system as part of the Your House federal target programme.

AHML Mission

The Agency’s mission is to establish and develop the two-level mortgage lending market infrastructure in Russia while ensuring its own profitability.

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1. About AHML 1.3. AHML Goals and Objectives

AHML Goals and Objectives

The Agency has the following objectives specified in its Charter:

Implements the state policies to provide the public at large with affordable mortgages

Allocates the public funds received by the Agency in the form of contributions to the authorised capital and the Russian Federation state guarantees for specific applications in order to create necessary preconditions for the formation and gradual evolution of the mortgage lending market

Forms reliable mechanisms to refinance mortgage loans

Continuously monitors the development of the mortgage lending market, fine-tunes the Standard Procedures for Granting, Refinancing, and Servicing Mortgage Loans as the primary system-forming set of instructions and regulations governing the interactions between mortgage market players.

As the key operator of the mortgage refinancing system, the Agency performs the following functions:

Establishes and continuously develops the infrastructure of mortgage market based on a two-level refinancing model for standard collateralised mortgage loans

Improves the Standard Procedures for Granting, Refinancing, and Servicing Mortgage Loans to make mortgage loans equally affordable for the public at large all over the Russian Federation

Automates mortgage business processes in the interests of all market players through developing high-tech principles regulating the processes of formation of the mortgage loans database, accounting and monitoring of performance of obligations by mortgage borrowers, operational management of the collateral portfolios; renders methodological, technical, and other assistance to Russian mortgage refinancers

Establishes preconditions for the development of the secondary market for standard mortgage loans originated to the public by Russian commercial banks and other organisations

Facilitates the development of a civilised market for mortgage-backed securities by way of granting access and assisting the market players in organising structured issues of mortgage-backed securities oriented at different investor groups

Implements a risk management system for mortgage lending.

Taking the above into account, the Agency within its operational scope sets the following operational goals for 2007:

Provide the borrowers with a wider choice of standard mortgage products offered by the Agency by introducing a new line of mortgage loans consisting of nine products with different terms, down-payments and interests rates

Put into practice the risk management system developed by the Agency and apply it to the Agency itself and all of its partners operating in the mortgage lending market

Test and improve the maximum number of mechanisms for the new product: the standard for military mortgages in order for its subsequent

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large-scale application, which will make mortgages affordable to the majority of the public who previously were unable to take a mortgage loan to solve their housing issues

Transfer all payments made by the borrowers whose mortgage deeds have been refinanced by the Agency to the accounts of the latter opened with the partnering collection agents in order to ensure timely and comprehensive monitoring of cash received from the borrowers

Provide access to refinancing tools for a wide range of credit institutions by aligning their borrower requirements with the Agency’s standards applicable at the time of such refinancing

Perform the opening structured issue of mortgage-backed securities

Prepare further issues of structured securities.

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1. About AHML 1.4. AHML Management Bodies

AHML Management Bodies

The General Meeting of Shareholders is the Agency’s supreme management body which appoints the members of the Supervisory Board. The AHML Supervisory Board performs general management of the Agency to the exception of any issues attributed directly to the General Meeting of Shareholders. The Supervisory Board appoints the members of the Management Board.

The day-to-day operations of the Agency are managed by the sole executive body (the Agency’s CEO) and the collegiate body (the Management Board). The CEO is the Chairman on the Agency’s Management Board.

THE SUPERVISORY BOARD

The current composition of the Agency’s Supervisory Board was approved by the General Meeting of Shareholders of 18 September 2007 (Order No. 3125-r of the Federal Agency for State Property Management dated 18 September 2007).

The Supervisory Board members have no participating interest in the Agency’s authorised capital or Agency shares.

The Supervisory Board Chairman: Dvorkovich Arkady Vladimirovich, Head of the Russian Federation Presidential Experts Directorate The Supervisory Board members: Kruglik Sergey Ivanovich, Russian Federation Deputy Minister of Regional Development Pankin Dmitry Vladimirovich, Russian Federation Deputy Minister of Finance Petrov Ilya Sergeyevich, Deputy Head of the Secretariat of the First Deputy Prime Minister of the Russian Federation Dmitry Medvedev Plutnik Alexander Albertovich, Advisor to a department with the Russian Federation Presidential Experts Directorate Popova Anna Vladislavovna, State Secretary – Russian Federation Deputy Minister for Economic Development and Trade Popova Olga Alexandrovna, Head of the Directorate for Finance and Credit, Foreign Trade Organisations and Foreign Property of the Federal Agency for State Property Management Savatyugin Aleksey Lvovich, Financial Policy Department Director, the Russian Federation Ministry of Finance

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Semenyaka Alexander Nikolayevich, Board Chairman, CEO of AHML Skripichnikov Dmitry Valeryevich, Deputy Director, Department for Corporate Management, the Russian Federation Ministry of Economic Development and Trade Tyrtyshov Yury Pavlovich, Russian Federation Deputy Minister of Regional Development The following persons resigned from the Supervisory Board in 2007: Aratsky Dmitry Borisovich, Member of the Agency’s Supervisory Board from 23 September 2005 to 18 September 2007 Gref German Oskarovich, The Chairman the Agency’s Supervisory Board from 23 October 2002 to 18 September 2007 Yakovlev Vladimir Anatolyevich, Member of the Agency’s Supervisory Board from 23 September 2005 to 18 September 2007 The collegiate executive body (the Management Board) The above composition of the Agency’s Management Board was approved by the Agency’s Supervisory Board on 5 December 2007. The members of the Management Board have no participating interest in the Agency’s authorised capital or Agency shares.

The Management Board Chairman: Member of the Supervisory Board, CEO of AHML

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1. About AHML 1.4. AHML Management Bodies

The members of the Management Board: Barsukov Sergey Vladimirovich, First Deputy CEO, AHML Vekshin Leonid Feliksovich, Deputy CEO, AHML Voitov Pavel Fyedorovich, First Deputy CEO, AHML Semenuk Andrey Grigoryevich, Deputy CEO, AHML Sozonov Nikolay Alexandrovich, Executive Director / Director of Mortgage Purchasing Department, AHML Chernyshova Lyubov Borisovna, Chief Accountant, AHML The following persons resigned from the Management Board in 2007: Chepenko Evgeny Vladimirovich, Deputy CEO, AHML The sole executive body The functions of the sole executive body of the Agency are performed by the Agency CEO, Mr Semenyaka Alexander Nikolayevich The CEO has no participating interest in the Agency’s authorised capital or Agency shares. [Подпись под иллюстрацией справа]: “EFFICIENT ECONOMY MEANS A STRONG COUNTRY!”

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OVERVIEW OF THE HOUSING MORTGAGE LENDING MARKET IN 2007, MAJOR TRENDS

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2. OVERVIEW OF THE HOUSING MORTGAGE LENDING MARKET IN 2007, MAJOR TRENDS

Due to a combination of macroeconomic, social, and country-specific factors, the external mortgage market environment in 2007 was rather complex.

MACROECONOMIC FACTORS In early 2007, Clearstream and Euroclear included the Russian rouble into its settlement currencies; the domestic and foreign markets for Russian debt instruments began to operate seamlessly, which boosted foreign investors’ demand for rouble bonds. The high demand for rouble bonds was due to strengthening of the rouble and expectations for the trend to persist, which would then decrease the domestic inflation rate. In 1H 2007, the demand for rouble bonds was so high that their annual yield amounted to about 7.5% to become almost equivalent of that of foreign currency bonds, and foreign investors despite the credit risks began to buy second and even third tier bonds. At the same time, the market was also affected by negative trends, in particular, by the liquidity crisis in the international capital market in 2H 2007 which was caused by a wave of defaults on subprime mortgages in the USA, the UK, and a number of European countries. The crisis reversed the market uptrends: the high demand for Russian financial instruments turned to their hasty sale by foreign investors. With the onset of the world economic crisis, capital rushed into the safest assets expanding the spreads of all types of debt securities in the foreign and domestic markets. Liquidity shortages followed to trigger withdrawal of foreign investors from the Russian financial market. According to market analysts, in August 2007 the Russian bond portfolio of foreign investors shrank by 20–30%. In Q3 alone, the outflow of foreign capital made USD 9.4bn. In September – October 2007, the situation somewhat stabilised: the spreads narrowed and the market opened for first tier issuers, who, in spite of high credit quality, had to offer a yield premium of 20–40 basis points. A growing market anxiety in global financial markets caused the market closing trend in the second half of November. As a result, the cost of funding in the foreign and domestic capital markets grew considerably. The said factors led to an overall decline in investment activity both domestically and globally. COUNTRY FACTORS The domestic market demonstrated economic growth (GDP increased by 8.1%1), investment growth (19%, the aggregate annual total: RUB 18.8tn), increase in real disposable income (10.7%), higher capitalisation of the banking system (from RUB 1,692.7bn up to RUB 2,671.5bn), more residential construction (increase from 50.5m sq m up to 60.3m sq m). The above factors produced a positive effect on the development of the primary mortgage lending market. The yield on the Agency bonds in 2007 was within the overall Russian market trends. In Q1 2007, the spreads on government issued securities with comparable maturities were 120–140 basis points. In Q2 – early Q3, the spreads narrowed

1 Here and below, the data source is the Federal State Statistics Service, ROSSTAT

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down to 90–110 basis points to widen again to 140–160 basis points at the year-end due to an adverse market situation. In February 2007, the A9 bonds were offered with a spread of 130 basis points to government securities with comparable maturities, the spread of A10 bonds at offering in December was 205 basis points. Due to an increase in the cost of market borrowings, many market players decided to postpone issues of mortgage-backed securities which were originally planned for 2007 until the following year. As the result, the resource base of the mortgage lending market was limited to the refinancing implemented by the Agency and the resource base of the creditors themselves. Nonetheless, by the end of 2007, the market more than doubled; the volume of mortgage loans according to the Central Bank of Russia made RUB 556bn (RUB 263bn in 2006). Housing mortgage debt exceeded RUB 700bn (RUB 250bn in 2006) which is equivalent to 2.2% GDP (1% GDP in 2006). According to the Federal Registration Service, the number of mortgage loans originated by banks and non-credit institutions in 2007 grew 1.9 times and made 395,000 loans. The Agency refinanced 11% of such loans (i.e. 42,173 mortgages for RUB 39,298m). To a certain extent, the growth in the mortgage market was due to the increased number of lenders (from 499 up to 586), longer maturities (some market players originated loans for up to 30 years), lowering interest rates in roubles down to 12.6% (with the annual decrease of 1.1% on average) and in foreign currency down to 10.9% (annual decrease of 0.5%). The strengthening of the rouble and low rates of inflation in Q1–Q3 2007 resulted in a stable growth in the proportion of the rouble denominated mortgages which reached 82% by the year-end (76% in 2006). Further development of the mortgage market created favourable conditions for the emergence of new market players – mortgage brokers, service providers, mortgage experts, collectors, specialty mortgage agents, etc. The mortgage market, therefore, completed its first development phase and stimulated growth of small businesses in regions by way of forming and promoting the necessary infrastructure. At the same time, it is noteworthy that the positive trend in terms of the number of originated mortgages was accompanied in Q4 2007 by a growth of interest rates for end-use borrowers up to 10.75–14% p.a. in roubles depending on the credit risk level. The increased demand for liquidity and the growing cost of borrowings changed the mortgage market supply structure. In Q4 2007, regional banks began to reduce the volume of originated loans and stopped keeping even the most profitable components of mortgage portfolios on their books. This resulted in accumulation of mortgage loan portfolios by the top 10 banks operating in the Russian market which was due to the proportional decrease of the same portfolios of regional banks. At the year-end 2007, the market concentrated around large players, the competition went down.

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2. OVERVIEW OF THE HOUSING MORTGAGE LENDING MARKET IN 2007, MAJOR TRENDS

At the same time, the number of mortgages refinanced by the Agency in federal districts with less developed financial infrastructure, such as the Far Eastern Federal District and the Southern Federal District, is gradually growing. The regions also continued to level off in terms of the percentage of refinanced mortgages. Thus, excluding the Central Federal District (the Agency refinanced 3% of all the mortgages originated in the region as compared to 11% in 2006), the gap between the Urals Federal District (6% of locally provided mortgage loans were refinanced by the Agency) and the Siberian Federal District (17% of locally provided mortgage loans were refinanced by the Agency) is 2.8 times, whereas in 2006 the same gap between the region leading in the percentage of refinanced mortgage loans (the Siberian Federal District – 27%) and the outsider region (Urals Federal District – 9%) was 3 times.

The Agency’s share in the total number of mortgage loans by federal district in 2006–2007 (Federal Registration Service)

Federal District Total mortgage deals Mortgages refinanced by

AHML

AHML’s share in total number of retail loans, %

2006 2007 2006 2007 2006 2007

Russian Federation 206,123 395,002 39,214 42,173 19 11

Central Federal District 38,722 73,593 4,423 2,311 11 3

Northwestern Federal District

15,151 35,347 2,868 4,173 19 12

Southern Federal District 12,330 29,689 2,009 2,493 16 8

Volga Federal District 54,240 97,652 13,557 14,298 25 15

Urals Federal District 35,237 59,257 3,200 3,386 9 6

Siberian Federal District 44,780 81,991 12,178 13,855 27 17

Far Eastern Federal District 5,663 17,473 979 1,657 17 9

2007 Annual Report

3.1. Key Events in 2007

3.2. Agency Ring

3.3. Developing Standards

3.4. Automating the Single Information Space of the Standardised System of Housing Mortgage Loan Refinancing. Standardising Data Exchange

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3.5. Agency’s Borrowings in the Capital Market

3.6. Developing a Partner Network for the Standardised System of Housing Mortgage Loan Refinancing. New Principles of Interaction

3.7. Military Mortgage

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3. 2007 Annual Report 3.1. Key Events in 2007

Key Events in 2007 February – April Federal Mortgage Standard advertising and information campaign. The purpose of the campaign is to create positive awareness among the public at large of the mortgage lending concept, provide better information about practical measures exercised by the government to make housing more affordable to the public and facilitate unification of standards for lending and servicing mortgage loans. 8 February Offering of the Agency’s A9 corporate bonds for RUB 5bn. 12–13 April A regional meeting among the Central Federal District participants of the Mortgage Loans Refinancing System The Housing Mortgage Loans Refinancing System as a Tool to Implement the Nationwide Project “Affordable and Comfortable Housing to Russian Citizens 23 May Offering of the first structured mortgage bond issue for RUB 3.2 bn. This bond issue (A-issue) is rated A2. The fixed coupon rate is set at 6.94%. The bond yield to maturity is 7.12% p.a. 8–10 June At XI St Petersburg International Economic Forum, the Agency organises a round-table conference Development of the Russian Securitisation Market – the Future for Structured Issues of Mortgage-Backed Securities. 13 June The Agency’s authorised capital is increased through a contribution of the Russian Federation in the amount of RUB 4.5bn. 13 June MICEX Stock Exchange upgrades the Agency’s corporate A2, A3, and A6 bonds from quotation list B to quotation list A. 1 July Interest rates are decreased, nine mortgage products are now offered instead of only six to promote the affordability of mortgage loans to the public. 5–7 July The I Nationwide Special Conference Automated Operations of the Mortgage Market Players is held in Novosibirsk. A quadrilateral agreement is signed to develop unified standards of data exchange and create a single information space. 1 September The Agency introduces a new set of standard document templates used for mortgage lending to servicemen participating in the Mortgage Savings System of Housing Provision to Servicemen.

