The National Mortgage Guarantee (Nationale Hypotheek Garantie, or NHG) is provided by the Homeownership Guarantee fund (Waarborgfonds Eigen Woningen, or WEW) and acts as a government-backed guarantee fund. For homeowners, NHG acts as a safety net by protecting households from the risk of unemployment, disability, divorce and death of a partner. Arjen Gielen, CEO of the WEW explains the implications of NHG for mortgage providers.
There are currently approximately 1.5 million homes with an NHG mortgage. Market share of existing homes falling within the cost criteria that are financed by the NHG was 78% in 2015. As of 31 December 2015, the WEW was guarantor for some €187 billion (about €175 billion in 2014) in mortgage loans related to 1.254.000 active guarantees. In 2015, the fund met €144 million in losses. As of 31 December 2015, the foundation’s total guaranteed equity was around €899 million¹.
The NHG provides comprehensive coverage of lenders’ risks. A guarantee that isn’t limited just to the residual debt (the difference between debt and sales proceeds), but amongst other things also includes interest arrears (including penalties), and costs necessarily incurred to facilitate the sale, costs from business expenses and insurance, and costs as a result of urgent repairs and restoration².
The NHG has a Triple A rating with the credit rating agencies. The risk of the WEW itself being unable to meet its financial obligations is further minimized by the fact that the Dutch government unconditionally guarantees all guarantee obligations. This guarantee is enshrined in the contingency agreement with the government.
For mortgage lenders, it is first and foremost an additional product that makes the mortgage more appealing to their clients. This is due to both the lower interest rates that can be applied to an NHG mortgage and the risks the WEW takes over from the client by writing off residual debt.
Specifically, the NHG guarantee mitigates the payment risks for lenders. As a result, lenders need fewer buffers for assets guaranteed by the NHG, as their maximum loss against these assets is lower. The NHG’s role as credit risk mitigant (CRM) is recognized within the regulatory framework for banks and insurance companies. According to the European directives CRR/CRD IV (an elaboration of the Basel accords), the NHG is identified as a CRM under both the standardized approach and within the banks’ internal models, leading to substantially lower capital costs. Solvency II for insurance companies also recognizes the NHG as a CRM, albeit only under the internal models that insurers can use.