Download What`s Ahead for EU Mortgage Markets? ELRA General Assembly

What’s Ahead for
EU Mortgage Markets?
ELRA General Assembly
Brussels, Belgium
27 April 2009
Kerstin FISCHER
European Mortgage Federation
1
Structure of Presentation
1. Introduction to the European
Mortgage Federation (EMF)
2. Definitions
3. Market Trends
4. State of Play
5. Next Steps
6. Conclusions
2
The Voice of the EU
Mortgage Industry
1
 EMF: a product federation - all categories of mortgage
lenders
 Membership: EU MS & Accession Countries
 Representing mortgage industry at EU level
=> retail & funding sides
 European Covered Bond Council (ECBC) since 2004
 Important sector in the general EU economy:
 €6.1 trillion outstanding (end 2007)
 = 50.1% of aggregate EU GDP
 Access to housing for 70.4% of EU population
3
Defining Home loans
2
 Two categories of mortgage credit, based on the
borrower: residential and commercial
 Residential mortgage credit/Home Loans
= credit to consumers as per EU definition of consumer:
 “a natural person who is acting for purposes which
can be regarded as outside his trade or profession”
 3 categories of Home Loans:
 “classic” mortgage loans: secured by real estate
property and granted for housing purposes;
 ERS: Mortgage loans secured on real estate property
but granted for consumption purposes;
 Housing loans, i.e. granted for housing purposes
but non-real estate secured or unsecured loans.
4
Value of EU Residential Mortgage
Market - 1997-2007
3
6,500,000
15.0
6,000,000
14.0
Total Outstanding Mortgage Loans,
million euros, left scale
5,500,000
13.0
Year-on-year growth rate, right
scale
12.0
5,000,000
11.0
4,500,000
10.0
4,000,000
9.0
3,500,000
8.0
3,000,000
7.0
2007
2006
2005
2004
2003
2002
2001
5.0
2000
2,000,000
1999
6.0
1998
2,500,000
5
Source: European Mortgage Federation
Outstanding Mortgage Loans in the EU –
2006 & 2007 (mil. €)
3
UK
Germany
France
Spain
Netherlands
Italy
Denmark
Sweden
2007
Ireland
Belgium
2006
Portugal
Greece
Austria
Finland
Poland
Luxembourg
Hungary
0
500,000
1,000,000
1,500,000
2,000,000
6
Mortgage Markets’ Growth
rate (%) - 2006 & 2007
3
Romania
Bulgaria
Lithuania
Poland
Slovakia
Czech Republic
Latvia
Slovenia
Estonia
Cyprus
Luxembourg
Greece
Hungary
Malta
Ireland
Spain
France
2007
2006
60
70
Finland
Italy
Portugal
UK
Denmark
Sweden
Austria
Belgium
Netherlands
Germany
-10
0
10
20
30
40
50
80
90
100
7
Source: European Mortgage Federation
Mortgage Debt as % of GDP –
2006 & 2007
Netherlands
Denmark
UK
Ireland
Portugal
Spain
Sweden
Germany
Cyprus
Luxembourg
Malta
Belgium
Estonia
Finland
France
Latvia
Greece
Austria
Italy
Lithuania
Czech Republic
Hungary
Slovakia
Poland
Bulgaria
Slovenia
Romania
3
2007
2006
EU 27 AVERAGE
(2007): 38.7
0.0
20.0
40.0
60.0
80.0
100.0
120.0
8
Owner Occupation in Europe –
2002-2007
3
Romania
Lithuania
Bulgaria
Estonia
Hungary
Latvia
Spain
Slovenia
Slovakia
Italy
Greece
Belgium
Portugal
Poland
Luxembourg
Ireland
Malta
UK
Cyprus
Czech…
Finland
Austria
France
Netherlands
Denmark
Sweden
Germany
0.0%
EU 27
WEIGHTED
AVERAGE:
70.4
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
9
House Price y-o-y growth
rates (%) – 2005-2008
3
30.0
25.0
20.0
DK
ES
FR
SE
UK
PT
IE
15.0
10.0
5.0
0.0
-5.0
-10.0
II 2008
I 2008
IV 2007
III 2007
II 2007
I 2007
IV 2006
III 2006
II 2006
I 2006
IV 2005
-15.0
10
Mortgage CBs outstanding as % of
total outstanding mortgage loans –
2007
3
Denmark
Sweden
Hungary
Spain
Germany
France
Ireland
Portugal
Austria
EU 15 weighted
average: 17.0%
UK
Norway
Netherlands
Poland
Luxembourg
Latvia
0.0
20.0
40.0
60.0
80.0
100.0
120.0
11
Mortgage Covered Bonds
outstanding – 2007 (mil. €)
Denmark
3
211,381
Spain
266,959
Germany
206,489
Sweden
92,254
UK
81,964
France
63,555
Netherlands
15,727
Ireland
13,575
Portugal
7,850
Norway
6,009
Hungary
5,987
Austria
4,125
Poland
676
Luxembourg
150
Latvia
Italy
36
0
300,000
250,000
200,000
150,000
100,000
50,000
0
12
Booming Mortgage & Housing
Markets until mid-2007
3
 Interest rates at a historic low thanks to favourable
economic context
 Significant decrease in mortgage loan prices due to:
 Increasingly strong competition within the Industry
 Banks’ increased efficiency: consolidation, outsourcing
 Abundance of liquidity: cheap funding on capital mkts
 Very high consumer demand as a result of:
 Increased affordability: low interest rates; decrease
in prices; general increase in households incomes
& strong product innovation (LTVs/maturities/flexib)
 Change in demographic organisation of households
 Expectation of continued increase in house prices
13
2007 : A Turning Point
4
 US Sub-Prime Crisis:
 Result of abundant liquidity & continued house price growth
 Relaxing of credit underwriting conditions
 Funding through securitisation: loans/risk do not remain on
lenders’ balance sheets
 Securitisation process has developed, becoming much more
complex and less transparent
 Global Financial Crisis: Impacts on EU
 Majority of EU lenders do not grant sub-prime loans &
primarily fund through savings deposits & covered bonds
 But EU banks invest in US securitisation portfolios containing
sub-prime loans – primarily relying on CRA ratings
 In 2007, EU banks discover existence of risky loans in their
portfolios
=> Result: Very strong loss of confidence, drastic drying
up of liquidity on EU markets and, finally, a credit crunch
14
State of Play in the EU by
November 2008
4
 EU Industry acknowledges a slow-down in the
mortgage market in a general context where:
 Property markets in a number of MS are witnessing
a decline in their price growth rate (DK, ES, UK)
and even some price falls (IE)
 Consumer demand is easing due to general increase
in prices and decline in economic perspectives
 As a result, either due to lack of liquidity or out
of caution, EU lenders have:
 Strengthened their credit underwriting conditions
 Increased the price/cost for riskier loans
15
Stakeholders’ Reactions:
EU Commission (1)
5
 EU regulation of mortgage industry today:
 Institutional regulation aiming at banks’ economic
soundness & general financial stability: CRD/Basel II
 Product regulation: consumer credit, time share
 Horizontal consumer protection: UCP Directive
 2007 Commission White Paper: further integration of
EU mortgage markets:
 MC = access to housing for 67% of EU citizens
 Financial sector outstanding= 49.6% of EU GDP 2007
 Linked to construction sector = major driver of economy
 COM: further integration would benefit consumers/ lenders
=> lower costs & increased product diversity.
(“integration”: not defined)
16
Stakeholders’ Reactions:
EU Commission (2)
5
 To achieve further integration, DG MARKT
considers four types of measures:
 Comparative studies on desirability of regulation
/ harmonisation: equity release loans; credit
intermediaries; tying/ UCP; non-banks
 Removal of legal obstacles to cross-border
activities: registration, enforcement & valuation
 Facilitation of cross-border funding in the EU
 Further consumer protection measures
(PCI, ESIS)
 However, a number of these proposals have
been superseded by the crisis, and today the
Industry has other, more urgent priorities
17
Stakeholders’ Reactions:
EU Industry (1)
5