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7 September The Agency celebrates its 10th anniversary. 24 September The Agency refinances the 100,000th mortgage. 1 October The Agency introduces a new authorised agent-assisted procedure to collect payments. 15 October The Agency holds the first open competitive negotiations to select the bond issue arranger for the AHML government backed bonds series A10 for RUB 6.0bn and series A11 for RUB 10bn. The winners of the open competitive negotiations are Gazprombank OAO and KIT Finance Investment Bank OAO. 13–14 November The Agency organises the I Nationwide Conference Russian Mortgage – Sustainable Development and Market Prospects. 15 November State registration of the AHML corporate bonds issues series A10 for RUB 6bn and series A11 for RUB 10bn. 27 November Registration of mortgage bonds of the Second Mortgage Agent for RUB 10.7bn. 11 December Offering of A10 corporate bonds for RUB 6bn. The fixed coupon rate of 8.05% and the yield to maturity of 8.29% p.a. are determined through competitive tendering. 17 December The Agency achieves the targets set in its annual business plan concerning mortgage refinancing (RUB 37.7bn). At the year-end, the Agency is ahead of the annual plan by 4.7% despite a high volatility of the financial markets. In value terms, over 2007, the Agency refinances the same mortgage volume as over all the previous years of operation. 25 December The AHML receives the observer status with the European Mortgage Federation.

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3. 2007 Annual Report 3.2. Agency Ratings

AGENCY RATINGS The Agency’s 10-year operation was reflected through the global issuer’s rating awarded on 8 November 2007 by Moody’s Investors Service (hereinafter, “Moody’s”): the long-term and short-term A3/Prime-1 rating for the liabilities denominated in the national currency and the long-term and short-term Baa2/Prime-2 rating for the liabilities in foreign currency. The issuer’s rating for the liabilities denominated in foreign currency was limited by the country-specific upper limit for foreign currency deposits set for Russia at the same level (Baa2). At the same time, Moody’s Interfax awarded the AHML a long-term credit rating (Aaa.ru) under the national scale. The national scale issuer’s rating represents an assessment of the Agency’s solvency as compared to similar national issuers who issue bonds in the domestic market and gives market players a better understanding of existing market risks. The global scale ratings have a stable outlook, while the national scale ratings offer no specific outlook. The AHML ratings under the global scale by Moody’s and Moody’s Interfax for the liabilities in the national and foreign currencies reflect the likelihood of default and the size of expected global losses. The Agency is considerably dependent upon the government in terms of funding/guarantees and capitalisation and, according to Moody’s, in the event of a sovereign default, the AHML standing and financial indicators may be drastically affected. According to Moody’s, the Agency’s ratings reflect the AHML strong market position, open access to established mortgage loans refinancing infrastructure, a comparatively long track record in the new market, and high profitability combined with a stable interest margin, adequate levels of liquidity and high capitalisation. The ratings also reflect the Agency’s close ties with the Russian government and its key role in the implementation of the nationwide programme to provide housing to the public at large and develop the mortgage lending system. On the other hand, the Agency’s ratings reflect the growing competition in the Russian mortgage lending market and Moody’s concerns about the Agency’s ability to withstand the competitive pressure in the long term. Moody’s also takes into consideration the fact that the Agency’s ability to retain or increase its market share depends on its ability to raise cash in the domestic and international debt markets and on the government policy and support. Moody’s reports that the Agency is to a considerable degree affected by the risks typical of a fast-growing mortgage market and that the quality of refinanced mortgage pools may decrease as the loan portfolio ages. Furthermore, the AHML’s assessment of its financial standing partially reflects the risks inherent to the Russian economy as a whole. It is also noted that AHML plays an important role in the formation and promotion of the Russian mortgage market infrastructure, including the development of mortgage lending standards, personnel training, selection and certification of regional operators and service agents, software development, upgrade, and use by contracting companies. The accessibility of such infrastructure to AHML and its operational experience form a strategic competitive advantage of the Agency. According to Moody’s, credit risks represent the major financial risks of the Agency. As the Russian mortgage market is relatively young and the AHML loan portfolio has a focus on

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long-term debt, the estimated average probability of default may be lower than actual. At the same time, Moody’s give a positive assessment of the credit management procedures developed by the Agency which include certification of operators, service agents and experts and multi-level quality control tools to verify the quality of purchased mortgage pools. As the operational volumes grow and historical data accumulate, the credit risks management system will require further adjustments. According to Moody’s, the market share of AHML will gradually decrease in the long run as the market continues to mature and competition builds up. However, since the Russian market of refinanced mortgage lending is immature, the volume of the Agency’s operations in absolute terms is expected to show stable growth. NOTE: On 27 March 2008, Moody’s upgraded the AHML long-term and the short-term ratings with regard to liabilities in foreign currency from Baa2/Prime-2 up to A3/Prime-1. The AHML long-term and the short-term ratings in terms of liabilities in the national currency were confirmed to remain at A3/Prime-1. Moody’s Interfax confirmed the AHML long-term rating of Aaa.ru on the national scale.

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3. 2007 Annual Report 3.3. Developing Standards

Developing Standards Standardisation of mortgage lending business processes is among the Agency’s key missions. According to the Charter of the Agency, the development and adoption of standards at different levels and in various segments of the mortgage market is one of the AHML’s core tasks. Since 2002, the Agency has been operating under The Standard Procedures for Granting, Refinancing, and Servicing Mortgage Loans which is a set of proprietary regulations protected by the Russian copyright law. The Standards represent an integration of interdependent regulations, document templates, and the Agency’s requirements for the mortgage market players and for the content, structure, and format of documents and agreements governing interaction between mortgage market players. The Standards of the Agency are recognised by the majority of domestic mortgage lending market players and form the necessary basis for further growth of lending. In particular, the standard mortgage deed, as one of the components of the standards developed by the Agency, is acknowledged as a high-tech and most functionally advanced market instrument certifying the right of the mortgagee to performance under the collateralised mortgage liabilities and the lien over the mortgaged property. In 2007, the Agency’s standard mortgage deed was recommended for use by professional associations of market players: the Association of Russian Banks (ARB), the National Association of Mortgage Market Players (NAMMP), the Association of Mortgage Companies (AMC), and the International Finance Corporation (IFC). With the view of perfecting the Standards and unifying the documentation used by the major market players, in 2007, the Agency performed comparative analysis of the mortgage deed templates existing in the market. The findings demonstrated a 90% match between the standard templates for mortgage deeds used by the major market players. Many of the market players follow the guidelines of the Standards developed by the Agency as representing a reliable and well-tested market instrument. The data on the share of mortgage deeds in registered mortgages reported by the Federal Registration Service indicates the growing confidence of market players in the Standards. Thus, in 2007 more than a half of all mortgages were executed in the form of mortgage deeds.

[Подпись под иллюстрацией справа]: “HAPPY CHILDHOOD!”

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High relevance and applicability of the Agency’s Standards are confirmed by the fact that the document templates used by the Mortgage Savings System of Housing Provision to Servicemen are based on the same AHML Standards. The Agency continuously improves the Standards in order to raise the efficiency of the mortgage lending system as a whole. The major changes introduced by the Agency into the Standards in 2007 are related to the following:

1. New standard templates for insurance contracts and new requirements for insurance companies.

With the view of unifying the requirements and terms for insurance coverage of mortgage deals, the Agency has developed new templates for insurance contracts which comply with the new requirements set forth in Federal Law No. 172 On Amendments and Additions to the Russian Federation Law On Organising Insurance Industry in the Russian Federation dated 10 December 2003. The set of requirements relating to insurance companies were revised in order to promote fair competition in the insurance market and reduce the insurance rates for borrowers. The amendments introduced into the Standards enabled participation in the Agency-sponsored programme by insurance companies, regardless of their specialisation, by concluding either separate contracts for personal only or property only insurance, or a combined insurance contract which gives both personal and property insurance coverage.

2. A new method of borrowers’ payments transfer (due to a transition to the new payments collection and service system).

In order to improve the control over the payments by borrowers, the Agency has introduced a new procedure to collect borrowers’ payments applicable throughout the Russian Federation. All such payments under the loans originated in compliance with the Federal Mortgage Standard (FMS) shall now be transferred through special payment collection agents.

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3. 2007 ANNUAL REPORT 3.4 AUTOMATING THE SINGLE INFORMATION SPACE OF THE

STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, STANDARDISING DATA EXCHANGE

Automating the Single Information Space of the Standardised System of Housing Mortgage Loan Refinancing, Standardising Data Exchange

[Подпись под иллюстрацией справа]: “BUILD YOUR DREAM!”

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In 2007, the Agency worked to solve a number of issues to ensure smooth operation of the Standardised System of Housing Mortgage Loan Refinancing and faced a number of challenges including the need to improve data processing practices, provide partnering organisations with communication services and maintenance of information systems, and provide advice and technical support to users. Furthermore, a dialogue between major refinancing organisations with the view of developing unified data exchange standards became an obvious necessity.

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3.4.1 ORGANISING AGENCY’S DATA CENTRES

Organising Agency’s Data Centres In early 2007, the Agency operated the total of more than 100 units of server and network equipment, which enabled the provision of information services to the participants of the United Housing Mortgage Refinancing System (UHMRS). At the same time, the volume of incoming data on credit transactions and the ever increasing system performance requirements demanded continuous hardware upgrade. The Agency recognised the risks of potential data loss and system malfunctions and began to establish specialised data processing facilities to comply with applicable global and European standards (efficiency of computing server equipment and network subsystems, uninterrupted operation, scalability of the information systems, fault tolerance and disaster tolerance). The main AHML Data Centre is set up at OOO Stack Telecom (Stack Group). The Agency’s backup data centre is located in Novosibirsk. The Agency’s data centres have performance specifications as follows:

Reliability factor: 0.9999

Class Tier3+ (international classification)

Redundant fibre optic network

4 independent power supply units

Standalone operation time from backup diesel generators up to 8 hours.

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3.4.2 AGENCY’S BACKBONE PARTNER NETWORK

Agency’s Backbone Partner Network In early 2007, the data traffic through the communication channels of the AHML Unified Information System (UIS AHML) rose significantly as compared to prior periods, which caused a two-fold increase of the information load onto the system. Partnering organisations began to experience technical issues while accessing the UIS AHML due to longer times of processing credit cases and low throughput performance of information exchange channels provided by regional telecommunication operators. In 2007, the Agency ran a pilot project to build an independent network infrastructure to ensure smooth information exchange between AHML and the partnering organisations. In early 2007, the main objectives of the project were defined and approved as follows: improve the overall performance of the UIS AHML by way of increasing the carrying capacity of the network infrastructure; build a partner network to be independent from public telecommunication channels to ensure security and integrity of transmitted data; differentiate access to the unified information resources of the system; improve the quality of communication services for the Agency’s partners operating in different regions. Fourteen partners of the Agency joined the project. In May 2007, the Agency’s backbone partner network was launched in a test mode, in September all the pilot project participants were connected to the network. Since October 2007, the network has been fully operational with the following performance specifications: reliability factor of 0.9999 (the same reliability factor is demonstrated by the respective systems of the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX)), in terms of simultaneous connections, the network is capable of supporting up to 1,000,000 sessions per second.

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3.4.3. STABILISING PERFORMANCE OF THE UIS AHML

Stabilising Performance of the UIS AHML With the view of improving the performance of the UIS AHML modules, the Agency began to use Pivotal 5.9 and SQL Server 2005 and moved the system onto the .NET architecture; also reporting in the UIS AHML was optimised along with improvements to the user interface, the import of payments, etc. These efforts enhanced the overall stability of the UIS AHML and boosted its performance by 23% as compared to 2006.

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3.4.4. THE UIS AHML PLATFORM UPGRADE

The UIS AHML Platform Upgrade The ever growing demand of the mortgage market players and special requirements for data transfer and storage formats necessitated improvements in terms of reliability and stability of the UIS AHML. Therefore, planned migration of the UIS AHML toward Pivotal 5.9 and MS SQL Server 2005 was successfully performed on 22–23 December 2007 from Pivotal 5.1 and MS SQL Server 2000. Four application servers and two data servers were completely upgraded. As a result of this platform migration, the UIS AHML performance rose 22.5%. The migration to the new MS SQL Server 2005 and its operation under a 64-bit operational system increased the server efficiency through a more efficient use of RAM and reduced database lockups. On 10 December 2007, the Agency launched a procedure to test the recently introduced innovations by contracting companies who had not been engaged in the UIS AHML projects. This approach to testing IT innovations is recommended by global best practices, including the Microsoft Solution Framework methodology.

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3.4.5. SINGLE SERVICE SPACE (SSS)

Single Service Space

On 6 July 2007, the Agency, the International Finance Corporation (IFC, World Bank Group), GPB-Ipoteka Bank OAO and the Association of Mortgage Companies signed the Agreement on Development of General Procedures to Monitor and Exchange the Mortgage Market Data. The parties acknowledged the necessity to unite efforts to standardise the data exchange procedures and perfect the regulatory documents and jointly establish, develop and maintain a single service space to facilitate normalisation of operational procedures and improve mortgage service practices. The Agency commenced the development of an open XML standard to facilitate the transfer of mortgage portfolios between servicers with no risk of data loss or corruption.

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET

Agency’s Borrowings in the Capital Market In 2007, the major sources of the Agency’s funding to purchase mortgage deeds were represented by the cash obtained through the offering of state-guaranteed corporate bonds for the total of RUB 11bn, the offering of the opening issue of mortgage-backed securities for the total of RUB 3.3bn, the additional government contribution into the Agency’s authorised capital for the total of RUB 4.5bn and the debt resources raised. Under Federal Law No. 238-FZ On the Federal Budget for 2007 dated 19 December 2006 and the Russian Government Order No. 907-r dated 10 July 2007, the Russian Federation Ministry of Finance provided state guarantees for the Agency’s borrowings for the total of RUB 16bn. By virtue of the said state guarantees, the Agency offered A10 bonds for RUB 6bn in December 2007. The planned offering of A11 bonds for RUB 10bn was postponed until Q1 2008 in view of a considerable decline of the Russian debt market in late 2007.

[Подпись под иллюстрацией справа]: “STEADY GROWTH OF YOUR INVESTMENTS!”

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{пустая страница}

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET 3.5.1. SERIES A9 BONDS (STATE-GUARANTEED IN 2006)

Series A9 Bonds (State-Guaranteed in 2006)

On 8 February 2007, the Agency offered at MICEX Stock Exchange A9 non-convertible certificated bearer coupon bonds with the overall nominal value of RUB 5bn. The nominal value of each bond was RUB 1,000. The coupon period was set at 3 months.

The rate of the first coupon was determined through competition on the offering date and made 7.49% p.a., the yield to maturity was 7.70% p.a. The rates of all other coupons were equal to that of the first coupon. Series A9 bonds redemption schedule % of nominal value Redemption date 40 15 February 2013 20 15 February 2015 20 15 February 2016 20 15 February 2017 Series A9 bonds provide an early redemption option of 60% of the issue nominal value on 15 February 2015 if the Agency’s authorised body decides to perform early bond redemption. If the decision to redeem 60% of the bond nominal value on 15 February 2015 is not made, the A9 bonds shall be redeemed under the procedure set forth in the bond issue documents and the timeframes specified above.

