France Housing Seen Threatened Amid Pressure on Rates: Mortgages

Just when French homebuilders said nothing could make a 15-year low in business worse, a new banking rule is threatening to do exactly that.

The moribund economy, with unemployment at a 16-year high, leaves developers with no other means than some of the lowest interest rates on record to spur demand. Now the Bank of France may push mortgage rates higher.

Christian Noyer, the Bank of France governor, is prodding lenders to sell packages of residential mortgages to free up capital to fund small and medium-sized companies as international rules force banks to hold more reserves. Bundling mortgages of varying credit-worthiness for sale to investors will boost rates and damp the market, developers said.

“Mixing good debt with bad debt can only lead to increased costs,” Nordine Hachemi, the chief executive officer of developer Kaufman & Broad SA, said in an interview. “That’s a risk factor that may eventually lead to higher rates.”

Concern that higher borrowing costs will prompt property buyers to put plans on hold is giving builders pause. French housing starts declined 4.2 percent last year to the lowest since 1998 as President Francois Hollande increased real estate regulations and taxes to trim the deficit, offsetting the lure of record low interest rates.

Building permits slid by 13 percent, dimming prospects for developers such as Kaufman, based near Paris, and building-material makers Cie. de Saint-Gobain, Imerys SA and Vicat SA.

Raising Costs

With weakening demand, house prices, which reached a record high in 2011, may fall by as much as 4 percent this year after dropping 2.9 percent in 2013, according to the FNAIM French federation of 12,000 brokers. Apartment prices in Paris, which have tripled since the start of 2000, have dropped 3.6 percent since peaking in the third quarter of 2012.

The Bank of France push for securitizing home loans may add another damper on residential property demand.

“Securitizing home loans tends to boost structural costs a bit,” Thierry Dufour, deputy CEO of Credit Foncier, a mortgage lender owned by Paris-based bank Groupe BPCE, said in an interview. “It may require an extra perhaps 20 to 30 basis points.”

A 30-basis-point increase on the current rate of 3 percent, excluding insurance, for a 20-year mortgage on a 240,000 euro ($332,916) home loan in the greater Paris area would boost the total cost of borrowing by 8,710 euros, according to Cafpi SA, France’s biggest mortgage broker.

Financing Business

For Noyer, the push to securitize mortgages -- in addition to preparing banks for international capital rules -- is aimed at financing the French economy, which has barely grown in the past two years.

It is “indispensable” to find the “means to develop de-consolidated securitization of residential mortgages” to improve bank liquidity and solvency and rebalance a lending business marked by “particularly low rates,” he said at a conference in Paris in January.

“To be able to securitize, clearly there must be a margin to be shared,” La Banque Postale CEO Remy Weber said at a conference last month. “Therefore an impact on the rate level should be expected.”

Residential mortgage-backed securities, or RMBS, have not been a big source of funding for France’s largest banks, which have used deposits and covered bonds to boost lending.

Covered bonds are typically higher-rated and lower-yielding than unsecured debt because they are backed by assets that remain on lenders’ balance sheets. RMBS are collateralized by a portfolio of residential properties and don’t stay on banks’ books. RMBS investors demand greater yields, costing banks more.

Small Amount

“The fact that interest rates are low is less of a problem for covered bond investors than it is for RMBS ones, because the former are investing in secured bank debt and primarily relying on the bank to repay their bonds, with the assets providing extra support only in case of insolvency,” said Ariel Weil, a Moody’s Investors Service European structured finance analyst.

The outstanding amount of French covered bonds made up of mortgages and other assets was 362 billion euros at the end of 2012, according to the European Covered Bond Council.

That dwarfs the amount of French RMBS rated by Moody’s, which totals about 4 billion euros, excluding those from Credit Immobilier de France, which has stopped generating new business and is to be progressively shut down.

In contrast, Moody’s rated 178.9 billion pounds ($298 billion) of U.K. RMBS excluding subprime as of August last year.

Last year mortgage rates dropped less than banks’ funding costs, which enabled lenders to beef up margins, Credit Foncier Deputy CEO Dufour said.

The Bank of France call for banks to bolster margins, and the need to offer attractive yields to RMBS investors will boost mortgage rates, Cafpi’s deputy CEO Philippe Taboret said.

Rewarding Risk

“We have to reward investors’ risk on securitization,” Taboret said in an interview. “Interest rates aren’t currently moving, thanks to the very accommodative policy of the central bank. If securitization becomes sizeable, the cost for borrowers will be immediately passed on, the risk being significant.”

Even a partial securitization of about 20 percent to 25 percent of loans, would have consequences on rates, he said.

Credit Foncier said in January it plans to sell up to 3 billion euros a year of RMBS, after transferring about 1 billion euros in mortgage-backed bonds to La Banque Postale in 2012.

Banks have already lifted average French mortgage rates by 0.14 percentage point since reaching a record low in July to 3.04 percent in January as the U.S. Federal Reserve started reducing monetary stimulus, a Credit Logement-CSA survey shows.

For their part, developers and building materials companies are bracing for a lackluster year.

Tough Environment

Kaufman predicts a “mixed year,” with the gross margin at its housing division falling “slightly” because of a decline in orders over the past two years, and as the launch of new projects are delayed by this month’s French municipal elections.

Bouygues’s construction unit is “fighting for a share of a shrinking pie,” Yves Gabriel, its head, told Bloomberg last month. Lafarge CEO Bruno Lafont predicts a “slight” decline in cement demand in France this year.

“The market for new housing is still impacted by the tough economic environment, sluggish growth and rising unemployment,” Kaufman CEO Hachemi said. “It can be financed by low interest rates, but there’s this threat on mortgage securitization.”

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