The Dutch, whose economy is suffering from a housing-market collapse made worse by tighter regulation, plan to issue government-backed mortgage bonds to loosen lending and ensure the country avoids a repeat of the 2008 crisis when credit dried up.
Banks, pension funds and the Dutch government agreed last month to establish a finance company that will buy some of the highest-rated securitized mortgages from lenders with funding from government-guaranteed home-loan bonds. The program would issue at least 50 billion euros ($69 billion) within five years to reduce lenders’ reliance on capital markets for funding.
The Netherlands’ government wants to lure new mortgage providers and investors into a market increasingly seen as among the riskiest in Europe after the Dutch went on a borrowing binge before the financial crisis and housing prices fell 20 percent. The finance ministry is seeking reassurance the bonds won’t put taxpayers at risk and needs the blessing of European Union regulators that the initiative doesn’t break state-aid rules.
“An explicit state guarantee on Dutch-mortgage bonds creates more transparency and liquidity, which will attract a broader group of investors,” Harald Benink, professor of banking and finance at Tilburg University, said in a phone interview. “That may result in lower costs to fund mortgages and subsequently cheaper loans for consumers.”
Economic Affairs Minister Henk Kamp is pushing the effort as the U.K. also adopts state-guaranteed mortgage funding to support housing. The governments are stepping up involvement in property even after the U.S. was forced to rescue its mortgage-finance firms Fannie Mae and Freddie Mac five years ago amid a housing crash.
Dutch Finance Minister Jeroen Dijsselbloem, speaking to lawmakers in The Hague on Oct. 17, said the mortgage-finance company, or NHI, could create a funding source that would function even in times of market stress and could make it more appealing for foreign lenders to enter the market. He has to weigh that advantage against the risks of increasing the amount of direct and indirect guarantees to more than 500 billion euros, its level at the end of last year, burdening the Netherlands’ finances. Almost a third of those are related to home loans.
The Dutch government will regularly revise risk premiums it charges for its backing and will stress test its finances next year, Dijsselbloem said.
While the program may help lending, it also could increase the risks for the state after another period of surging house prices, according to Fons Lute, managing director for the fiduciary mandates investment team at BlackRock Inc., the world’s largest money manager.
It’s “uncertain how the program will work out if there will be a boom in house prices down the road,” said Lute. “The construction has similarities to Fannie Mae and Freddie Mac.”
Dutch mortgage debt more than doubled between 2000 and 2008 amid liberal tax breaks and is among the highest in the world at 651 billion euros, or 108 percent of gross domestic product as of the end of last year. A 20 percent drop in prices since a 2008 peak has left about a third of homeowners with a mortgage that exceeds the value of their property.
That poses a risk to the country’s banks, which currently rely on capital markets as there is a gap of about 450 billion euros between loans and deposits. Since 2008, the Dutch are also served by a shrinking and less-competitive pool of lenders after banks tried to cut leverage and limit lending, in part to meet regulatory demands. The three-biggest domestic banks, ING Groep NV, ABN Amro Group NV and Rabobank Groep, control of 84 percent of the Dutch mortgage market.
Dutch borrowers pay 1 percentage point more in interest than the European Union average because of the lack of competition, capital restrictions and a ban on price cutting to win business, the government has said. Cheaper funding through the new bonds could reduce the difference between mortgages and rates on government debt by about 0.2 percentage points within a few years, a committee advising the government said last month.
Other changes, such as the entry of new mortgage providers, may trigger another decrease of as much as 30 basis points, according to the committee. Dutch 5-year bonds yield 1.12 percent, 34.7 basis points more than German bonds with an equal maturity.
Consumers in the Netherlands also have had among the biggest drops in confidence in Europe as the country, in its third recession in five years, undergoes a revamp of its housing market aimed at capping risks from excessive debts on households, banks and the economy.
“If I say homes were increasingly used as cash machines I would be exaggerating -- although not even that much,” Dutch central bank President Klaas Knot said in a speech on Sept. 23.
Two decades of price increases came to a halt as the Dutch government took steps to lower maximum loan-to-value ratios to 100 percent by 2018 from 106 percent currently. Interest-only portions of mortgages were capped at 50 percent of home values in 2011 and, from this year on, tax breaks only apply for mortgages that are fully paid over 30 years.
To reduce the chance of putting taxpayers at greater risk, the NHI will only accept mortgages covered by a Dutch Homeownership Guarantee, or NHG. The 783 million-euro fund, which ultimately is backed by the Dutch government and covered more than 160 billion euros in mortgages at the end of September, compensates lenders in case borrowers are forced to sell their home at a price that’s below the value of their loan. Additional risks from the NHI, if the plan succeeds, will be mitigated by premiums, Dijsselbloem said.
While the NHI program brings benefits for banks, investors and the Dutch state, it remains to be seen whether those advantages will reach consumers, BlackRock’s Lute said.
“The biggest banks can get sufficient amounts of capital at relatively low costs already, while the lack of challengers eliminates any incentives they have to pass the advantage on to consumers,” said Maarten Pieter Schinkel, professor of economics at the University of Amsterdam. “There’s a risk large incumbent mortgage lenders will get better prices for their securitizations as they are systemic banks and also can mix in older loans with lower loan-to-values. Newcomers don’t have that advantage.”
For Jeroen Drost, chief executive officer of NIBC Bank NV, owned by a consortium led by J.C. Flowers & Co., there are sound reasons for the mechanism stretching back five years.
“You will not help the banks at this moment as right now markets are functioning,” he told reporters in August. “Don’t forget, however, in 2008, 2009, 2010 there was nothing. So if you know there is a mechanism with a large likelihood of remaining open even in a severe crisis, that gives you greater piece of mind to grant mortgages.”