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET 3.5.2. SERIES A10 BONDS

Series A10 Bonds On 11 December 2007, the Agency offered at MICEX Stock Exchange A10 non-convertible certificated bearer coupon bonds with the overall nominal value of RUB 6bn. The nominal value of each bond was RUB 1,000. The coupon period was set at 3 months.

The rate of the first coupon was determined through competition on the day of offering and made 8.05% p.a., the yield to maturity was 8.29% p.a. The rates of all other coupons were equal to that of the first coupon. Series A10 bonds redemption schedule % of nominal value Redemption date 50 15 November 2014 25 15 November 2016 25 15 November 2018 Series A10 bonds provide an early redemption option of 50% of the issue nominal value on 15 November 2015 if the Agency’s authorised body decides to perform early bond redemption. If the decision to redeem 50% of the bond nominal value on 15 November 2015 is not made, the A10 bonds shall be redeemed under the procedure set forth in the bond issue documents and the timeframes specified above. Therefore, the total amount of the Agency’s outstanding debt (series A1 through A10) made RUB 30.42bn in nominal value at year-end 2007. All of the Agency’s bond issues are guaranteed by the Russian Federation. The chart shows yield trends of the most liquid AHML bond issues (series A5 – A9) in 2007 compared to state securities with comparable maturities. MICEX began trading A10 bonds on 29 December 2007. AHML BONDS YIELD VS. STATE SECURITIES WITH COMPARABLE MATURITIES OVER 2007

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET 3.5.3. LOANS TAKEN

Loans Taken In 2007, the Agency continued taking out bank loans to manage liquidity in the situation of increased volatility on financial markets and steep volume growth of the purchased mortgage loans. As at the beginning of 2007, the Agency had taken RUB 7.1bn in loans. During 2007, the AHML was actively borrowing from the following foreign and Russian banks: Barclays Bank, Raiffeisenbank, Citibank, MDM Bank, Gazprombank. By using borrowed recourses as the source of funding in a volatile market, the Agency managed to secure continuous refinancing of mortgage loans (the total value of all purchased mortgages made RUB 40bn). All the Agency’s debt liabilities maturing in 2007 were met in due time and in full. At year-end 2007, the Agency’s loan portfolio adjusted to cash flow made RUB 19bn.

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET 3.5.4. SECURITISATION OF MORTGAGE LOANS 3.5.4.1. ISSUE OF MORTGAGE-BACKED SECURITIES

Issue of Mortgage-Backed Securities

Series One The first series of structured issues of mortgage-back bonds initiated by the AHML was registered by the Federal Financial Markets Service on 19 April 2007 and offered successfully on 23 May 2007. This series included three mutually subordinated issues of mortgage-covered bonds of Class A, Class B, and Class C with the following parameters: Bond class A B C Currency RUB RUB RUB Nominal value, RUB m 2,900.0 264.0 130.8 % of issue total 88 8 4 Rating (Moody’s) A3 Ba1 NR Credit enhancement, %* 19 11 7 Coupon rate, % 6.94 9.5 Legal final maturity 15 Feb 2039 15 Feb 2039 15 Feb 2039 * Credit enhancement is calculated as the nominal value of subordinated issues plus liquidity reserve Class A, B, and C bonds are collateralised with a single mortgage coverage. The mortgage coverage is composed of mortgage-covered liabilities denominated in Russian roubles, certified with mortgage deeds, and issued under the AHML standards in 55 Russian regions. The bond issuer is the Russian legal entity closed joint-stock company “First Mortgage Agent of AHML”, a dedicated joint-stock company formed under the Federal Law On Mortgage-Backed Securities. The shareholders of the closed joint-stock company “First Mortgage Agent of AHML” are two funds established under the law of the Netherlands. Series Two The second series of structured issues of mortgage-covered bonds initiated by the AHML was registered by the Federal Financial Markets Service on 27 November 2007. This series included three mutually subordinated bond issues of mortgage-backed securities in the form of mortgage-covered housing bonds of Class A, Class B, and Class C with the following parameters: Bond class A B C Currency RUB RUB RUB Nominal value, RUB m 9,440.0 590.3 697.3 % of the whole issue 88 5.5 6.5 Rating (Moody’s) A3 Ba3 NR Credit enhancement, %* 20 14.5 8 Coupon rate, % 8.5 9.5 Legal final maturity 15 Mar 2040 15 Mar 2040 15 Mar 2040

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* Credit enhancement is calculated as the nominal value of subordinated issues plus the liquidity reserve Class A, B and C bonds are collateralised with a single mortgage coverage. The mortgage coverage is composed of mortgage-covered liabilities denominated in Russian roubles, certified with mortgage deeds and issued under the AHML standards in 62 Russian regions. The bond issuer is a Russian legal entity closed joint-stock company “Second Mortgage Agent of AHML”, a joint-stock company specially formed under the Federal Law On Mortgage-Backed Securities. The shareholders of the closed joint-stock company “First Mortgage Agent of AHML” are two funds established under the law of the Netherlands.

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET 3.5.4. SECURITISATION OF MORTGAGE LOANS 3.5.4.2. CROSS-BORDER SALE OF MORTGAGE POOLS

Cross-Border Sale of Mortgage Pools

On 26 July 2007, 6,985 mortgage loans were sold to Russian Asset MBS SA for the purpose of subsequent cross-border securitisation. The total amount of this transaction made RUB 4,205m.

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3. 2007 ANNUAL REPORT 3.5. AGENCY’S BORROWINGS IN THE CAPITAL MARKET 3.5.4. SECURITISATION OF MORTGAGE LOANS 3.5.4.3. OTHER SALES OF MORTGAGE POOLS

Other Sales of Mortgage Pools

In 2007, a number of mortgage deeds were sold for the total of RUB 609m to add to previously established closed unit investment funds: the First Mortgage Fund and the Second Mortgage Fund. The total number of mortgage deeds sold through such transactions was 865.

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3. 2007 ANNUAL REPORT 3.6. DEVELOPING A PARTNER NETWORK FOR THE STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, NEW PRINCIPLES OF INTERACTION

Developing a Partner Network for the Standardised System of Housing Mortgage Loan Refinancing, New Principles of Interaction

[Подпись под иллюстрацией справа]: “A BIG FAMILY!”

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In 2007, the Agency continued to develop the partner network of the Standardised System of Housing Mortgage Loan Refinancing with the view of facilitating a more even development of the mortgage lending industry over the entire territory of the Russian Federation to make such services more affordable for the population at large and mitigate the risks of the Agency accumulating mortgage loans from a limited number of regions only and convert the investors’ claims into mortgage-backed securities. The Agency gives special attention to establishing regional operators in new regions where no operators existed before. As a result of a cooperative effort on the part of the Agency and regional administrations, regional operators were set up in Murmansk Region, Pskov Region and the Republic of Kabardino-Balkaria. The Agency also prepared regional operators for certification in the Republic of Altai, the Republic of Ingushetia, and Zabaykalsky Territory. Today, the Refinancing System is operational throughout the entire territory of the Russian Federation. The Agency has certified 79 regional operators and 64 service agents. Service agents perform refinancing functions in Smolensk Region and Ivanovo Region. The Agency conducted consistent monitoring and quality surveys of regional operators who issue and service mortgage loans. REFINANCED MORTGAGE LOANS IN 2004–2007, RUB BN

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3. 2007 ANNUAL REPORT 3.6. DEVELOPING A PARTNER NETWORK FOR THE STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, NEW PRINCIPLES OF INTERACTION

In Q4 2007, the Agency adopted and began implementing new refinancing principles. Under the new principles a regional operator has a monthly target for wholesale purchase of mortgage loans which includes two components as follows: 1. Government-backed target

Funding priorities are dependent on the Agency’s function as a development institution whose purpose is to level off the socio-economic situation between Russian regions. The following region-specific statistical indicators are taken into consideration when planning this component of the monthly plan: the number of registered ownerships to properties built through shared-equity construction projects as representing the overall level of development of housing construction under the Federal Law On Participation in Shared-Equity Construction of Apartment Buildings and Other Types of Immovable Property and Introducing Amendments to Certain Legislative Acts of the Russian Federation; the number of registered titles of natural persons to residential property under purchase and exchange agreements as representing the overall level of development and activity in the secondary housing market in each region; the number of registered mortgage companies and taken mortgage loans as representing the level of regional development of mortgage lending; the population of the region in question.

2. Target funded through market capital raised by the Agency This component of the Agency’s structured wholesale purchase of mortgage loans together with the Agency’s risk management procedures (for further details see “Risk Management System”) allow the AHML to remain cost-efficient as a development institution. This underlying principal of the second component of the monthly plan is a direct relation between the amounts of refinancing amounts allocated to each mortgage provider and objective indicators reflecting the quality of such provider’s work, such as the quality of issued mortgages and their servicing. This principle facilitates the accumulation of high quality mortgage pools in the Agency’s portfolio suitable for securitisation or sale to investors and raises the quality of portfolios held by other participants in the housing mortgage refinancing system as it motivates the latter to improve the quality of initial underwriting for potential borrowers and comply with the mortgage servicing procedures set forth by the Agency Standards.

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3. 2007 ANNUAL REPORT 3.6. DEVELOPING A PARTNER NETWORK FOR THE STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, NEW PRINCIPLES OF INTERACTION 3.6.1. MORTGAGE LOAN SERVICING SYSTEM Mortgage Loan Servicing System In 2007, the Agency continued to implement the programme to standardise the domestic mortgage market by way of utilising the technical capabilities of the UIS AHML and focusing on further development and fine-tuning of the mortgage loan servicing system. As of 31 December 2007, the Agency serviced 94,039 mortgage loans for RUB 66.1bn in total. Apart from servicing the mortgage loans on its books, the Agency also provides servicing of mortgage loans owned by investors. Thus, all the mortgage loans issued under the Agency Standards are serviced in a similar manner within one functional system. On 31 December 2007, there were 38,558 mortgage loans in investors’ portfolios for the total of RUB 20bn. Over 2007, the consolidated mortgage loan portfolio serviced by the Agency grew more than 1.5 times (from 61,502 to 94,039 loans). Online servicing of such a large bulk of mortgage loans and the requirements of investors to provide most recent information on the serviced portfolios and even individual mortgage loans necessitated the migration towards new principles of collection and accumulation of payments made by the borrowers.

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3. 2007 ANNUAL REPORT 3.6. DEVELOPING A PARTNER NETWORK FOR THE STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, NEW PRINCIPLES OF INTERACTION 3.6.2. MIGRATING TO A NEW PAYMENT SERVICING CONCEPT

Migrating to a New Payment Servicing Concept In March 2006, the Agency commenced a pilot project on transferring mortgage-related payments received from the borrowers directly to the Agency’s settlement account through the network of payment accumulation agents (PAAs). The new payment collection system became fully operational on 24 August 2007. By 31 December 2007, 47,459 mortgage loans for the total of RUB 33.1bn had been transferred to the new payment collection system which made approximately one half of the whole serviced portfolio. By the said date, 57 partners of the Agency had fully migrated to the new system and 52 other partners transferred some of their payments through the PPA network. The transfer of payments through the PPA network considerably reduces the credit risk, simplifies and expedites the processing of borrower payments, and allows the Agency to abandon the practice of imposing mortgage loans servicing limits for regional operators and service agents.

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3. 2007 ANNUAL REPORT 3.6. DEVELOPING A PARTNER NETWORK FOR THE STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, NEW PRINCIPLES OF INTERACTION 3.6.3. MORTGAGE LOAN DUE DILIGENCE

Mortgage Loan Due Diligence 2007 set a new record in the number of purchased mortgage loans (the refinancing volume in 2007 was equal to the total volume over all the previous years) which, as a consequence, required the Agency to monitor the quality of mortgages more closely. Through mortgage loan due diligence, the Agency verifies that the information in the UIS AHML corresponds to that contained in the credit file. In 2007, the Agency introduced an advanced mortgage verification procedure which also improved the quality of the refinanced mortgage loans portfolio. In 2007, the assessment of the credit files refinanced by the Agency was performed by the Agency-accredited and contracted expert organisations and aimed to identify any cases of non-compliance of mortgage deeds with the requirements set forth by the Standards and applicable laws of the Russian Federation. At the year-end 2007, the total number of such expert organisations was 24. The Agency conducts continuous quality monitoring of the expert organisations. The Agency conducted continuous quality monitoring of mortgage deeds by way of random inspections of standard mortgages in the Agency’s portfolio, total inspections of mortgages, and verifying the information contained in the UIS AHML database to identify any invalid data. In 2007, as part of the corporate internal control, the Agency developed the Expert Quality Assessment Procedure with new approaches to mortgage screening which monitor the performance of each expert and take into consideration the opinions of mortgage providers (surveys among mortgage providers are conducted each quarter). As of 31 December 2007, the Agency collaborated with 75 regional operators, 66 service agents, 36 insurance companies, 1,049 appraisers, 24 experts. Over 2007, the growth in the number of partners participating in the Standardised System of Housing Mortgage Loan Refinancing was respectively as follows: regional operators (+12%), service agents (+11%), insurance companies (+14%), appraisers (+22%), experts (+8%). PARTNER NETWORK GROWTH

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3. 2007 ANNUAL REPORT 3.6. DEVELOPING A PARTNER NETWORK FOR THE STANDARDISED SYSTEM OF HOUSING MORTGAGE LOAN REFINANCING, NEW PRINCIPLES OF INTERACTION 3.6.3. MORTGAGE LOAN DUE DILIGENCE In 2007, the Agency revised its requirements for insurance and assessment companies to bring them in compliance with the current laws of the Russian Federation (the new requirements were incorporated into the Agency Standards).

1. Requirements for insurance companies (focus on quality of service) The Agency began to demand, as a principal requirement, that an insurance company should have a rating, besides the requirements set forth by the current laws of the Russian Federation. The Agency determines which rating agencies may be used and sets the minimal acceptable rating by each such agency. The Agency developed and introduced into practice a new procedure which sets a concentration limit on an insurance company to evaluate the default probability of such insurance company based on the insurer’s rating and to assess the risks arising from concentrating mortgages insured by one company in the Agency’s portfolio. This approach helps to evenly distribute the risks among all the mortgage insurance market players. In view of separation of insurance companies by types of insurance introduced by Federal Law No. 4015 1 On Organising Insurance Industry in the Russian Federation dated 27 November 1992 and for the purpose of providing an appropriate insurance coverage for mortgage loans, the Agency through consultations with insurance companies, public professional organisations of insurers and the market regulators developed and on 1 July 2007 introduced into practice new templates of insurance contracts for the participants in the housing mortgage lending programme under the AHML Standards: a) a combined insurance contract template (for both personal and property insurance

coverage) b) separate insurance contract templates (for personal insurance only or property

insurance only).

