EU Mortgage Markets
CML Regulating Mortgages
Conference
London
6 July 2009
Annik Lambert
European Mortgage Federation
1
Structure of Presentation
Introduction to the European
Mortgage Federation (EMF & ECBC)
Market Trends
State of Play
Next Steps
Conclusions
2
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 provides3
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
5
Value of EU27 Residential Mortgage
Market - 1997-2007
6
Source: European Mortgage Federation
Outstanding Mortgage Loans in the EU –
2008 & 2007 (mill. €)
7
Mortgage Markets’ Growth rate
(%) - 2008 & 2007
8
Source: European Mortgage Federation
Mortgage Debt as % of GDP –
2008 & 2007
9
Owner Occupation in Europe (%)
– 2002-2008
10
House Price y-o-y growth
rates (%) – 2005-2008
11
Transaction Costs
(% of property value)
12
Source: European Mortgage Federation
Mortgage CBs outstanding as % of
total outstanding mortgage loans -
2007
13
Mortgage Covered Bonds
outstanding – 2007 (mil. €)
14
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
15
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 16
liquidity on EU markets and, finally, a credit crunch
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
17
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 (Calls for a number of well-targeted concrete
measures and NOT a “one-model-fits-all” scheme
19
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.
20
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 2009-
10 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