Download Covered Bonds

Housing Finance in Emerging
Markets
Washington DC – 16 March 2006
“Internationalisation of
Covered bonds”
Cristina Costa
Senior Adviser - ECBC
European Mortgage Federation
European Mortgage Federation
 Founded in 1967 to represent mortgage lenders’
interests at EU level (retail & funding)
 Groups national trade associations and credit
institutions from EU Member States + acceding
countries
 New Member State membership: Czech Rep.,
Hungary, Latvia and Poland
 Accession Country Membership: Romania
 Just welcomed Ukraine as its latest member
 Represents approx.75% of EU mortgage market
 EU mortgage market amounts to approx. 49% of
EU GDP
2
Agenda
I. Mortgage Market Trends
II.Covered Bonds: an attractive
funding source
III. Expansion of covered bonds
IV. The Spanish Experience
V. Case Study : Hungary
VI. Outlook
3
EU Mortgage Market Trends
 Mortgages Outstanding: Total value of outstanding
residential mortgage loans EUR 5.2 trillion at end 2005 (c.
49% of GDP)
 Growth: Average annual growth rate approx. 8% per year
over the last 10 years. Growth is much higher in the New
MS
 Interest Rates: The introduction of the Euro has resulted
in significant falls in mortgage interest rates, which in turn
has stimulated the markets
 House prices: Big price increases in most countries over
past few years, but there are signs of house price growth
slowing down around Europe
 Regulation: Capital adequacy and European retail FS
integration dominate the regulatory agenda
 Funding: Diversified access to capital market funding is
increasingly important; EMF launches ECBC to represent
covered bonds
4
Mortgage Funding in Europe
Covered bonds outstanding as % of mortgage
debt outstanding (2004)
UK
EU:17%
Poland
Ireland
Latvia
Austria
France
Germany
Spain
C zech Republic
Sweden
Hungary
Denmark
0%
10%
20%
30%
Source: European Mortgage Federation
40%
50%
60%
70%
80%
90%
100%
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Special character of covered bonds
Specific legal
framework/
Contractual
provision
Preferential right
of bondholders
Quasi-bankruptcy
remoteness
Covered Bonds
Separated
collateral pools
High quality
collateral
Strict
supervision
Source: ABN Amro
6
Cb Legislation
Geographical Overview - Covered Bond Legislation in Europe
(as of January 2006)
Legislation in countries of
the EU/EEA/CH
19
2000
2006
2003
2004
1998
2002
2003
Legislation in
future EU member and
further countries in
transition
23
2005
1998
4
 1997
2006
1995
2005
1999
2005
1990
1997
Concrete legislation
in preparation
1999
3
2003
2000
Legislation under
consideration
7
2
28
Covered Bonds
 Most European countries have adopted cb legislation
 Competition has driven legislation to ever higher
(safety) standards without sacrificing funding flexibility
 No trend towards lowest common denominator
 Regulated at EU level (Art. 22(4) of UCITS):
 Issued by a credit institution
 Subject to special supervision
 Investment of proceeds effected in eligible assets
 Outstanding issues covered by eligible assets until
maturity
 Priority claim of bondholders on subset of assets
 Recently adopted CRD lists set of eligible assets
8
CB: an attractive funding source
 For issuers
• Low funding costs
• Flexible alternative to deposits and senior bonds
• Possibility of extending the maturity profile of banks’
liability side to make it match with mortgage loans
loan maturity
 For investors
• Alternative to Government bonds (yield pick-up)
• Secure instrument in case of issuer insolvency double protection (claim against issuer & cover pool)
• Higher liquidity due to large issue sizes and market
maker commitments
• Geographic and asset class diversification
9
Record supply in European jumbo
covered bonds
Source: HVB
10
The Spanish Experience
 Prior to 1976 (pre Franco), parallels with Eastern Europe
 Laws date back to 1872 which saw first law allowing
‘Cédulas hipotecarias’.