2. Requirements to appraisers set forth by Federal Law No. 157-FZ On Introducing Amendments to Federal Law On Appraisal Activity in the Russian Federation dated 27 July 2006. The Agency’s principal requirement to appraisers pursuant to the current law is membership in self-governing organisations and professional insurance. The Agency performed a survey of authorised appraisers to verify that all applicable legal requirements are met.

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3. 2007 ANNUAL REPORT 3.7. MILITARY MORTGAGE

Military Mortgage In 2007, pursuant to the Russian Government Resolution No. 51 On Conducting an Experiment on Mortgage Lending to Participants in the Mortgage Savings System of Housing Provision to Servicemen of 29 January 2007, the Agency, jointly with the Federal Directorate for the Mortgage Savings System of Housing Provision to Servicemen, developed a new mortgage product offering a partial capitalisation of interest. The mortgage product for the Mortgage Savings System participants has the following properties: the mortgage loan issued to servicemen is calculated based on the accumulation contribution provided to each Mortgage Savings System participant; the servicemen pay the accrued interest by instalments; this mortgage product has a monthly loan payment which grows from year to year and is tied in with the yearly forecasted maximum rate of inflation specified every year in pursuance of the Federal Law On the Federal Budget of the Russian Federation; when a serviceman registers his title to a newly purchased home, the mortgage for such home is by virtue of law simultaneously registered for the benefit of the lender (through a mortgage deed) and for the benefit of the Russian Federation Ministry of Defence (no mortgage deed is issued) where the claims of the Russian Federation Ministry of Defence are preceded by the claims of the lender. In order to carry out this experiment, the Agency implemented the following measures:

The Agency developed special standards of mortgage lending to servicemen and associated document templates. These standards take into account the guaranteed regular increase of incomes in the military to offset inflation which allows servicemen to take bigger mortgages as compared to standard loans

The Agency developed the Procedure of Interaction Between the Participants in the Experiment which allowed regional operators and service agents to promptly engage in the experiment and test the new mortgage product in their respective regions

The Agency held two workshops The Mortgage Savings System of Housing Provision to Servicemen. Specifics of Mortgage Lending to Servicemen via the AHML Programme and round-table conference Mortgage Lending to Participants of the Mortgage Savings System: Experimental Results and Development Prospects until 2010.

Twenty-two regional operators and one service agent took part in this experiment. During the experiment the total of 299 mortgages were issued for RUB 456.429m. All such mortgage loans were issued through the AHML Military Mortgage Programme. The Agency refinanced 135 mortgage loans for the total of RUB 167.276m. [Подпись под иллюстрацией справа]: “EVERYTHING IS ALRIGHT AT HOME!”

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The List of Transactions Entered into by the Agency in 2007 that are Recognised by the Federal Law On Joint-Stock Companies as Major and Interested Party Transactions

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4. THE LIST OF TRANSACTIONS ENTERED INTO BY THE AGENCY IN 2007 THAT ARE RECOGNISED BY THE FEDERAL LAW ON JOINT-STOCK COMPANIES AS MAJOR AND INTERESTED PARTY TRANSACTIONS

The AHML Supervisory Board Resolution No. 05 of 26 September 2007 authorised the following major transactions (a number of related transactions) conducted through a public offering of:

The AHML series A10 non-convertible certificated bearer coupon bonds

The AHML series A11 non-convertible certificated bearer coupon bonds

The Federal Property Management Agency Resolution No. 3381-r On Resolutions of Extraordinary General Meetings of Shareholders dated 31 October 2007 pursuant to the Russian Government Order No. 3866-p-P13 dated 19 September 2007 authorised the AHML to close transactions with any parties who are conserved interested parties in the transaction either at the time of such authorisation or during the bond offering (interested party transactions) through the public offering of AHML non-convertible certificated bearer coupon bonds series A10 series and A11 for the total of RUB 16bn.

The Agency closed one interested party transaction with Bank VTB OAO at the bond series A10 offering for the purchase of 30,000 bonds at RUB 1,000 each for the total of RUB 30m.

There were no other interested party transactions which were not approved by the Agency’s Supervisory Board over the reporting period.

[Подпись под иллюстрацией справа]: “INVEST IN RUSSIA!”

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Risk Management System

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5. RISK MANAGEMENT SYSTEM

One of the most important activities of the Agency in 2007 was the introduction and further development of the risk management system. The Agency implements this programme as a living set of regular special measures aimed at minimising possible losses. The risks classified by the Agency in 2007 as significant are represented below:

interest rate risk

credit risk

liquidity gap risk (the risk of low demand for long-term fixed rate bonds, risk of late provision of government support, the risk of early loan repayment)

Agency specific risks.

Interest rate risk In Q4 2007, due to the changes in the market situation, the interest rates for borrowed financial resources went up (see a detailed description in Section “Overview of the Financial and Mortgage Lending Markets in 2007, Major Trends”). In the case of a fixed rate mortgage, keeping the cost of the loan servicing for the borrower at the same level (to retain the affordability of mortgage lending for the public at large) results in the creditor’s risk which forces the creditor to resort to risk hedging mechanisms as the margin decreases. In 2007, the Agency offered no floating rate products and used risk mitigation mechanisms while keeping the loans affordable and supporting the refinancing programme by the measures described in more detail in Section “Agency’s Borrowings in the Capital Market”. Credit risk, mortgage default risk The domestic mortgage lending industry entered into a certain maturity phase which presents an additional risk – the risk of defaulting mortgage loans. In the effort to manage this risk, the Agency classified overdue mortgages into the following buckets: from 30 to 90 days, from 90 to 180 days, over 180 days. In 2007, the Agency experienced a considerable growth in overdue payments (in the beginning of 2006, overdue payments made 0.7% of the consolidated portfolio, whereas at the beginning of 2007, they made 2.6%). The reasons behind this upward trend include the natural ageing of the portfolio (the loans entered the defaulting period which, according to the worldwide statistics, falls onto 36th –40th month of the loan life), somewhat lower borrower solvency which is partially due to the lack of necessary skills among Russia’s population to manage household finance and a poor loan taking culture. The portfolio accumulated and serviced by the Agency allows it to conduct statistical surveys of overdue payments and defaults to take risks mitigation measures:

establish provisions to cover any possible losses based on the estimates of overdue payments by applying the mortgage loan migration matrix ‘from current state to default’

identify and limit the purchase of any credit clusters with system risks

streamline overdue mortgage service

make the Standards more stringent with regard to the borrowers and mortgaged property (for more details see Section “Developing a Partner Network for the Standardised System of Housing Mortgage Loan Refinancing, New Principles of Interaction”).

Counterparty default risk

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This risk relates to inability of regional operators (service agents) to perform under their liabilities as per the mortgage servicing contract. This risk is managed by way of imposing a limit of solvency on regional operators (service agents) and applying more stringent partner accreditation procedures bundled up with a monitoring system to track the results of their operations. The Agency mitigates this risk by setting the cap for possible losses through imposing certain upper limits on partners. The said limits then determine the maximum volume of serviced mortgages based on the estimated probability of the borrower defaults and the relative amount of payments under the mortgage loans. Liquidity gap risk, risk of low demand for long-term fixed rate bonds In December 2007, the Agency for the first time ever experienced the inability to offer long-term bonds guaranteed by the Russian Federation and failed to offer the issue of series A11 bonds for RUB 10bn. In the situation of non-existent demand for long-term bonds on the part of investors, the Agency considers this source of funding inappropriate and the financial market to be non-functional. In such conditions, the practice of taking bank loans to keep mortgages at an affordable level and at the same time maintain the volumes of wholesale purchase of mortgage loans must be balanced by way of forming a fund to repay the bank loans through monthly payments out of the annuities. The Agency implemented these measures in 2007 with due account for the interests of the shareholder, the market and the borrowers in the hope that an improving market situation would later on allow the Agency to raise enough funding from open markets. See in more detail in Section “Agency’s Borrowings in the Capital Market.” Risk of delayed provision of government support This risk arises from the specifics of governmental funding provision both into the Agency’s authorised capital and as the Russian Federation guarantees of the company bonds. As the result of this risk, the schedule of steady funding may be disrupted and most public funding may become available at the end of the year thus forcing the Agency to raise more debt recourses to support the mortgage refinancing programme, which translates into higher cost of capital and lower Agency’s income. Furthermore, the Agency is forced to postpone some of the bond issues until the next calendar year in order to offer its corporate bonds in the amounts adequate to current market demands under the rates acceptable for the Agency and in compliance with the ‘clear market’ principle. Risk of failing to establish a market for mortgage bonds This risk occurs in the situation of the lack of necessary legislative decisions regulating the development of the secondary market for mortgage bonds and most apparently manifests in combination with high demand for liquidity on financial markets. A growing spread requested by investors in order to invest into mortgage bonds presents an additional source of this risk as well as a further decrease of the average return on the AHML portfolio of mortgage loans. When investors raise requirements to the coupon rate in view of unfavourable market conditions, these operations become unreasonable and economically unprofitable. Risk of early loan repayment In 2007 this type of risk (a complete or partial repayment by the borrower of the principal before the contract date) formed rather promptly. The threat of this risk reduces the actual stream of receipts and widens the gap between the required amounts of coupon payments under the outstanding issued debt and the actual proceeds from mortgage loans. This leads to imbalances in the amounts and maturity of the Agency’s liabilities to

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its creditors and the liabilities of the borrowers to the Agency which poses a funding liquidity risk.

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5. RISK MANAGEMENT SYSTEM

The major factors conditioning the increase of early repayments in 2007 were the steady growth of household income and the prices of residential real estate, as well as the widening gap between the current market interest rates and the interest rates under previously made loan agreements (closed 1–3 years earlier) and, as a consequence, a trend for relending under lower interest rates. With the view of managing the risk of early loan repayment, the Agency implements the following measures. The Agency’s Standards make provisions for a moratorium on early loan repayments over the first 6 months from the date of the loan. The Agency correlates the parameters of the planned corporate bond issues subject to the average life cycle of mortgage pools (in 2007 the actual life cycle of a mortgage pool was estimated to be eight to nine years) and maturities on the debt capital market. This manifests, in particular, in the Agency’s right to early redeem some of the corporate bonds which gives the fund-raising mechanism more flexibility and ensures better risk management (see a detailed description in Section “The Agency’s Borrowings in the Capital Market”).

The Agency-specific risks Due to the specifics of the Agency’s functions as a tool of the state housing policy, there are individual risks which are less typical of other mortgage lending market players. The risk of the mortgage portfolio concentration is one of such risks. The Agency is a development and regulatory institute of the entire Russian mortgage market and therefore, it should be equally represented in Russian regions based on the population numbers and the size of the regional market. In 2007, 67.7% of the Agency’s portfolio was formed by mortgage loans from two federal districts (the Volga Federal District and the Siberian Federal District). Prevalence of certain districts in the Agency’s mortgage loan portfolio results in the fact that the overall yield of the Agency’s portfolio and, consequently, the margin are then directly dependent upon the socio-economic development and the political situation in each particular region and not upon the growth of the country’s economy as a whole. It is also noteworthy that the mortgage loan portfolio should be diversified by region in order to perform a subsequent securitisation. Investors have stringent diversification requirements with regard to the securitised pool. Therefore, the increasing concentration of the mortgage loan portfolio impedes effective measures aimed to organise the market for mortgage-backed securities. In order to manage this risk, the Agency regionally diversifies wholesale purchases of mortgage loans, monitors the real estate market and forms a reserve to cover any possible losses on account of the portfolio concentration in a particular region. A more detailed description of the distribution of this risk is presented in Section “The Agency’s Borrowings in the Capital Market”. Moody’s rated the level of the risks borne by the Agency as acceptable.

[Подпись под иллюстрацией справа]: “CONNECTING GENERATIONS!”

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Public Awareness Raising and Education

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6. PUBLIC AWARENESS RAISING AND EDUCATION

Public Awareness Raising and Education

In 2007, as the Agency celebrated its 10th anniversary, its operations and the market in general began to function at a completely new level: the primary lending market was being formed and the secondary market for mortgage-backed securities began to emerge. This presented a number of new challenges to the Agency in terms of informing market players and managing the existing Agency’s operational mechanisms.

In its communications, the Agency follows the guidelines set forth in the Agency’s business plan, the goals and objectives specified in the Charter, the parameters set forth by the Concept, the results of public surveys, and the public demand for mortgage lending.

With the view of implementing its own marketing strategy and the strategy of its partners, in Q1 2007, the Agency performed a market campaign to promote the Federal Mortgage Standard (FMS). In order to reach the largest possible and diversified audience and raise the public awareness, the Agency chose Channel Russia as its primary information medium as it covers 98% of Russia’s territories and is highly trusted by the Russian public. The main objective of this promotional campaign is to allay any public anxiety over mortgage lending and form a positive attitude toward the mortgage industry and establish a robust stream of associations: AHML – the State – Reliability – Affordability – Your Home.

With the promotional campaign, the Agency intended to raise the demand for the standard mortgage products through advertisements on TV, the Internet and in the press. The Agency also opened a toll-free hotline with a federal telephone number (8-800) to provide consultations to the public about the FMS and receive the marketing feedback regarding the end user loyalty, the demand for the Agency products and the brand awareness among the public. Over the marketing campaign, 20 hotline employees (outsourced by the Agency to Golden Telecom) took 36,213 informative calls (only those calls were taken into account when callers asked specific questions about the mortgage lending mechanism, the addresses and telephones of regional operators or asked for a preliminary calculation of the loan amount based on the size of income and annuity options depending on the loan period).

The majority of calls received were associated with enquiries about the formalities and financial terms of mortgage loans and fell into the following call categories: “Mortgage Lending”, “Borrower Requirements”, and “The Federal Mortgage Standard”.

A promo site (www.rfipoteka.ru) was opened in support of the Agency’s promotional campaign with the view of informing potential borrowers in plain terms of the opportunities offered by mortgage lending under the Agency Standards. The said website initiated a survey among visitors who were offered a number of questions as part of the Agency’s market campaign (see the charts below).

http://www.rfipoteka.ru/

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As part of the Agency’s partnership programme, the Agency arranged consultations with a number of regional companies who planned to conduct active promotions of standard mortgage loans during the same time period. The Agency partners were offered the opportunity to use the TV commercials, layouts for banners and printed promotional materials developed by the Agency. Twenty five partners of the Agency took part in this promotion. The Agency made sure that all the necessary information was timely disclosed as required by the Russian law.

In 2007, the Agency continued to inform the borrowers, partners and the business community about any changes in its operational activities through the official website (www.ahml.ru). During the year, the total of 42 press releases and announcements pertaining to the Agency’s primary activities were published on the corporate website and distributed through industry-specific channels.

In 2007, the Agency paid very close attention to relations with mass media. Four hundred publications and articles, including 21 interviews with the Agency’s top management, were published in the national press and broadcasted by leading TV and radio channels.

By way of improving cooperation with regional partners, in April 2007, the Agency held a regional conference for the participants of the housing mortgage refinancing system in the Central Federal District where the participants were presented with the goal of improving the quality of mortgage deeds delivered to improve the quality and transparency of the assets in order to secure access to more refinancing resources.

