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Dynamics among providers in the Dutch mortgage market

Cor Zwaan, Otto ter Haar, Rolf Belonje

Since 2011, a number of major shifts took place among providers in the Dutch mortgage market. During this period, for instance, the percentage of mortgage loans issued by the country’s three major banks (ING, Rabobank and ABN Amro) decreased from some 70% to around 50%. The market share of institutional investors investing in the mortgage market via so-called ‘regiepartijen’ rose considerably in the same period as well, achieving an annual volume of approximately €13 billion. Regiepartijen are non-banks that offer institutional investors access to the Dutch mortgage market via lending platforms. So how can these shifts be explained?

Cor Zwaan, Director of Investment Solutions at Credit Management and Investor Solutions B.V. (CMIS Group), sees multiple causes. 'Stricter capital requirements (as dictated by Basel regulations) have led to a decrease in the market share of banks when it comes to issuing new mortgages. Additionally, banks tend to supply funding through short-term investments, which makes mortgages with a short-to-medium fixed-interest period an attractive proposition. Due to the current low interest rate, consumer demand is largely shifting towards the longer fixed-interest periods of 15 years and up. The opportunities this creates are being seized upon by non-banks, who are successfully encouraging Dutch pension funds and foreign institutional investors to invest their money in existing and new Dutch residential mortgages.'

Capital requirements

The Dutch central bank (De Nederlandsche Bank) estimates that as a result of demographic developments and the rising house prices, mortgage volume will grow from €625 billion as of mid-2016 to €850-875 billion in 2025. The expectation is that traditional mortgage lenders will be unable to meet this demand. How exactly the dynamic among providers will develop in the coming period depends on the capital requirements with which banks are expected to comply, among other factors.

The Basel Committee on Banking Supervision (Basel III) has agreed that the minimum capital requirements for banks must be increased. The underlying thought here is that higher capital requirements lead to a more stable financial system, in which banks are better able to absorb unexpected significant losses and are discouraged from taking irresponsible risks.. From an international perspective, mortgages in the Netherlands have a relatively low degree of risk. Consequently, they have been relatively free of regulatory pressure until now.

Basel 3

'Currently, most Dutch banks use the internal ratings-based (IRB) approach when calculating their minimum capital requirements', Otto ter Haar, Banking Supervision Advisor at the Dutch Banking Association (NVB), explains. 'These are internal models estimate credit risk which are subject to inspection and approval by European (ECB) or Dutch (DNB) supervisory authorities. Because all relevant and quantifiable factors are considered, the process allows for an accurate assessment of risk. These models are re-examined annually in order to determine if they were in fact effective in predicting the losses incurred in the previous year. In the Netherlands, the actual losses are significantly lower than the European average, which leads to lower risk weights as well.'

Basel 3.5 - new agreement?

At the moment, the Basel Committee is engaged in vigorous negotiations on a new agreement. The most important point of discussion concerns the introduction of an output floor intended to limit the extent to which banks can utilise their internal risk models. With this new proposal, Ter Haar warns, the danger is that a great deal of the existing risk sensitivity will be cast aside. It’s a one-size-fits-all approach that delivers the same outcome for every country in the world. The only risk factor considered is the loan-to-value (LTV) ratio. In the Netherlands, however, the willingness and ability to pay have proven to be more relevant factors in predicting the risks than the LTV. What’s more, based on records of payments, past due and defaults on mortgages we observe that an 80% Loan to Value (LTV) in a mature and stable jurisdiction – like the Netherlands - reflects a different risk profile compared to an 80% LTV in an emerging market jurisdiction, say in Brazil.. Factors such as the legal structure of the country, the housing market, customary payment practices and the social safety net in case of unemployment, for instance, also play a role in determining losses and therefore risks. We believe that similar risks should lead to similar capital levels, while different risks should lead to different capital levels.'

Impact of new regulations

The fear is that the new Basel proposals  would make it more expensive for Dutch banks to issue mortgage loans, in particular those with a high LTV ratio. Ter Haar shares this concern as well. 'The new proposals threaten to weaken the relationship between risk and capital, leading to increased costs for Dutch banks. On one hand, this will have the effect of raising the cost to consumers. It is possible, however, that it will decrease the number of mortgage loans issued by banks as well. It is in the interest of Dutch banks to maintain sound rules governing capital: they must remain risk-sensitive. It is not, on the other hand, in the interest of Dutch homeowners to be confronted with more expensive mortgages as a consequence of new global regulations – regulations that appear to be ill-suited to the Netherlands.' Banks will remain key players in the Dutch mortgage market. At the same time, these new rules could create additional space in the Dutch mortgage market for lenders other than banks.

