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What’s Ahead forWhat’s Ahead forEU Mortgage Markets?EU Mortgage Markets?

ELRA General AssemblyELRA General AssemblyBrussels, BelgiumBrussels, Belgium

27 April 200927 April 2009

Kerstin FISCHEREuropean Mortgage Federation

Structure of PresentationStructure of Presentation

1. Introduction to the European Mortgage Federation (EMF)

2. Definitions

3. Market Trends

4. State of Play

5. Next Steps

6. Conclusions

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The Voice of the EU The Voice of the EU Mortgage IndustryMortgage Industry 11

EMF: a product federation - all categories of mortgage lenders

Membership: EU MS & Accession Countries

Representing mortgage industry at EU level => retail & funding sides

European Covered Bond Council (ECBC) since 2004

Important sector in the general EU economy: €6.1 trillion outstanding (end 2007) = 50.1% of aggregate EU GDP Access to housing for 70.4% of EU population

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Defining Home loansDefining Home loans 22

Two categories of mortgage credit, based on the borrower: 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”

3 categories of Home Loans: “classic” mortgage loans: secured by real estate

property and granted for housing purposes; ERS: Mortgage loans secured on real estate property

but granted for consumption purposes; Housing loans, i.e. granted for housing purposes

but non-real estate secured or unsecured loans.

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Value of EU Residential Mortgage Value of EU Residential Mortgage Market - 1997-2007Market - 1997-2007 33

Source: European Mortgage Federation

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Outstanding Mortgage Loans in the EU – Outstanding Mortgage Loans in the EU – 2006 & 2007 (mil. €)2006 & 2007 (mil. €) 33

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Mortgage Markets’ Growth Mortgage Markets’ Growth rate (%) - 2006 & 2007rate (%) - 2006 & 2007 33

Source: European Mortgage Federation

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Mortgage Debt as % of GDP – Mortgage Debt as % of GDP – 2006 & 20072006 & 2007 33

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Owner Occupation in Europe – Owner Occupation in Europe – 2002-20072002-2007 33

House Price y-o-y growth House Price y-o-y growth rates (%) – 2005-2008rates (%) – 2005-2008 33

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Mortgage CBs outstanding as % of Mortgage CBs outstanding as % of total outstanding mortgage loans – total outstanding mortgage loans – 20072007 33

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Mortgage Covered Bonds Mortgage Covered Bonds outstanding – 2007 (mil. €)outstanding – 2007 (mil. €) 33

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Booming Mortgage & Booming Mortgage & Housing Markets until mid-Housing Markets until mid-20072007 33 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

Very high consumer demand as a result of: Increased affordability: low interest rates; decrease

in prices; general increase in households incomes & strong product innovation (LTVs/maturities/flexib)

Change in demographic organisation of households Expectation of continued increase in house prices

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2007 : A Turning Point2007 : A Turning Point 44 US Sub-Prime Crisis:

Result of abundant liquidity & continued house price growth Relaxing of credit underwriting conditions Funding through securitisation: loans/risk do not remain on

lenders’ balance sheets Securitisation process has developed, becoming much more

complex and less transparent

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 containing

sub-prime loans – primarily relying on CRA ratings In 2007, EU banks discover existence of risky loans in their

portfolios=> Result: Very strong loss of confidence, drastic drying up of liquidity on EU markets and, finally, a credit crunch

State of Play in the EU by State of Play in the EU by November 2008November 2008 44

EU Industry acknowledges a slow-down in the mortgage market in a general context where: Property markets in a number of MS are witnessing

a decline in their price growth rate (DK, ES, UK) and even some price falls (IE)

Consumer demand is easing due to general increase in prices and decline in economic perspectives

As a result, either due to lack of liquidity or out of caution, EU lenders have: Strengthened their credit underwriting conditions Increased the price/cost for riskier loans

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Stakeholders’ Reactions: Stakeholders’ Reactions: EU Commission EU Commission (1)(1) 55 EU regulation of mortgage industry today:

Institutional regulation aiming at banks’ economic soundness & general financial stability: CRD/Basel II

Product regulation: consumer credit, time share Horizontal consumer protection: UCP Directive

2007 Commission White Paper: further integration of EU mortgage markets: MC = access to housing for 67% of EU citizens Financial sector outstanding= 49.6% of EU GDP 2007 Linked to construction sector = major driver of economy

COM: further integration would benefit consumers/ lenders => lower costs & increased product diversity.(“integration”: not defined)

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Stakeholders’ Reactions: Stakeholders’ Reactions: EU Commission EU Commission (2)(2) 55 To achieve further integration, DG MARKT

considers four types of measures: Comparative studies on desirability of

regulation / harmonisation: equity release loans; credit intermediaries; tying/ UCP; non-banks

Removal of legal obstacles to cross-border activities: registration, enforcement & valuation

Facilitation of cross-border funding in the EU Further consumer protection measures

(PCI, ESIS)

However, a number of these proposals have been superseded by the crisis, and today the Industry has other, more urgent priorities

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Stakeholders’ Reactions: Stakeholders’ Reactions: EU Industry EU Industry (1)(1) 5 5 Integration = EU cross-border activities

Lenders do go cross-border through subsidiaries & M&A

Integration = EU price convergence Range of adjusted prices in the EU is <1% and

continuously converging, thanks to: Increased competition, lender efficiency, and greater

price transparency

Integration = EU market completeness Markets are broadly complete and the product range is

continuously broadening, but there are gaps (DE; IT; P) Missing products: ERL; fixed-rate & sub-prime products In principle, there is room for improvement

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Stakeholders’ Reactions: Stakeholders’ Reactions: EU Industry EU Industry (2)(2) 55

Pre-Crisis EU mc markets: broadly integrated Level of cross-border activity depends on individual

lender’s appetite / objectives (economic context) Margins left little room for further price reductions Market completeness level: could be improved in

principle

However, the crisis has changed the landscape: Lenders tend to avoid new risky undertakings,

to fall back on markets they know best; Prices are increasing (re-evaluation of risk, increased

interest rates); and Product diversity is narrowing rather than widening.

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Lessons learnt: Where do Lessons learnt: Where do we go from here? (1)we go from here? (1) 66 Here & Now - Industry’s priorities: overcome current crisis +

restart a dynamic & sustainable business, in a context where:

MS’ sensitivities to global crisis vary widely, depending on: Choice as to major funding technique: deposits, CBs, MBS Level of exposure to US securitisation Range of products: attitude to more risky products State of housing market & consumer demand

Causes of the crisis in the EU mainly result from: EU markets’ sensitivity to US ‘ups & downs’: global

distribution of risk through securitisation proved to lead to “contagion” rather than to mitigation

Loss of confidence resulting in drying up of liquidity Lack of transparency of securitisation process: investors

relying on CRAs/not aware of real risk level Some relaxing of credit underwriting conditions

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Lessons learnt: Where do Lessons learnt: Where do we go from here? (2)we go from here? (2) 66

EU markets’ wide diversity calls for certain targeted concrete measures rather than wide harmonised scheme

Causes of crisis: clear differentiation EU – USA “Responsible lending” standards applied by all lenders:

framework of indicators (still to be defined) Level Playing Field: Same business, same risks, same

rules Adequate information to consumers, allowing for a

well-informed choice (Code/regulation?) Min. level of responsibility for the loan originator:

Who does not keep loans on balance sheet? Improved transparency of the securitisation process

and rating agency procedures? Increased reliance on mortgage insurance to mitigate

lenders’ risks?

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European Mortgage FederationEuropean Mortgage Federation

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