In order to facilitate standardisation, automation, and unification of business processes of the mortgage market players, the Agency organised the first Nationwide IT Conference Automation of Operations of Mortgage Market Players which has held on 5–6 July 2007 in Novosibirsk. The main items on the conference agenda were: mechanisms for integration between different information products, methods to secure and protect confidential information, and ways to reduce the labour intensity of servicing mortgage cases.

More than 150 representatives of mortgage companies and banks from a variety of Russian regions took part in the conference and discussed the issues of automation in the mortgage industry, shared experience in developing information systems to simplify and improve procedures used to issue, refinance and service mortgage loans. Following the conference, a forum was organised on the promo site of the conference (www.itipoteka.ru) to share experience and unite efforts of the mortgage lending market players.

In order to make the Agency’s technical support more easily accessible for the UIS AHML users, the Agency launched the first technical support hotline at the backup data processing centre in Novosibirsk. The hotline operating schedule takes into account the fact that the serviced market players are located in different regions of the Russian Federation across six time zones and is ready to take the call at the caller’s convenience between 5.00 am and 6.00 pm Moscow time. The personnel of the technical support hotline advise customers on the issues relating to the partners’ mortgage loan procedures, information security and access to the UIS AHML, conduct marketing surveys among the partners pertaining to the operation of the UIS AHML, and maintain records of any unresolved questions received from customers.

One of the most important milestones of the AHML operations over the 10-year period was the refinancing of the 100,000th mortgage loan in October 2007. The Agency, in cooperation with the state information agency RIA Novosti, held a press conference to advertise this achievement to the public at large. The press conference was arranged as a telebridge with the Russian Federation Presidential Envoys in the Urals Federal District and the Volga Federal District.

http://www.ahml.ru/

http://www.itipoteka.ru/

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The Agency’s information policy requires close attention to provision of timely and most complete information to potential investors and representatives of the expert community. Over the reporting year, such communication channels as online internet conferences, press conferences, speeches at public industry specific events (forums, conferences, seminars, etc.) were used extensively.

In November 2007 the Agency organised the nationwide conference Russian Mortgage – Sustainable Development and Market Prospects as part of the domestic mortgage industry anniversary. The conference was dedicated to the studies of the mortgage market development over the past 10 years and the analysis of its mid-term development prospects. More than 400 people took part in this conference, including representatives of federal and regional authorities, top management of largest investment companies and banks, regional partners to the Agency, representatives of financial institutes specialising in the mortgage market including the foreign markets, representatives of law firms and consulting companies and rating agencies.

The conference exposed the urgent necessity to consolidate the efforts of all the mortgage market players, helped develop essential solutions to standardise the market, perfect applicable laws, further advance information and communication technologies for the mortgage lending industry.

The Agency regularly offers series of training programmes for various applications and durations. In 2005, the Agency organised and now constantly upgrades training programmes of advanced training in the UIS AHML for its personnel and employees of its partners. The main objective of such training programmes is to ensure that employees have knowledge and skills to keep up with all the recent developments in the Russian mortgage industry.

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The training programmes offered by the Agency provide mortgage loan professionals with both theoretical knowledge of the mortgage lending business and operations with credit files and valuable hands-on experience. The Agency holds advanced training seminars in its own classroom for the following disciplines: credit folder operations in the UIS AHML, servicing credit folders in the UIS AHML, accreditation and partner database in the UIS AHML.

Regional partners have an opportunity to train their employees to operate the UIS AHML under the training course The AHML Unified Information System – Theory and Practical Skills at seven institutions of higher education accredited by the Agency in Moscow and Novosibirsk.

The duration of the training course is 36 academic hours. The training format includes lectures, practical skills building sessions and round-table conferences. Students are required to pass an exam at the end of the course. The total of 67 Agency’s own employees and 294 employees of the Agency’s partners took this course in 2007. Since the launch of this course in 2005, the overall number of employees trained is 361. The students who did not pass the end exam make 4.5%.

In 2007, the training under the Agency’s standard courses was provided to 337 employees of the Agency and its partners.

In 2007, as part of the Agency’s Mortgage Savings System Project, the Agency, in cooperation with Federal Directorate for the Mortgage Savings System of Housing Provision to Servicemen”, developed and printed an information booklet for servicemen in 12,000 copies.

Improving the Legislative and Regulatory Framework for Mortgage Lending

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7. IMPROVING THE LEGISLATIVE AND REGULATORY FRAMEWORK FOR MORTGAGE LENDING

The Agency was instrumental in the development by the federal executive bodies of Draft Federal Law No. 505802-4 On Introducing Amendments to the Federal Law On Mortgages (Pledges of Immovable Property), the Federal Law On Mortgage-backed securities, and the Federal Law On State Registration of Rights to Real Estate and Transactions Therewith which proposes to introduce custodian accounting for mortgage loans. This draft law has passed the first reading at the State Duma of the Federal Assembly of Russia.

The Agency’s proposals were taken into consideration by the Federal Financial Markets Service when developing the Draft Federal Law On Introducing Amendments to Certain Legislative Acts of the Russian Federation to Regulate Securitisation of Financial Assets.

The Agency participated in the development of the regulatory framework required for mortgage lending of the participants in the Mortgage Savings System of Housing Provision to Servicemen. Federal Law No. 324-FZ dated 4 December 2007 introduced amendments into the Russian Federation Tax Code, the Federal Law On Mortgages (Pledges of Immovable Property), the Federal Law On the Mortgage Savings System of Housing Provision to Servicemen, the Russian Federation Urban Development Code. The Agency also made proposals to amend the Bank of Russia Regulation No. 39-P of 26 July 1998 On the Procedure of Charging Interest for Operations Related to Attraction and Distribution of Monetary Funds by Banks and Accounting Thereof and the Russian Government Resolution No. 655 of 7 November 2005 On the Procedure Governing the Operation of the Mortgage Savings System of Housing Provision to Servicemen.

With the view of perfecting the regulatory framework in terms of the mortgage collateral, the mortgage agent and mortgage bonds, the Agency developed amendments to Federal Law No. 152-FZ dated 11 November 2003 On Mortgage-backed securities, Federal Law No. 208-FZ dated 26 December 1995 On Joint-Stock Companies, the Russian Federation Civil Code, Federal Law No. 127-FZ dated 26 October 2002 On Insolvency (Bankruptcy), Federal Law No. 39-FZ dated 22 April 1996 On Securities Market and normative acts of the Russian Federation Federal Financial Markets Service (the RF FFMS) and submitted the said amendments to the RF FFMS.

By Order No. 07-13/pz-n dated 8 February 2007 the Russian Federation Federal Financial Markets Service adopted a new revised text of The Regulation on the Composition and Structure of Assets of Joint-Stock Investment Funds and Unit Investment Funds which regulates the mechanisms facilitating investments by unit investment funds into mortgage-backed securities at offering.

The Agency also made a proposal to amend The Regulation Governing the Activities of Trade Organisers in the Securities Market to perfect the mechanism of quoting mortgage-backed securities in the top listing. The proposed amendments were endorsed by the Russian Federation Federal Financial Markets Service Order No. 07-102/pz-n dated 9 October 2007 On Adoption of the Regulation Governing the Activities of Traders in the Security Market.

The Agency submitted a proposal to the Russian Federation Ministry of Finance to amend the RF Ministry of Finance Order No. 100-n dated 8 August 2005 On Adopting the Rules Governing Investment of Insurance Reserves by Insurers.

The Agency prepared and submitted to the Federal Antimonopoly Service comments to the Draft Mortgagee Code.

Representatives of the Agency took part in the work groups of the Expert Council under the President of the Russian Federation engaged in implementation of high-priority national projects

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and demographic policy and the in development of the long-term national mass construction strategy for citizens of all social categories, in the development of the Draft Federal Law On Introducing Amendments to Certain Legislative Acts of the Russian Federation to Promote Low-Height Housing Construction, and in the work group of the Russian Federation Ministry of Economic Development and Trade developing the Draft Federal Law On Introducing Amendments to the Federal Law “On Mortgages (Pledges of Immovable Property)” (regulating withdrawal of mortgage records, the mortgage deed contents, the procedure for its registration, issue, the transfer of rights under the mortgage loan).

The Bank of Russia explained certain provisions of the Mortgage Savings System Capitalisation of unpaid interest payments under the mortgage loans provided and the

interest charged to the balance of debt, including capitalised interest, does not conflict with applicable standards of the Bank of Russia. This type of loan repayment does not represent a line of credit

Mortgage loan reserves may be formed taking into consideration the guarantees given by the state to repay the debt through the Mortgage Savings System of Housing Provision to Servicemen which represent an additional security besides the mortgage contract itself

Lowering the mortgage interest rate for the servicemen represents no debt restructuring

The mortgage loan amount exceeding the collateral value (which is possible in certain periods due to the interest capitalisation) may not be considered as grounds for removing such loan from the portfolio of homogeneous loans

Paragraphs 3.54 and 4.53 Part II, Bank of Russia Regulation No. 302-P dated 26 March 2007 makes provisions to show accrued interests on the balance accounts of issued mortgage loans.

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7. IMPROVING THE LEGISLATIVE AND REGULATORY FRAMEWORK FOR MORTGAGE LENDING

Following the above experiment, Federal Law No. 324-FZ On Introducing Amendments to Certain Legislative Acts of the Russian Federation dated 4 December 2007 was adopted to improve the efficiency of the mortgage savings system. This law introduces changes into Federal Law No. 117-FZ On the Mortgage Savings System of Housing Provision to Servicemen dated 20 August 2004, Part II of the Russian Federation Tax Code, Federal Law No. 102-FZ On Mortgages (Pledges of Immovable Property) dated 16 July 1998, and Federal Law No. 76-FZ On the Status of Servicemen dated 27 May 1998 which, in particular, provide as follows:

define the categories of servicemen and servicewomen who are eligible for participation in the mortgage savings system

regulate the use of special-purpose housing loans by the participants in the Mortgage Savings System to participate in shared-equity construction projects and to cover the purchase cost of housing and insurance

widen the scope of entitlement of servicemen to housing funds, in particular, for those servicemen and servicewomen who have been in service for 20 years (subject to applicable adjustments of seniority) and regardless of the duration of service when discharged for health reasons or found physically unqualified for military service

clarify the procedure of state registration of mortgage by virtue of law regulating the purchase of housing with the money accumulated under the programme for housing provision for servicemen which allows to register a mortgage for the benefit of the creditor and subsequently register the same mortgage for the benefit of the Russian Federation.

[Подпись под иллюстрацией справа]: “ PEACE AND PROSPERITY!”

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AHML Business Plan Performance in 2007

8.1. Refinancing Housing Mortgage Loans and the Affordability of the Mortgage for the Public

8.2. Fund-Raising

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8. AHML BUSINESS PLAN PERFORMANCE IN 2007 8.1. REFINANCING HOUSING MORTGAGE LOANS AND THE AFFORDABILITY OF MORTGAGES FOR THE PUBLIC

Refinancing Housing Mortgage Loans and the Affordability of Mortgages for the Public Under the Agency’s business plan for 2007, the total volume of refinanced mortgage loans was targeted at RUB 37.7bn. The overall results of the refinancing in 2007 made RUB 39.46bn, including RUB 39.30bn in standard mortgage loans and RUB 0.16bn in military mortgage under the mortgage savings system for servicemen. The Agency outperformed versus business plan by 4.7%. In July 2007, the Agency decreased the interest rates for the mortgage loans issued under the Agency Standards and introduced nine new standard mortgage products with the annual interest rates in the range between 10.75% and 14% (previously the minimum rate had been 11%).The table below represents the parameters reflecting the affordability of mortgage loans under the refinancing system:

Item 1 Jan 2007 1 Jan 2008

Number of mortgage deeds (loans), thousand

45.93 55.481

Weighted average interest rate, %

13.31 13.09

Loan-to-value ratio, % 67.34 73.82

Payment-to-income ratio (household), %

33.58 34.69

Average loan amount, RUB‘000

637.14 874.168

Average collateralised floor area, %

52.09 51.61

Average value of collateralised housing, RUB‘000

1,086.32 1,379.63

Average amount of monthly annuity payments per loan, RUB

8,497.26 18,630.25

Average monthly borrower’s income per household, RUB

29,609.00 37,916.00

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8. AHML BUSINESS PLAN PERFORMANCE IN 2007 8.2. FUND-RAISING

Fund-Raising The Government of the Russian Federation increased the Agency’s authorised capital by RUB 4.5bn (Russian Government Resolution No. 404-r), the Agency’s Charter was correspondingly amended on 24 August 2007. The additional monetary contribution into the Agency’s authorised capital was transferred to the AHML settlement account on 27 July 2007. In February 2007, the Agency offered series A9 bonds backed with the state guarantees in 2006 for the total of RUB 5bn. The annual coupon rate was set at 7.49%. Under the state guarantees provided to the Agency by the Russian Federation in 2007 for RUB 16bn, the Agency on 11 December 2007 offered series A10 bonds for RUB 6bn. The annual coupon rate was set in the amount of 8.05%. Due to the worsening financial market situation, the offering of the Agency’s series A11 bonds for RUB 10bn was postponed until Q1 2008. At year-end 2007, the outstanding issued debt made RUB 30.4bn. According to the business plan, the Agency planned to securitise mortgage loans in May 2007 (for the total of RUB 8.5bn) and in November 2007 (for the total of RUB 10bn). In May 2007, the Agency offered three mortgage bond issues (Classes A, B, C) for the total of RUB 3.3bn. The coupon rates were set as follows: for Class A mortgage bonds – 6.94%, for Class B mortgage bonds – 9.5%. The Agency redeemed subordinated tranches of mortgage-backed securities for the total of RUB 0.13m (the target amount for May was RUB 0.4m). In July 2007, the Agency securitised a mortgage pool for the total of RUB 4.2bn through a direct sale to a special purpose vehicle for the purpose of a subsequent issue of securities in the foreign market. In 2H 2007, the Agency initiated another issue of mortgage bonds. In September 2007, the Agency sold a mortgage pool for RUB 10.7bn to the closed joint-stock company “Second Mortgage Agent of AHML” under deferred payments to be included into the mortgage collateral. The three bond issues (A, B, C) were registered by the RF FFMS on 27 November 2007. The preliminary date of offering was set for late November – December 2007; however, due to the worsening situation in the domestic and foreign financial markets, it was postponed until Q1 2008. With the view of ensuring a continuous redemption of mortgages in 2007, the Agency borrowed the total of RUB 26.4bn (RUB 17.4bn in the Agency’s business plan), including short-term loans for the total of RUB 5.5bn. In 2007, the overall volume of repaid loans amounted to RUB 14.6bn. At year-end 2007, the outstanding loans amounted to RUB 19bn (accounted for as long-term debt due to the maturity of over one year).

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8. AHML: BUSINESS PLAN PERFORMANCE IN 2007 8.3. FINANCIAL INDICATORS

Financial Indicators The Agency’s performance over 2007 recognised on the balance sheet, profit and loss statement, cash flow statement, aggregate plan of fund raising and spending, general administrative costs (accrued expenses) are enclosed hereto (see Appendices 1–4). The Agency’s net income at year-end 2007 exceeded the planned amount by 15.3% and amounted to RUB 664m. This indicator was affected by the following major factors: 1. Income-related factors:

changes in the essential parameters of securitisation deals (volumes, terms, etc.) and a higher rate of mortgage loan repayment decreased the proceeds by RUB 126m

coupons were expected to be accrued for the subordinated tranches on the Agency’s balance from the moment of their repayment. In fact, the coupon accrual and payments will be performed after the tranches A and B have been fully redeemed. This factor decreased the estimated revenues by RUB 93m.