 Mortgage Law 1946 (legal & operational security)
 Moncloa Pact 1977 (removal of obstacles)
 1982 Mortgage Market Law
 Securitisation law introduced in 1991
 Spanish Economy:
 Steady fall in unemployment from 26% to around 10%
 Falling interest rates (Eurozone membership)
 Cut National debt; Big increase in per capita income
 Result - Housing, construction and Mortgage Markets
booming
Covered Bonds in Spain
 Almost 1/5 of mortgages funded by Cédulas, and 1/3 of
new lending
 In 2005, issuance highest in Europe surpassing that of
Jumbo Pfandbriefe
 Issuance open to all types of institutions (multi-sellers,
direct)
 80% LTV limit on residential or 70% for commercial
property
 Strengthening status & demand of cédulas through:
 2004 Insolvency Act
 2005 Modification to Withholding tax regime
 Expected Jumbo issuance for 2006 is approximately EUR
58 Billion.
Spanish Multi-cédula structure
Cédulas Issuers
(a number of Savings Banks)
CH CH CH CH CH CH CH
AyT Cédulas Fund
Portfolio of individual issues
AyT Cédulas Cajas
(Issuer)
Liquidity Reserve
&
Protection Deposit
Aaa/AAA/AAA
Joint cédulas
Investors
Source: AyT, HVB
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Lessons to be learnt from Spain
Spanish Experience
 Highest home ownership rate in Western World
 Lowest State Housing in Western World
 Thriving covered bond market and securitisation
market
 One of Europe’s fastest growing mortgage markets
Achieved by…
 Diversified Funding Strategy
 Building programme to ensure supply of quality
housing
 Macro-economic reform
 Solid primary market laws to ensure safety of
collateral
 Minimising State involvement
Housing & Mortgage Markets in
Hungary vs. EU 25 and CEECs-2004
EU 25
Total value of residential loans,
€ million, (EU 25)
Residential Mortgage loans as
% GDP
Residential mortgage loans per
capita, € 000s (EU 25)
Growth rates of residential
mortgage market
Home ownership
Outstanding covered bonds as
% of residential mortgage
lending outstanding
CEECs
Hungary
4,670,736
31,479
7,767
45.3%
6.9%
9.6%
10.2
0.43
0.80
9.7%
34.4%
35.0%
Above 80% in many
63.5% CEECs
92.0%
17.0%
Source: European Mortgage Federation, Hypostat 2004
N/A
63%
15
Case Study: Hungary
 Regulatory Environment:
•
Legal framework – Mortgage Banking Act (1997)
•
State subsidy scheme (introduced 2001)
 Well developed system of refinancing partner
banks through purchasing mortgages
 3 covered bond issuers - FHB, HVB, OTP
 CB fastest growing market (6% of GDP) - total
outstanding volume EUR4.9bn (EMTN Programme)
 Since 2004: market based development
•
High HUF interest rates have turned clients towards
FX-based products
•
Current monthly net growth (30-35 billion HUF)
seems to be sustainable
16
Hungary: Challenges
 Size of the domestic market
•
Crowding-out effect of Govies (growing budget deficit)
 Liquidity concerns
•
Primary issues are relatively small (c. EUR50m)
•
Secondary turnover is moderate
 Less supportive macro environment
•
Volatile interest rates and FX market
 Growing role of foreign EUR issuances but majority of
outstanding cb volume were domestic issues and HUF
denomination
 Cut in subsidy scheme and growing FX lending
decreased the incentive of cb funding for non
mortgage bank lenders
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Outlook 2006
 European Mortgage Markets show no signs of slowing,
especially in new member states
 Continued Growth of covered bonds
 Emergence of new issuers: IT, PT, NL, UK….
 FSA to implement EU compliant cb regime; NL next.
 Increased level of investor interest (CEE, Asia)
 Continued work of ECBC
•
Work on definition of common standards for covered bonds
 European Commission working on European standard –
funding likely to be one of the driving forces behind
integration
•
Launch of Expert Group on Funding
18
Thank you!
E-mail : [email protected]
Tel:
+32 2 285 40 30
EMF website: www.hypo.org
Address:
European Mortgage Federation
Avenue de la Joyeuse Entrée, 14/2
Brussels 1040
Belgium