The Dutch government agreed with pension funds and banks to set up an institution that will sell mortgage bonds backed by the country’s top credit rating, a bid to reduce financing costs for lenders and consumers.
To ensure liquidity in the securities, which will be modeled on government bonds and have differing maturities, the vehicle should aim to issue at least 50 billion euros ($67 billion) of mortgage debt in five years, according to documents prepared by a committee advising the Dutch government. Lenders will transfer low-risk loans through securitizations, while retaining default risks to avoid “moral hazard,” it said.
The mortgage institution could bring Dutch rates more in line with those in other countries, according to the committee’s head, pension executive Tjerk Kroes. The Netherlands named Kroes to lead the committee as it seeks to boost an economy hurt by a housing collapse. The plan requires approval by the European Union, which regulates state aid to the financial industry.
“The National Mortgage Institution -- if set up adequately taking into account risks for the government -- can prove to be an important link in the recovery of the housing market and potentially contribute even to the return of confidence,” said Kroes, the director of corporate strategy and policy at APG Groep NV, Europe’s largest pension fund asset manager.
Dutch borrowers pay 1 percentage point more in interest than the European Union average, the government has said, partly because the nation’s banks rely on capital-market funding to fill a gap of about 450 billion euros between deposits and loans. The shortfall is inflated by the nation’s mortgage debt, among the highest in the world at 108 percent of Dutch gross domestic product.
“While this will support funding costs of weaker banks, Dutch covered bond supply by large banks is low and bonds are very well bid,” said Bernd Volk, head of European covered bond and agency research at Deutsche Bank AG in Frankfurt. “It remains to be seen if this will actually increase new lending.”
Banks are unable to match their loan book to local savings, which are predominantly held in the country’s pension funds. Those funds invest more than 85 percent of their 960 billion euros in assets outside the Netherlands. High loan-to-value ratios and limited competition among mortgage providers have also pushed up costs for borrowers.
The state vehicle, which will only cover low-risk mortgages, will get funding at borrowing costs similar to those of the Dutch state plus a liquidity surcharge, cheaper than home lenders can get on their own, Kroes said. That may allow new Dutch and foreign mortgage providers to enter the market.
The borrowing rates for Dutch government bonds are among the lowest in the euro area, with 30-year securities currently yielding about 2.90 percent and 10-year bonds 2.30 percent.
The committee said cheaper funding could cut the difference between rates on government bonds and mortgages by about 20 basis points, or 0.2 percentage point, within years. Additional benefits, such as the entry of new mortgage providers, may trigger another decrease of as much as 30 basis points, according to the report.
“The risks for the state can’t materially increase,” Dutch Economy Minister Henk Kamp said in a letter to parliament today. “The government will consider if and how the National Mortgage Institution can be structured so that it meets European state aid aspects and other preconditions.”
To avoid increased risks for the state, the institute will only accept mortgages covered by a Dutch Homeownership Guarantee, or NHG. The 787 million-euro fund, which is ultimately backed by the Dutch government, compensates lenders in case borrowers are forced to sell their home at a price that’s below the value of their loan. The fund covers mortgages of as much as 290,000 euros, with this guaranteed amount reduced to 265,000 euros from July.
Housing prices have dropped by 20 percent since peaking in 2008, and may not start to recover before 2015, the Dutch central bank has said. Kroes advised the government to commit to reducing the share of mortgages covered by NHG when the housing market has recovered.
To further limit risks for the state, and to avoid consolidating the National Mortgage Institution in the government’s budget, it must build up equity through premiums paid by mortgage providers, and possibly by capital from institutional investors, Kroes said. The vehicle’s risks should be capped and monitored by a regulator, he said.