2. Expense-related factors:

a) operating and fund-raising expenses (finance and investment costs) as accrued (the cash flow limit –RUB 4,466m, actual – RUB 4,367m):

the absence of planned expenses associated with outsourcing overdue debt management reduced the overall expenses by RUB 93m in legal costs

the changes in the parameters of mortgage-selling transactions (affecting the timeframes and volumes), adjustments in the number of purchased mortgage loans and the assessment periods reduced the costs associated with mortgage servicing by RUB 94m

the actual volume of borrowing exceeding the plan resulted in additional cost of servicing the debt raised by RUB 437m

the postponement of A11 series bond offering until 2008 reduced the costs of arranging and servicing the issue by RUB 240m

the postponement of the second issue of mortgage-backed securities until 2008 and the adjustment of expenses associated with the first issue (the business plan made provisions for the Agency, who is not a mortgage bond issuer, to write off issue-related expenses as they occur; whereas in reality most expenses are written off over the bond maturity period) reduced the accrued expenses relating to the mortgage-backed securities issue by RUB 168m

b) general administrative expenses (operating expenses, the limit – RUB 723m, actual – RUB 606m):

the Agency’s savings were attributed to the following expenses: the labour costs, payment of associated taxes, and outstaffing for the total of RUB 68.1m; upkeep and maintenance of premises and vehicles for the total of RUB 27.6m; telecommunication costs, advertising costs, publications and printed materials for the total of RUB 15.5m; travel expenses and personnel retraining for the total of RUB 13.8m; other expenses, including financial aid associated with vacations and medical insurance for the total of RUB 20.8m

the Agency’s actual expenses under the following items were in excess of the budgeted amounts: the costs of auditing and consulting – RUB 13.4m; the costs of IT and software – RUB 15.8m. The necessary adjustments to the cash flows and accrual methods were approved under the Expenditure Budget for Q4 2007 (adopted by AHML Management Board Resolution No. 1/26-2 dated 5 October 2007).

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In accordance with the Agency’s business plan, the cost reallocation was conducted by the Agency’s collegiate executive body within the 15% annual expense limit (see Appendices 1 and 4). At year-end 2007, the capital adequacy ratio stood at 17.4% (compared to 19% in the business plan), return on assets was 1.4% (1.3% in the business plan), return on equity was 8.2% (7.2% in the business plan). These results correspond to the same indicators of the previous year: 17.1%, 1.5% and 9.7%, respectively.

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The Agency’s Financial and Operating Performance

9.1. The Agency’s Financial Analysis 9.2. The Agency’s Financial Position

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9. THE AGENCY’S FINANCIAL AND OPERATING PERFORMANCE 9.1. THE AGENCY’S FINANCIAL ANALYSIS

The Agency’s Financial Analysis Revenue structure: 1. Revenues from operations 2. Interest receivable 3. Other income The Agency’s revenue from operations (sales) are formed by interest payments made by borrowers under the mortgage loans purchased by the Agency and service fees for servicing sold mortgage deeds. In 2007, the fees collected for servicing sold mortgage deeds amounted to 3% of the Agency’s total revenues. In 2007, the revenue grew 2.4 times year-on-year to make 98% of the Agency total revenue. The growing share of the Agency’s revenue from operations shows rapid expansion of the AHML core business operations of refinancing mortgage loans within the reporting period; the Agency purchased mortgage loans for the total of RUB 39,462.8m (RUB 27,052.8m in 2006 and RUB 7,828.5 in 2005, respectively). Interest receivable represents the interest income from financial investments. In 2007, the amount of interest receivable grew 1.5 times year-on-year, which is comparable to the overall rate of expansion of the Agency’s business. Other income represents revenues from other sources beyond those listed above. Other income is primarily made up by the paid-in capital on bond issues and fees for connecting partners to the UIS AHML. Table 1. Income over 2005–2007, RUB‘000 Item 2007 Weight 2006 Weight 2005 Weight

Revenue from operations (sales)

1

5,549,649 98% 2,289,382 97% 1,070,702 96%

Interest receivable

74,074 1% 49,218 2% 11,954 1%

Other income2 34,616 1% 30,624 1% 33,670 3%

TOTAL 5,658,339 100% 2,369,224 100% 1,116,326 100%

1 The Sales Revenue item in 2007 is reduced by the nominal value of sold mortgage deeds. The Agency’s Profit and Loss Statement shows the nominal value of sold mortgage deeds as income from regular operations pursuant to Accounting Regulation “Company Income” PBU 9/99 approved by the Russian Federation Ministry of Finance Order No. 32n dated 6 May 1999. 2 The Other Income item is reduced by the value of sold (discharged) bills. The Agency’s Profit and Loss Statement shows income from discharged bills in full (inclusive of the bill value) as other income pursuant to Accounting Regulation “Company Income” PBU 9/99 approved by the Russian Federation Ministry of Finance Order No. 32n of 6 May 1999.

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Expense structure: 1. Expenses from operations (operating expenses) 2. Interest payable 3. Other expenses Operating expenses include the fees paid to regional operators and service agents at the annual rate from 0.5% to 1.5% of all serviced mortgage deeds, the costs of depositary services and mortgage accounting at the annual rate of 0.25% of the outstanding principal on the deposited mortgage deeds; the costs of mortgage loan due diligence; administrative expenses. In 2007, operating expenses grew 2.1 times year-on-year; the interest payable grew 2.8 times in view of a 1.5-times larger volume of refinanced mortgage loans and a 1.6-times bigger mortgage portfolio as compared to the previous year. In 2007, the ratio of operating expenses to revenue decreased from 28.6% down to 25.1% year-on-year. Other expenses are represented by costs beyond those listed above; the ratio of other expenses to revenue stays flat at 3%.

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9. THE AGENCY’S FINANCIAL AND OPERATING PERFORMANCE 9.1. THE AGENCY’S FINANCIAL ANALYSIS Table 2. Expenditure over 2005-2007, RUB‘000 Item 2007 Weight 2006 Weight 2005 Weight

Operating expenses1 1,393,538 29% 653,830 34% 327,242 32%

Interest payable 3,239,890 68% 1,173,930 62% 657,577 65%

Other expenses2 132,155 3% 72,134 4% 31,538 3%

TOTAL 4,765,583 100% 1,899,894 100% 1,016,357 100%

1 The Operating Expenses item is reduced by the nominal value of sold mortgage loans (cost of sold goods). The Agency’s Profit and Loss Statement shows the nominal value of sold mortgage loans as expenses through ordinary activities (cost of sold goods) pursuant to the Accounting Regulation “Company Expenses” PBU 10/99 approved by the Russian Federation Ministry of Finance Order No. 33-n dated 6 May 1999. 2 The Other Expenses item is reduced by the value of sold (discharged) bills. The Agency’s Profit and Loss Statement shows the costs associated with discharged bills in full (inclusive of the bill value) as other expenses pursuant to the Accounting Regulation Company Expenses PBU 10/99 approved by the Russian Federation Finance Ministry Order No. 33-n dated 6 May 1999. The analysis of the Agency’s income and expense structure demonstrates that as the Agency expands its business, income remains to be mainly generated by the Agency’s core business operations and the major costs are the interest payable including, above all, the costs associated with issuing and servicing bonds and the interest payable under the loans taken by the Agency. Page 56

9. The Agency’s Financial and Operating Performance 9.2. The Agency’s Financial Position

The Agency’s Financial Position Financial results The Agency’s financial performance at year-end 2007 was considerably improved as compared to 2006: the pre-tax profits and net income grew 1.9 times. In 2007, the Agency improved its financial performance despite the planned decrease of the mortgage loan interest rate and the liquidity crisis which developed in the financial markets worldwide at the end of Q3 2007. Table 3. Financial performance over 2005-2007, RUB‘000 No. Item 2007 2006 2005

1 Profit (loss) before tax 892,756 469,330 99,969

2 Net income (loss) within the reporting period 664,218 345,649 73,236

Equity capital The Agency’s equity capital in 2007 was increased in absolute terms by RUB 5,064m. In July 2007, another contribution of RUB 4.5bn was made to the Agency’s authorised capital, which was officially registered in August 2007.

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Table 4. Equity capital over 2005-2007, RUB‘000 No. Item 2007 Weight 2006 Weight 2005 Weight

1 Authorised capital 9,090,000 85.55% 5,090,000 91.53% 690,000 82.02%

Added capital 500,000 4.71% - - - -

2 Reserve funds 38,108 0.36% 20,826 0.38% 9,840 1.17%

3 Development fund 46,384 0.44% 30,561 0.55% 31,673 3.76%

Fund for social development

6,913 0.07% - - - -

Risk coverage fund 267,816 2.52% - - - -

4 Retained earnings* 664,218 6.25% 395,539* 7.11% 73,236 8.71%

5 Deferred income** 11,482 0.11% 23,991 0.43% 36,501 4.34%

* Inclusive of loan loss provisions for the total of RUB 49.9m. ** Deferred income is represented by paid-in capital obtained through the offering of series A1 bonds in 2003. Under the current law of the Russian Federation and the AHML Charter, the Agency’s reserve funds may be used only to cover the Agency’s losses, redeem bonds and Agency’s shares when other funding is unavailable. In 2007, the Agency did not resort to the reserve funds. The reserves accumulated in the Agency’s development fund are used to finance expansion of the Agency’s business activity and are applied for other similar purposes including research and development of Russian and foreign mortgage lending practices; unused development funds may be used to cover the losses within the current reporting period. The Agency’s social development funds are used to finance socially oriented projects, bonuses, including annual performance bonuses to the Agency employees, health care, recreation and other similar costs.

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9. THE AGENCY’S FINANCIAL AND OPERATING PERFORMANCE 9.2. THE AGENCY’S FINANCIAL POSITION The Agency’s risk coverage funds are used to cover the losses and expenses associated with non-performance or inadequate performance of liabilities by borrowers and counterparties, including transactions related to the sale of mortgage property and any associated costs. The growth of Agency’s profits and the additional contribution made to the AHML authorised capital improved the corporate financial standing. Overall, the Agency demonstrates positive growth in its financial position. Indicators demonstrating financial stability and efficiency of the Agency The Agency discloses information relating to its financial and business activities pursuant to the guidelines recommended by the Federal Financial Markets Service in the Regulation on Information Disclosure by Security Issuers adopted by the RF FFMS Order No. 06-117/pz-n dated 10 October 2006 which was revised to incorporate the specifics of the Agency’s operations. The Agency’s financial stability Over the reporting period, the capital adequacy ratio stayed flat versus 2006. The current liquidity ratio grew considerably in 2007. The growth of the current liquidity ratio is due to a substantial growth of accounts receivable, a major portion of which is made up by the debt of the closed joint-stock company “Second Mortgage Agent of AHML” for the mortgage pools sold by the Agency to form mortgage covered bonds, short-term debt repayment, and taking long-term loans. Table 5. Agency’s financial stability No. Item 2007 2006 2005* 2005**

1 Capital adequacy (autonomy) ratio 17.42% 17.07% 6.92% 12.68%

2 Current liquidity ratio 33.21 0.60 3.10 85.10

* The ratios are calculated not taking into consideration the received but not yet registered (as of 31 December 2005) contribution to the Agency’s authorised capital. ** The ratios are calculated not taking into consideration the received but not yet registered (as of 31 December 2005) contribution to the Agency’s authorised capital. Calculations of the current liquidity ratio disregard the reserves represented on the balance sheet as deferred expenses (established mainly to issue debt). Efficiency of the Agency’s operations In 2007, the Agency demonstrated a minor decline of the corporate return on equity and return on assets. Table 6. The Agency’s performance indicators No. Item 2007 2006 2005

1 Return on equity 8.21% 10.80% 9.01%

2 Return on assets, % 1.42 1.55 0.82

To calculate the above profitability indicators, annual average amounts of equity capital and assets are applied.

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The decrease in return on equity ratio is due to the fact that, despite the increasing net income, the AHML equity capital grew substantially – mostly through the state contribution of RUB 4.5bn into the Agency’s authorised capital. The decrease in the return on assets ratio is caused by the fact that despite the increasing net income, the asset amount (the average value) was also dramatically increased. The Agency’s non-current assets grew as a result of the growing volumes of refinancing which, consequently, increased the long-term investments (the mortgage loan portfolio). The growth of the Agency’s current assets was caused by a considerable increase in the accounts receivable which, for the most part, are made up by the debt of the closed joint-stock company “Second Mortgage Agent of AHML” for the mortgage pools sold by the Agency to form mortgage covered bonds. Taking into consideration the relative and absolute indicators and the specifics of the AHML operations, the Agency, despite somewhat lower indicators of profitability, has a sufficient reserve of financial soundness.