Non-banks

In their search for new sources of revenue, pension funds and foreign investors have discovered the Dutch mortgage market. This discovery has resulted in increased competition and has contributed to reducing the three large banks’ share in the total number of new mortgage loans issued.

Rolf Belonje, Director of Dutch Mortgage Portfolio Management (DMPM, part of Blauwtrust Groep) expects this development trend to continue. 'Dutch mortgages have become a highly interesting asset class. Dutch mortgages have become more uniform as a result of recently implemented changes in legislation, making them easier to understand for both foreign and domestic investors. The combination of a transparent product and a relatively low credit risk – even during the economic crisis, the losses suffered by mortgage lenders in the Netherlands were relatively minor – is now leading to major interest from investors, both foreign and domestic.' 

Non-banks make it possible to investors to invest in the Dutch mortgage market directly. Entering the market via this route is primarily interesting for investors who are looking to invest in the Dutch mortgage market yet lack the experience or organisational capacity required to issue mortgage loans themselves.

Hypotrust

With its Hypotrust label, Blauwtrust Groep was the first non-bank in the Netherlands. To date, the group has issued over € 25 billion in mortgage loans using this model. 'Hypotrust was founded in 1993 and was intended as a plug-and-play platform for institutional investors who were seeking to invest in the Dutch mortgage market, but had no organisational basis in the Netherlands – and no interest in one - either. With its very own licence for issuing mortgage loans, Hypotrust was the first non-bank lender in the Dutch mortgage market', says Belonje. 'With a single generalised acceptance framework and a single set of product conditions, this innovative model allowed for joint participation by multiple investors.'

Today, there are multiple non-banks active in the Dutch mortgage market and their share of the new-mortgage market has increased strongly in recent years. 'We expect to see a further increase in the percentage of mortgage loans issued by non-bank', Belonje says. 'It remains difficult for large banks to compete using their current business models, in the event they feel the need to compete at all. While margins are expected to decrease as a result of increased competition, in the current interest climate mortgages are sure to remain an interesting option.'

Comprehensive solution

Belonje points out that the market isn’t necessarily interested in non-banks as such, but rather comprehensive solutions. 'Non-banks must purchase a variety of components and then offer a comprehensive solution through partnerships with various organisations. This can entail risks as well, in addition to various aspects of data exchange that may not always be desirable.'

Blauwtrust Groep

With Blauwtrust Groep, many institutional investors are choosing the comprehensive solution. DMPM takes care of portfolio management, Conneqt takes care of marketing and distribution, while Quion is responsible for servicing. 'This allows the investors to decide whether to use a personal brand, an existing brand or a custom product when entering the mortgage market. Investors can also opt to establish a dedicated mandate designed entirely around the needs of the investor in question. Another possibility is to arrive at what is known as a collective mandate, in which multiple investors participate in a single mandate. In that case, investors must be willing to accept a certain degree of mutual dependency.'

One example of this is the IQWOON label introduced mid 2016. 'Subsequent to the investor’s intent, DMPM and the other parts of Blauwtrust Groep brought this new label to market in approximately three months’ time. To date, IQWOON applications worth some €900 million in total have been submitted', according to Belonje.

Merius Investment Platform

As of 1 September 2016, CMIS Group offers mortgages under the Merius Mortgages (Merius Hypotheken) brand. Funding to support this label is obtained via the Merius Investment Platform. Zwaan, too, recognises the need for a comprehensive solution. 'The Merius Investment Platform is part of CMIS Group, which manages all aspects of the mortgage-related value chain on behalf of investors. This "one-stop shop solution" offers distribution, issuance and management of mortgage loans, special servicing, portfolio management and investor reporting.The Merius Investment Platform offers an integral solution and is aimed at long-term investors such as Dutch and foreign insurance companies, pension funds and banks. What’s more, as a result of the Merius Investment Platform, having multiple investors invest simultaneously in new Dutch residential mortgages becomes an attractive and easily managed option', says Zwaan.

Non-banks are offering investors various options for participation. Which product is best suited for a particular investor depends on factors including the extent of the mandate and the degree to which the investor wishes to independently shape the mortgage product to be offered. Recently, for example, Merius Hypotheken expanded its range of products to include mortgages certified by the Dutch Mortgage Guarantee Scheme (NHG). This expansion was realised thanks to the securement of a new institutional investor who committed to structural and long-term investments in new Dutch residential mortgages.

The Merius Investment Platform is aimed at investors who are interested in investing in mortgages via a direct investment (whole loans or pass-through note). 'We offer investors the opportunity to precisely coordinate their investment to their risk appetite, and to tailor their investment activity to their (typically long-term) commitments. Because we offer this flexibility in the choice of NHG and non-NHG mortgages, various LTV categories and assorted fixed-interest periods, investors are able to identify their own perfect match.'