Integration = EU cross-border activities
 Lenders do go cross-border through subsidiaries & M&A

Integration = EU price convergence
 Range of adjusted prices in the EU is <1% and
continuously converging, thanks to:
 Increased competition, lender efficiency, and greater
price transparency

Integration = EU market completeness
 Markets are broadly complete and the product range is
continuously broadening, but there are gaps (DE; IT; P)
 Missing products: ERL; fixed-rate & sub-prime products
 In principle, there is room for improvement
18
Stakeholders’ Reactions:
EU Industry (2)
5
 Pre-Crisis EU mc markets: broadly integrated
 Level of cross-border activity depends on individual
lender’s appetite / objectives (economic context)
 Margins left little room for further price reductions
 Market completeness level: could be improved in
principle
 However, the crisis has changed the landscape:
 Lenders tend to avoid new risky undertakings,
to fall back on markets they know best;
 Prices are increasing (re-evaluation of risk, increased
interest rates); and
 Product diversity is narrowing rather than widening.
19
Lessons learnt: Where do
we go from here? (1)
6

Here & Now - Industry’s priorities: overcome current crisis +
restart a dynamic & sustainable business, in a context where:

MS’ sensitivities to global crisis vary widely, depending on:
 Choice as to major funding technique: deposits, CBs, MBS
 Level of exposure to US securitisation
 Range of products: attitude to more risky products
 State of housing market & consumer demand

Causes of the crisis in the EU mainly result from:
 EU markets’ sensitivity to US ‘ups & downs’: global
distribution of risk through securitisation proved to lead to
“contagion” rather than to mitigation
 Loss of confidence resulting in drying up of liquidity
 Lack of transparency of securitisation process: investors
relying on CRAs/not aware of real risk level
 Some relaxing of credit underwriting conditions
20
Lessons learnt: Where do
we go from here? (2)
6
 EU markets’ wide diversity calls for certain targeted
concrete measures rather than wide harmonised scheme
 Causes of crisis: clear differentiation EU – USA
 “Responsible lending” standards applied by all lenders:
framework of indicators (still to be defined)
 Level Playing Field: Same business, same risks, same
rules
 Adequate information to consumers, allowing for a
well-informed choice (Code/regulation?)
 Min. level of responsibility for the loan originator:
Who does not keep loans on balance sheet?
 Improved transparency of the securitisation process
and rating agency procedures?
 Increased reliance on mortgage insurance to mitigate
lenders’ risks?
21
European Mortgage Federation
THANK YOU FOR YOUR ATTENTION!
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+32 2 285 40 30
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