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The Agency’s Adherence to the Corporate Governance Code 10.1. Corporate and Reference Information 10.2. The Agency’s Adherence to the Corporate Governance Code 10.3. Information Concerning the Agency Being Included into the List of Joint-Stock Companies of Strategic Importance and the Special List 10.4. The Agency’s Authorised Capital 10.5. The Agency’s Management and Supervision bodies in 2007 10.6. Payment of Dividends

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE The Agency continues to perfect its corporate governance in the best interests of the shareholder and investors and pursuant to applicable law of the Russian Federation, the principles set forth by the international investment community, the requirements of the Corporate Governance Code recommended by the Russian Federation Federal Commission for the Securities Market No. 421/r of 4 April 2002. The Agency rigorously adheres to the mandatory legal requirements to disclose information pertaining to the operations in the securities market as governed by the Agency Regulation on Information Policy. The Agency also provides additional data to better inform all stakeholders about its business activities. In 2007, the AHML Supervisory Board adopted a new revision of the Regulation on Information Policy of AHML. This Regulation set forth the Agency’s procedures for information disclosure pursuant to applicable law and other information related to the Agency’s operations. The Agency’s official website www.ahml.ru regularly publishes essential information about the Agency’s business activities, important events; the public at large has access to important corporate statistics. In 2007, the Agency formed the Audit Committee under the Supervisory Board (the Audit Committee) which major functions include control over the Agency’s finance and business activities, the assessment of nominees for the Agency auditor position and review of the auditor’s reports. The Agency also appointed the members of the Management Board and the corporate secretary who ensure that the Agency’s bodies and officers adhere to the procedures guaranteeing the rights and legitimate interests of the Agency’s shareholders. The work of the Audit Committee is governed by the Agency Regulation on the Supervisory Board’s Audit Committee approved by the Supervisory Board. The work of the Management Board is governed by the Agency’s Management Board Regulation approved by the Resolution of the Federal Property Management Agency No. 2356-r of 26 July 2006. The work of the corporate secretary is governed by the Regulation on the Agency’s Corporate Secretary approved by the Supervisory Board. The AHML Supervisory Board annually adopts the business plan of the Agency for the corresponding year. In 2007, the Agency’s business plans for 2007 (Meeting Minutes No. 2 dated 24 May 2007) and the 2008 (Meeting Minutes No. 9 dated 21 December 2007) were adopted. The Agency intends to continue to adhere to the Corporate Governance Code subject to applicable limitations set forth for the joint-stock companies whose only shareholder is the Russian Federation.

http://www.ahml.ru/

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.1. CORPORATE AND REFERENCE INFORMATION

Corporate and Reference Information The Agency is continuously improving its corporate governance in the best interests of the shareholder and investors and pursuant to applicable law of the Russian Federation, the principles set forth by the international investment community, the requirements of the Corporate Governance Code recommended by the Russian Federation Federal Commission for the Securities Market No. 421/r of 4 April 2002. The Agency rigorously adheres to the mandatory legal requirements to disclose information pertaining to the operations in the securities market as governed by the Agency Regulation on Information Policy. The Agency also provides additional data to better inform all stakeholders about its business activities. In 2007, the AHML Supervisory Board adopted the revised text of the Regulation on Information Policy of AHML (Meeting Minutes No. 09 of 21 December 2007). This Regulation set forth the Agency’s procedures of information disclosure pursuant to applicable laws and other information related to the Agency’s operations. The Agency regularly publishes information about its activities on the AHML official website. In 2007, the Agency formed the Audit Committee under the Supervisory Board (the Audit Committee) which major functions include the control over the Agency’s finance and economic activities, the assessment of nominees for the Agency auditor position and reviews of the auditor’s reports. The Agency also appointed the members of the Management Board and the corporate secretary who ensure that the Agency’s bodies and officers adhere to the procedures guaranteeing the rights and legitimate interests of the Agency’s shareholders. The work of the Audit Committee is governed by the Agency Regulation on the Supervisory Board’s Audit Committee approved by the Supervisory Board Resolution No. 04 of 25 April 2006. The work of the Management Board is governed by the Regulation on the Agency’s Management Board approved by the Resolution of the Federal Property Management Agency No. 2356-r of 26 July 2006. The work of the corporate secretary is governed by the Regulation on the Agency’s Corporate Secretary approved by the Supervisory Board Resolution No. 04 of 24 June 2004. Each year the AHML Supervisory Board adopts the business plan of the Agency for the corresponding year. In 2007, the Agency’s business plans for 2007 (Meeting Minutes No. 2 dated 24 May 2007) and 2008 (Meeting Minutes No. 9 dated 21 December 2007) were adopted. The Agency intends to continue to adhere to the Corporate Governance Code subject to applicable limitations set forth for the joint-stock companies whose only shareholder is the Russian Federation. The Agency’s corporate name in full and in abbreviated form: открытое акционерное общество «Агентство по ипотечному жилищному кредитованию», ОАО «АИЖК»; Open joint-stock company ”The Agency for Housing Mortgage Lending“, AHML. Location: 69b Novocheryemushkinskaya Str., Moscow, Russian Federation 117418. Other representative offices: Bldg. 3, 14 Krzhizhanovsky Str., Moscow, Russian Federation.

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Contact information: Telephone: +7 (495) 775-47-40 Fax: +7 (495) 775-47-41 Email: [email protected] www.rosipoteka.ru Information on the Agency’s state registration: Data of state registration: 5 September 1997 Certificate of state registration No. 067.470 Registering authority: Moscow Chamber of Registration Date of registration with the Unified State Register of Legal Entities: 30 September 2002 Primary State Registration Number: 1027700262270 Registering authority as appears on the certificate of registration with the Unified State Register of Legal Entities: Inspectorate No. 27, South-West Administrative District, Moscow City Directorate of the Russian Ministry of Taxation

mailto:[email protected]

http://www.rosipoteka.ru/

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.2. INFORMATION CONCERNING THE AGENCY BEING INCLUDED INTO THE LIST OF JOINT-STOCK COMPANIES OF STRATEGIC IMPORTANCE AND THE SPECIAL LIST

Information Concerning the Agency Being Included into the List of Joint-Stock Companies of Strategic Importance and the Special List Under the Russian Presidential Decree No. 1009 dated 4 August 2004 and with the view of securing strategic interests of the Russian Federation, the state defence and security, the protection of morals, public health, rights and lawful interests of the Russian Federation citizens, the Agency is included on the list of joint-stock companies of strategic importance. Joint-stock companies on the strategic list may not be privatised. Likewise, under the Russian Government Order No. 91-r dated 23 January 2003, the Agency is included in the List of joint-stock companies whose shareholder – the Russian Federation – takes decisions on such issues as appointing an authorised representative to vote at general meetings of shareholders, forming the agenda items for general meetings of shareholders, nominating candidates for the corporate management bodies, the Revision Commission and the Counting Board, requesting to convene extraordinary general meetings of shareholders, convening extraordinary general meetings of shareholders, voting on the agenda items at general meetings of shareholders, and negotiating instructions by the Russian Federation representatives and representatives of the Russian Federation interests on the boards of directors (supervisory boards) as determined by the Russian Government, Prime Minister of the Russian Federation or on his behalf by Deputy Prime Minister of the Russian Federation.

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.3. THE AGENCY’S AUTHORISED CAPITAL

The Agency’s Authorised Capital

As of 31 December 2007, the Agency’s authorised capital is RUB 9,090,000,000 (nine billion ninety million) which is divided between 3,636,000 (three million six hundred thirty six thousand) ordinary registered undocumented shares with nominal value of RUB 2,500 (two thousand five hundred) each. The Agency has not issued preferred shares. The Russian Federation enjoys no special rights of participation in the management of the Agency ("golden share").

Over its operating history, the Agency has issued ordinary registered undocumented shares seven times.

In 2007, the Agency conducted share issue No. 7 to increase the Agency’s authorised capital in order to facilitate further development of the refinancing system and raise the volume of refinanced mortgage loans:

State registration number of the issue: No. 1-02-00739-A-005D dated 17 July 2007

Nominal value of shares: RUB 2,500 (two thousand five hundred)

Number of shares in the issue: 1,600,000 (one million six hundred thousand) shares

Total value of the issue: RUB 4,000,000,000 (four billion). By RF FFMS Order No. 07-2844/pz dated 27 November 2007, the individual number (code) 005D in the state registration number 1-02-00739-A-005D was abolished since 17 July 2007. Through the share issue and the increase of the authorised capital, the Agency managed to set up the refinancing system and ensure its further development and secure uninterrupted refinancing of mortgage loans. The sole shareholder of the Agency (100% shares) is the Russian Federation represented by the Federal Property Management Agency. The functions of the Agency’s registrar are performed by the Agency itself. The Agency’s share register is maintained by the Agency’s Directorate for Regulatory Framework Development and Interaction with Authorities.

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.4. THE AGENCY’S MANAGEMENT AND SUPERVISION BODIES IN 2007

The Agency’s Management and Supervision Bodies in 2007 The General Meeting of Shareholders The General Meeting of Shareholders is the Agency’s supreme management body . Decisions at the General Meeting of Shareholders are taken pursuant to the instructions from the Russian Government and formalised as orders of the representative of the Agency’s shareholder – the Russian Federation – the Federal Property Management Agency.

The Agency’s annual General Meeting of Shareholders of 2007 addressed the following items: 1. The 2006 annual report of AHML was approved. 2. The 2006 annual financial statements of AHML were approved, including the Agency’s profit and loss statement. 3. The profits of AHML were distributed, including the dividend payments. 4. The number of members on the AHML Supervisory Board and their appointment procedure were set. 5. The AHML Revision Commission was formed. 6. The AHML Auditor was nominated. The AHML annual General Meeting of Shareholders approved the annual Agency’s report, the 2006 annual accounting reports, the distribution of profits as generated by the Agency in 2006, the new composition of the Supervisory Board and the Revision Commission, and appointed a new Agency Auditor. The decisions taken by the Agency’s General Meeting of Shareholders were approved by the Federal Property Management Agency Order No. 3125-r dated 18 September 2007 pursuant to the Russian Federation Government instructions No. 3668p-P13 dated 5 September 2007. The Agency held three extraordinary general meetings of shareholders in 2007: 1. Convened by the Federal Property Management Agency Order No. 662-r dated 26 March 2007 pursuant to the Russian Federation Government instructions No. 510p-P13 dated 14 February 2007. This extraordinary General Meeting of Shareholders approved the amended and restated Charter of the AHML. 2. Convened by the Federal Property Management Agency Order No. 1766-r dated 13 June 2007 pursuant to the Russian Federation Government instructions No. 1806p-P13 dated 11 May 2007. This extraordinary General Meeting of Shareholders resolved to increase the authorised capital of AHML by way of offering 1,600,000 additional ordinary registered undocumented shares for the total of RUB 4,500,000,000 under a private offering to the Russian Federation represented by the Federal Property Management Agency for the offering price of RUB 2842.5 per share payable in the Russian currency. 3. Convened by the Federal Property Management Agency Order No. 3381-r dated 31 October 2007 pursuant to the Russian Federation Government instructions No. 3866p-P13 dated 19 September 2007. This extraordinary General Meeting of Shareholders resolved to authorise AHML to close transactions with any parties who are considered interested parties in the transaction either at the time of such authorisation or during the bond offering (interested party transactions) through the public offering of the AHML non-convertible certificated bearer coupon bonds series A10 series and A11 for the total of RUB 16 b.

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Page 64 10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.4. THE AGENCY’S MANAGEMENT AND SUPERVISION BODIES IN 2007 The Agency’s Supervisory Board The Supervisory Board is the Agency’s management body with the general management functions. Over 2007, the Supervisory Board held nine meetings during which the principles of refinancing mortgage loans were approved; the following three forms of the Agency’s participation in affordable housing construction projects were set forth: through refinancing loans originated to servicemen, young families and the families entitled to maternity (family) capital and participation in shared-equity construction projects; through a deferred purchase of mortgage deeds from banks under advance payments; through refinancing individual housing construction loans with the land plot as collateral and the new house to be collateralised after construction; the Agency’s Audit Committee formed; the members of the Management Board and the Agency’s Secretary appointed; the revised text of the Agency’s Regulation on Information Policy adopted; the Agency’s business plans for 2007 and 2008 approved; the decision to offer non-convertible certificated bearer coupon bonds series A10 and series A11 was passed, etc. In 2007 the Agency’s Supervisory Board addressed the following items: Meeting Minutes No. 01 dated 27 February 2007:

1. On including the items proposed by the shareholder, i.e. the Russian Federation represented by the Federal Property Management Agency, into the agenda of the AHML annual General Meeting of Shareholders.

2. On including the candidates proposed by the shareholder, i.e. the Russian Federation represented by the Federal Property Management Agency, into the list of nominees to the AHML Supervisory Board.

3. On including the candidates proposed by the shareholder, i.e. the Russian Federation represented by the Federal Property Management Agency, into the list of nominees to the AHML Revision Commission.

Meeting Minutes No. 02 dated 24 May 2007:

1. On the appointment of the AHML corporate secretary. 2. On first deputies of the AHML CEO. 3. On the AHML business plan for 2007. 4. On major operational parameters of AHML for the time period up to 2010 pursuant to the

Draft Federal Budget for 2008–2010. 5. On preliminary approval of the Agency’s annual report for 2006. 6. Miscellaneous: approval of the offering price for ordinary registered undocumented

shares of AHML and adoption of the agenda for the extraordinary General Meeting of Shareholders.

Meeting Minutes No. 03 dated 22 June 2007: On approving an additional issue of ordinary registered undocumented shares of AHML. Meeting Minutes No. 04 dated 4 August 2007:

1. On approving the agenda for the AHML annual General Meeting of Shareholders. 2. On recommendations concerning the distribution of net income generated through the

AHML operations in 2006. Meeting Minutes No. 05 dated 26 September 2007:

1. On appointment of the Supervisory Board Chairman of AHML. 2. On offering non-convertible certificated bearer coupon bonds series A10. 3. On offering non-convertible certificated bearer coupon bonds series A11. 4. On appointing the payment agent for AHML bond issues series A10 and A11.

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5. On approving a large scale transaction (a series of related transactions) associated with the offering of non-convertible certificated bearer coupon bonds series A10 and A11.

6. On approving the agenda of the AHML extraordinary General Meeting of Shareholders. 7. On participation of the AHML in the Russian Union of Industrialists and Entrepreneurs. 8. On setting the remuneration amount for the AHML Auditor.

Meeting Minutes No. 06 dated 8 October 2007: On appointing the payment agent for non-convertible certificated coupon bearer AHML bonds series A10 and A11 backed by the state guarantees of the Russian Federation. Meeting Minutes No. 07 dated 26 October 2007:

1. On approving decisions to issue securities – the AHML bonds of series A10 and A11. 2. On approving the prospectuses for the AHML bonds series A10 and A11. 3. On the launch date and the coupon rate for the offering of the AHML bonds series A10

and A11. 4. On preliminary performance results of the AHML over the nine months of 2007. 5. On paying the remuneration to the AHML CEO for the Agency’s performance in 2006.

Meeting Minutes No. 08 dated 5 December 2007: On appointing the members of the AHML Management Board.

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.4. THE AGENCY’S MANAGEMENT AND SUPERVISION BODIES IN 2007 Meeting Minutes No. 09 dated 21 December 2007:

1. On the refinancing principles applied by the AHML to mortgage loans and possible ways of the Agency’s participation in affordable housing construction projects.

2. On the AHML business plan for 2008 and for the time period up to 2010. 3. On the number of personal composition of the Revision Commission under the AHML

Supervisory Board. 4. On the new revision of the Regulation on Information Policy of AHML. 5. On the AHML new brand name.

All the members of the Supervisory Board take an active part in the meetings of the Supervisory Board and the vote on the agenda items. Members of the Agency’s Supervisory Board include representatives of the Russian Federation ministries and agencies who are appointed to the Supervisory Board pursuant to instructions by the Russian Government. All the members of the Supervisory Board are representatives of the Russian Federation. No member of the Supervisory Board holds any shares in the Agency. The Agency’s executive bodies The Agency’s executive bodies are represented by the sole executive body – the Agency CEO, Mr Semenyaka Alexander Nikolayevich – and the collegiate executive body – the Agency’s Management Board consisting of 7 (seven) persons. Mr Semenyaka A.N., born in 1965, was appointed to his current position under the resolution of the AHML Supervisory Board dated 29 March 2002, Meeting Minutes No. 03. Mr Semenyaka’s term of office was extended for a new term under the resolution of the AHML Supervisory Board dated 29 September 2005, Meeting Minutes No. 05. The Agency’s CEO is paid for his services a remuneration as determined by the Supervisory Board and set forth in the employment contract approved by the Supervisory Board on 24 June 2004, Meeting Minutes No. 04 which consists of a salary, a quarterly bonus and an annual bonus. The procedure and the time for paying salaries, bonuses and rewards in accordance with the Agency’s annual performance are set forth by the Agency’s Regulation on Dividend Policy adopted by the Supervisory Board and by the requirements of the AHML Regulation on Compensation and Incentive Bonuses. The Agency’s Management Board In view of the requirement for the Agency to have a collegiate executive body, the AHML Supervisory Board (Meeting Minutes No. 08 dated 5 December 2007) formed a collegiate body of corporate governance – the Agency’s Management Board consisting of seven members. No provisions for any remuneration or compensation payments to the members of the Agency’s Management Board for their functions as the board members were made in 2007. Under paragraph 16.5 of the Agency’s Charter and paragraph 2.2 of the AHML Regulation on the Agency’s Management Board, the jurisdiction of the Management Board includes taking collegiate decisions pertaining to the following:

1) Developing current and future plans to achieve the goals and objectives set forth by the Agency’s Charter.

