EU Mortgage Markets CML Regulating Mortgages Conference
London 6 July 2009
Annik Lambert European Mortgage Federation
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Structure of Presentation
Introduction to the European Mortgage Federation (EMF & ECBC) Market Trends State of Play Next Steps Conclusions
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The Voice of the EU Mortgage Industry
The EMF is a product federation bringing together: All categories of mortgage lenders From EU Member States & Accession Countries Represents the mortgage industry at EU level: Retail: Home Loans & Commercial Loans Funding: ECBC (2004) The Mortgage Industry is a major driver of the general EU economy: €6.1 trillion outstanding at end of 2007 Equal to 50.1% of aggregate EU GDP Access to housing for 70.4% of EU population CBs = €2.1 trillion asset class that provides 3 17% of all mortgage funding
ECBC: The Voice of the Covered Bond Industry
Platform for CB market participants: Increased need of mortgage lenders to tap capital mkts Exceptional developments of CB in recent years => reflected in intro. of CB legislation in 25/27 MS Going global: Canada, Japan, Mexico, Turkey, USA ... ECBC members (i.e. Issuers; Investment Banks; Rating Agencies; Trading Platforms and Law Firms) represent over 95% of all CBs issued (globally) CBs have performed comparatively well in current climate and issuances have slowly restarted since Jan. 2009 – this is boosted by new ECB scheme to purchase up to €60bn of CBs 4
Defining Home loans
Two categories of mortgage credit based on the borrower status: 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” Home Loans encompass three loan categories: Mortgage loans (secured on real estate property) granted for housing purposes Mortgage loans granted for consumption purposes, i.e. equity withdrawal (ERL) Housing loans, i.e. non-real estate secured loans or unsecured loans, granted for housing
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Value of EU27 Residential Mortgage Market - 1997-2007
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Source: European Mortgage Federation
Outstanding Mortgage Loans in the EU – 2008 & 2007 (mill. €)
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Mortgage Markets’ Growth rate (%) - 2008 & 2007
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Source: European Mortgage Federation
Mortgage Debt as % of GDP – 2008 & 2007
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Owner Occupation in Europe (%) – 2002-2008
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House Price y-o-y growth rates (%) – 2005-2008
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Transaction Costs (% of property value)
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Source: European Mortgage Federation
Mortgage CBs outstanding as % of total outstanding mortgage loans 2007
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Mortgage Covered Bonds outstanding – 2007 (mil. €)
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Until mid-2007: Booming Mortgage & Housing Markets
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 ⇒ Led to very high consumer demand as a result of: Increased affordability: 2 points above & general increase in households incomes Change in demographic organisation of households Strong product innovation (LTVs/maturities/flexib) Expectation of continued increase in house prices
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2007 : A Turning Point
The catalyst: US Sub-Prime Crisis Abundant liquidity & continued house price growth => relaxing of credit underwriting conditions => sub-prime Funding through securitisation & externalisation of loans (no risk to lender) => sub-prime Increased complexity of securitisation process & reduced transparency => investors fail to/no longer make their own assessment of risk and rely on CRAs 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 -which contain sub-prime loans- primarily relying on CRA ratings In 2007 EU banks discover existence of toxic loans in their portfolios =>Very strong loss of confidence, drastic drying up of liquidity on EU markets and, finally, a credit crunch
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2008: Taking stock of the crisis
Due to lack of liquidity and/or out of caution, EU lenders have been forced to: Strengthen their credit underwriting conditions Increase the price/cost of riskier loans Reduce range of products (LTV) and less use of intermediaries Reduce their cross-border activity Interest rates have been rising and then falling following ECB/national central banks/monetary policy Property markets in a number of Member States (MS) are witnessing a decline in their price growth rates (DK, ES, UK) & even some price falls (IE) Consumer demand is easing due to the general increase in prices and decline in economic perspectives
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EU Industry Position
Pre-Crisis EU mortgage markets were broadly integrated: Lenders go cross-border through subsidiaries and through mergers & acquisitions Price convergence is high (<1% difference between adjusted prices) and lenders’ margins are narrow Level of market completeness could be improved However, the crisis has changed the landscape: Lenders tend to avoid new risky undertakings and to fall back on markets they know best Lenders’ prices are increasing (re-evaluation of risk & increasing margins) Product diversity is narrowing ‘Disintegration’ process
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EU Industry Priorities
To overcome the current crisis and restart a dynamic & sustainable business taking into account: The intrinsic differences between EU & US markets: No automatic parallel in choice of measures Preserve EU market competitiveness at global level The differences between national markets in the EU and subsequent difference in MS sensitivity to the crisis: Major funding technique: deposits, CBs, MBS Level of exposure to US securitisation Range of products: attitude to “riskier” products State of housing market & consumer demand =>Calls for a number of well-targeted concrete measures and NOT a “one-model-fits-all” scheme
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2009: Where do we stand?
Quickly changing landscape and conditions:
COM shifts policy => from mortgage market integration to horizontal responsible lending initiative, though including most integration issues ECB announces new scheme to purchase up to €60bn of covered bonds to restore liquidity ECB has cut its central rate to 1% - cumulative decrease of 325bps since May 2008 CRD is currently under review => focus on large exposures, securitisation, credit default swaps etc.
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2009: How is the Industry reacting?
Development of EMF Responsible Lending Standards => acknowledgement of need for greater transparency Updating of the Code of Conduct/ESIS Support of initiative to promote minimum level of responsibility for the loan originator Closely following initiative by some Member States and Commission on Foreclosure ECBC has taken steps to restore liquidity through negotiations with system providers and the ECBC 21
What challenges for 200910 and beyond?
Considering the causes & effects of the crisis & the current state of play, the EU Mortgage Industry faces a number of challenges in 2010 and beyond:
Government guarantee schemes: Changed landscape & subsequent distortion of competition Identification of remaining toxic products Return to a free market Risk of short-term regulatory reactions at EU level: product regulation, foreclosure, CRD review, “loan to deposit ratios”, leverage ratios, national vs. EU regulation for c/b activities Lack of confidence in the banking sector: decrease in 22 consumer demand and savings deposits
European Mortgage Federation
E-mail: emfinfo@hypo.org Tel: +32 2 285 40 30 EMF website: www.hypo.org Address: Avenue de Cortenbergh, 71 B-1000 Brussels Belgium