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2) Preliminary approval of the Agency’s priority operational activities and long-term plans for their implementation, including annual budgets, business plans, performance reports, the development and endorsement of plans for the Agency’s current operations to be submitted for the review by the Agency’s Supervisory Board.

3) Approving the Standard Procedures for Granting, Refinancing, and Servicing Mortgage Loans.

4) Approving the information about the Agency to be disclosed to the shareholders, creditors and mass media.

5) Preliminary approval of decisions related to offering or issuance of securities, publications of security prospectuses and other documents associated with the issue or purchase of the Agency’s securities.

6) Ensuring the Agency’s long-term and current targets are met, implementing the Agency’s financial and other projects.

7) Developing the terms and procedures for raising and investing money. 8) Preliminary approval of the Agency’s annual report, the balance sheet, profit and loss

statement, the Agency’s profit distribution procedure, the Agency’s code of corporate governance, the Regulation on the Agency CEO, tenders, corporate standards and other documents governing the Agency operations to be submitted for the review by the Agency’s Supervisory Board and the General Meeting of Shareholders.

9) Reviewing and approving drafts of the Agency’s collective agreement and submitting it for approval of the Agency’s CEO.

10) Determining and approving the Agency’s organisational structure, the composition and status of the Agency’s units and functional services.

11) Determining the Agency’s policies pertaining to employing, appointing and training personnel and drafting the staff list.

12) Determining the Agency’s remuneration practices and initiating incentive bonus programmes.

13) Approving the Agency’s internal documents within the jurisdiction of the Management Board which do not require approval from the Agency’s Supervisory Board or the General Meeting of Shareholders.

14) Setting the fees for a renewal of registered bonds that have been lost. 15) Coordinating foreign economic activities of the Agency. 16) Taking decisions concerning the necessity of major transactions and submitting essential

materials and recommendations to the Agency’s Supervisory Board or the General Meeting of Shareholders to assist their decision-making process concerning such transactions.

17) Taking decisions on early redemption of the Agency’s outstanding bonds when corresponding provisions for an early redemption were made at the bond offering and approved by the Agency’s Supervisory Board.

18) Taking decisions on other issues relating to day-to-day operations of the Agency and forwarded for the Management Board’s review by the Agency CEO, the Supervisory Board or the shareholder, as well as other issues as specified by the Agency Charter.

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.4. THE AGENCY’S MANAGEMENT AND SUPERVISION BODIES IN 2007 In 2007, the Agency’s Management Board held 40 meetings during which new Agency-refinanced credit products were approved for the unified refinancing system, amendments and additions were introduced into the Agency’s Standard Procedures for Granting, Refinancing, and Servicing Mortgage Loans to account for the specialisation of insurers, the new standard insurance agreement template, the transition to the new payment collection practice directly to the Agency’s settlement account and the changes reducing the proportion of higher-risk loans in the Agency’s portfolio; the Agency’s performance targets were set for 2008 and the 2009–2010 planning period; the Agency’s procedures governing open competitive negotiations arranged to select arrangers for bond issues were adopted; the Agency’s Personnel Training Concept for companies active in the housing mortgage market was adopted; the Concept for Specialisation of Standard Procedures for Granting, Refinancing, and Servicing Mortgage Loans for Low-Rise Housing Construction and the Concept for Granting Agency’s Guarantees for Affordable Housing Construction Projects Subject to Received Proposals were adopted; the Procedure for Limiting Insurer Concentration was adopted, etc. The Agency’s Revision Commission The members of the Revision Commission are appointed annually at the Agency’s General Meeting of Shareholders under a recommendation of the Supervisory Board pursuant to the instructions of the Russian Government. The Agency’s General Meeting of Shareholders (pursuant to the Federal Property Management Agency Resolution No. 3125-r dated 18 September 2007) appointed the Revision Commission consisting of three members as follows: Baksheeva O. L. – Deputy Department Head, the Federal Property Management Agency; Egorov S. N. – Consultant to a department with the Russian Government; Chibis A. V. – Department Head, the Agency for Construction, Housing and Public Utilities. As a result of the Agency’s audit by the Revision Commission in 2007, it was found that the Agency’s operations over the audited period were in compliance with the goals and objectives set out in the AHML Charter and applicable law of the Russian Federation. The Agency’s accounting statements were prepared based on applicable Russian accounting and reporting standards. The Agency accounts for its property, liabilities and business transactions pursuant to Article 5, Federal Law No. 129-FZ On Accounting dated 21 November 1996 and the Regulation on Accounting and Reporting in the Russian Federation approved by the Russian Ministry of Finance Order No. 34n dated 29 July 1998. In 2007, the members of the Revision Commission received no compensations for their work in the form of salaries, bonuses, fees, benefits, reimbursements, or any property.

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10. THE AGENCY’S ADHERENCE TO THE CORPORATE GOVERNANCE CODE 10.5. PAYMENT OF DIVIDENDS

Payment of Dividends Pursuant to paragraph 3.5, the Agency’s Regulation on Dividend Policy approved by the Supervisory Board Resolution No. 11 of 20 October 2006, the Agency pays out at least 10% of net income as dividends. In 2007, the Agency paid out the dividends for the operational year 2006. Under the Federal Property Management Agency Resolution No. 3125-r of 18 September 2007 the dividends were paid out in the amount of RUB 51,847.3 thousand (15% of net income).

[Подпись под иллюстрацией справа]: “A HOME FOR YOUR FAMILY!”

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Plans for 2008

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11. PLANS FOR 2008

Plans for 2008 Despite the ongoing liquidity crisis in the foreign and domestic markets, in planning its business operations for 2008, the Agency was guided by its function as an institution established to develop and stabilise the mortgage lending market. Therefore the Agency’s business plan adopted by the Supervisory Board (Meeting Minutes No. 09 dated 21 December 2007) made no provisions for scaling down the Agency’s mortgage purchasing activities as it had been previously proposed under the Concept for Developing a Unified System for Housing Mortgage Lending in Russia. This was due to the fact that it was essential to continue to render support to the mortgage lending industry in Russia’s regions and form pools of mortgage loans in order to issue mortgage-backed securities to facilitate the development of the secondary mortgage market. In 2008, the Agency will not only work to support the recently formed market for mortgage lending, but also develop individual market segments by introducing and standardising new products and advancing operating processes and practices. During this period, the Agency plans to perfect industry-specific standards and methods, as well as relevant information technologies. Material factors that may affect the Agency’s operations The lowering anxiety in the world’s financial markets in view of more accurate estimates of actual losses caused by the mortgage crises in the USA and a number of European nations and effective plans to amend the current market situation along with the growing cost of money in Russia may stimulate a capital inflow into the country. If this scenario comes to pass, the Agency will have additional opportunities for developing the market for mortgage-backed securities. The same stimulating effect onto the secondary mortgage market may be produced through revision of investment policy statements of state corporations (the Deposit Insurance Agency, RUSNANO, Bank for Development and Foreign Economic Affairs (Vnesheconombank), the Housing and Utility Reform Foundation, etc.) and the Russian State Pension Fund. Growing prices for food and consumer goods, rising costs of utilities and mortgage interest rates, which may be trigged by the growing cost of borrowed financing on the domestic market will, with a high degree of certainty, reduce the number of early repayments under previously taken loans. This may have a positive effect on the Agency’s long-term planning of corporate cash flows. At the same time, the overall growth in the cost of funding which is estimated for 2008 to be within 200 bps should be also taken into account. The Agency will consider this factor to plan its corporate bond issues with and without state guarantees, initiate issues of mortgage-backed securities, and tap into debt capital. Taking into account the above and based on the actual operational performance, in 2008 the Agency will do its best to retain the ratings awarded to the Agency in 2007 by concentrating efforts to mitigate all possible negative factors. Any further development of the mortgage market toward better quality of mortgage loans, lower risks, larger refinancing, lower cost of transactions and a fairer distribution of risks between the market players and their specialisation will require further modernisation of applicable Standards. In particular, the Agency will continue to revise its requirements for mortgage borrowers and also the types, sources and methods of verifying their solvency, as well as the

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collateral and underwriting procedures for mortgage contracts and the list of documents submitted for appraisal. The Agency, with the view of continuing to effectively perform its functions as an instrument of state policies in the mortgage market, plans to introduce changes into the mortgage product range offered under the AHML standards and expand it with new Agency mortgage products:

social mortgage products –loans to certain social categories (servicemen, young families)

tools and mechanisms stimulating the supply of real estate for socially-oriented projects and offering new opportunities for construction of houses to be subsequently sold to the public through social mortgage products.

The development and introduction of new products is planned to be implemented by the Agency under government-sponsored programmes directly or indirectly related to the AHML functions as a development institute promoting stability and infrastructural development of the industry and being the industrial database, while at the same time taking into account the Agency’s interests as a market player. As the AHML fund-raising performance will be dependent upon the current situation in the financial market (to the exception of share issues), the Agency prepared two operational scenarios in its business plan for 2008. The Agency’s standard scenario assumes that the liquidity levels in the Russian and international markets will grow over the next six to eight months and applicable laws will be timely amended as regards mortgage lending and subsequent securitisation which would allow the Agency to raise enough funding through the issues of corporate bonds backed with the Russian Federation state guarantees and securitisation of mortgage loans. At the same time, in view of higher liquidity risks, the Agency will be refinancing mortgage loans only when it is guaranteed to be able to raise the required amounts in the market. The overall volume of mortgage loans to be refinanced by the Agency under the standard scenario over the year is RUB 64.6bn, including standard mortgage loans for RUB 49.2bn and new mortgage products for RUB 15.4bn.

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11. PLANS FOR 2008 The major risk that could prevent the standard scenario from happening is the risk of a high demand for liquidity. In the situation when investors expect to get high profits from purchased instruments, the Agency, when offering such instruments, will be guided by the principle of the highest possible cost of capital while ensuring cost efficiency. When investors are not ready to buy corporate and mortgage bonds with the offered levels of yield, the Agency will operate under the pessimistic scenario. The pessimistic scenario assumes that the financial market undergoes a sharp decline of liquidity levels, interest rates go up, investors are reluctant to invest into Russian mortgage-backed securities. In such conditions, in 2008 the Agency plans to raise cash in the financial market by way of offering previously registered corporate bond issues of series A11 for the total of RUB 10bn and mortgage-backed securities for the total of RUB 10.7bn. At the same time, for the purpose of mitigating its own risks, the Agency will reduce the volume of mortgage refinancing proportionally to the volume of capital raised. The overall volume of mortgage loans to be refinanced by the Agency under the pessimistic scenario over the year is RUB 12.1bn, including standard mortgage loans for RUB 9.4bn and new mortgage products for RUB 2.7bn. With the view of implementing the best funding scenario in 2008, the Agency plans to carry out the following measures:

issue additional shares as provided by the Federal Law On the Federal Budget for 2008 and the 2009–2010 Planning Period, in 2008 the authorised capital will be increased by RUB 6bn and in 2009 by RUB 8bn.

issue state-guaranteed bonds under the government support programme in 2008 for the total of RUB 28bn and conduct the offering of the bonds guaranteed by the state in 2007 and postponed until 2008.

A material event requiring disclosure in the 2007 annual report In Q1 2008, the Agency offered series A11 bonds in the financial market for the total of RUB 10bn, the state guarantee for these bonds was provided in 2007. The annual coupon rate and the yield to maturity were set at 8.2% and 8.33%, respectively. Other coupon rates are equal to that of the first coupon rate. Series A11 bond redemption schedule: % of nominal value Redemption date 30 15 September 2015 20 15 September 2016 20 15 September 2017 10 15 September 2018 10 15 September 2019 10 15 September 2020 Series A11 bonds have provisions for a possible early redemption of 50% of the nominal bond value on 15 September 2017 or 30% of the nominal bond value on 15 September 2018 if the Agency’s authorised body decides to perform an early bond redemption. If the decision to redeem 50% of the bond nominal value on 15 September 2017 or 30% of the bond nominal value on 15 September 2018 is not made, the A11 bonds shall be redeemed under the procedure set forth in the bond issue documents and in the timeframes specified above.

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Note: Under the Federal Law On the Federal Budget for 2008 and the 2009–2010 Planning Period and the Housing Federal Target Programme (in Russian: ‘Zhilische’) for the period of 2008–2010, the Russian Government provides state guarantees for the Agency bonds for the total of RUB 108bn including RUB 28bn in 2008 and RUB 80bn over 2009–2010.

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11. PLANS FOR 2008 An important event requiring disclosure in the 2007 annual report On 27 February 2008, the closed joint-stock company “Second Mortgage Agent of AHML” offered mortgage loans of the second issue for the total of RUB 10.7bn. This debt issue includes three tranches: for the senior A-tranche of RUB 9.44bn, the first coupon rate was set at 8.5%; for the mid B-tranche of RUB 0.59bn, the first coupon rate was set at 9.5%; and the junior C-tranche of RUB 0.69bn was placed through a private offering. The actual offering value for the Class B bonds made RUB 1.35bn, which is 193.2% of their nominal value. The debt redemption is scheduled for 2040. As the volume of issued mortgage-backed securities grows the said benefits will start to directly affect the final borrower’s interest rate and the overall pace of development of the mortgage market. The AHML not only plans to continue to securitise its mortgage loan portfolio, but also to assist other market players in applying the same instruments to promote their own mortgage programmes. Under the standard scenario of the AHML business plan, when the situation in the financial market improves the Agency will sell some of the established mortgage pools (for around RUB 16bn) to investors, while the other part (for the total of over RUB 10bn) will be sold to a mortgage agent in order to issue mortgage-covered bonds. The Agency, with the view of securing continuity of its primary business operations in 2008, plans to mitigate the risks of possible liquidity gaps caused by delayed provision of governmental support (for further details see “Risk Management System”), it also plans to continue to take bank loans and may even issue corporate bonds without government guarantees with the maturity period of up to two years (considering the high rating awarded to the Agency by Moody’s). This way, in 2008, the Agency plans to carry out its functions to meet the goals set forth by the Concept for Developing a Unified System for Housing Mortgage Lending approved by the Russian Government while at the same time preserving its corporate stability and liquidity and reaching the levels of profit which enable the Agency to form reserves to cover any possible losses associated with the Agency’s operational risks and to pay the dividends. The Agency intends to continue improving and advancing the quality of mortgage servicing system through further development of mortgage servicing infrastructure and by improving applicable techniques for mortgage servicing and standardisation procedures. In 2008, the Agency plans to develop regulatory documents to lay new principles for partner accreditation / de-accreditation along with the principles for training partners as they develop their mortgage business according to their mortgage specialisation. In 2008, the Agency intends to improve the internal rating system which would enable the Agency to assess the financial position of counterparties in a more accurate and timely manner and, thus, bring down the corresponding risks taken by the Agency. CEO A. N. Semenyaka Chief Accountant L. B. Chernyshova

agency for housing mortgage lending 2007 annual...

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