European Mortgage Markets after the Credit Crisis

Plenary Session 3ENHR Toulouse

7 July 2011

Kath ScanlonLondon School of Economics

Mortgage industries in the boom

•Mortgage market deregulation: new entrants, more competition

•New funding models

•Rising house prices ↓ (↑)•Proliferation of new mortgage

products

↓•Higher household indebtedness

The traditional mortgage

• Annuity (each payment contains both principal and interest)

• 20- to 25-year term• Maximum 80% loan-to-value ratio (in

some countries lower)• Maximum loan amount determined by

borrower income (2.5 to 3x annual income OR payment less than 30% of monthly income)

New products• Interest-only• Longer terms• Foreign currency• High loan-to-value ratios• High loan-to-income ratios• Self certification

All achieve lower monthly payments

Funding of mortgage lenders

Traditional• Retail deposits• Bonds

Innovative• Money markets

(inter-bank loans)

• Securitization (the norm in USA, less so elsewhere)

Consequences of changes in products and funding

• Eased affordability problems for borrowers

• Fuelled house-price increases• New products added to risk,

especially in combination• New funding models vulnerable

to credit market conditions

Outlook• If house prices continued to rise

and general economy remained healthy: Good

• If house prices fell and general economy deteriorated: Poor

Crisis timeline

• 2006: Housing transactions begin to fall in some countries

• 2007: House prices begin to fall in most countries

• 2008: Lehman Brothers collapse closes inter-bank lending markets

Banking & development industries after 2007

• Bank crisis and restructuring, including nationalisations, in many countries

• Not necessarily involving mortgage lenders or domestic housing markets—but reflecting new more globalised funding patterns

• Decline in housing starts and completions, leading to financial problems for developers.

Mortgages post-2007• Increases in defaults/arrears as job

losses hit• Borrowers could not remortgage

because of declines in house values and tighter lending criteria

• Lenders could not get funding so tightened credit availability

• Rollbacks/elimination of innovative products

Gross new residential mortgage lending: 07 to

08 Number of loans Value

Country Period 2007 month

or quarter

2008 month

or quarter

% change

Currency unit

2007 month

or quarter

2008 month

or quarter

% change

Ireland

Q4- Q4 37,719 18,706 - 50

Euros mn 8,282 3,359 - 59

Iceland Aug-Aug 1,347 653 - 52

Icelandic kroner mn 12,300 5,976 - 51

Russia Q4- Q4 395,000 (year)

386,300 (year) - 2.2

Russian rubles bn 192.6 96.3 - 50

Denmark* Dec-Dec

Danish kroner bn 84 43 - 49

UK Nov-Nov 80,500 33,000 - 59

UK pounds mn 22,160 12,000 - 46

Sweden** Nov-Nov

Swedish kroner mn 29,270 16,469 - 44

Portugal Nov-Nov

Euros mn 1,719 982 - 43

USA

Q4- Q4

US $ bn 481 277 - 42

Spain Dec-Dec 1,347,888 970,785 - 29

Euros mn 135,576 83,780 - 38

Australia Nov-Nov 65,842 49,810 - 24

Aus $ bn 15.5 12.6 - 19

Government policies: Dealing with effects

Developers• Financial assistance

to prevent bankruptcy and protect jobs

Low interest rates help both

Borrowers• Help with

mortgage payments

• Bans/limits on repossessions

• Sale/rent-back programs

The post-crisis period: 2009 onwards

• National experiences diverge• Some countries (Ireland, Spain)

still struggling• Others show signs of recovery

New residential mortgage lendinglate 2009 & late 2010

Number of loans Value

Country Period 2009 month/

qtr

2010 month/

qtr

%

Δ

Currency unit

2009 month/

qtr

2010 month/

qtr

%

Δ

Russia Nov-Nov 15,000 34,000 127% Russian rubles mn

7 42 541%

France Nov-Nov Euros bn 89 158 77% Belgium Nov-Nov 23,195 33,156 43% Euros mn 2,053 2,961 44% Poland Annual 189,000 230,000 22% Zlotys bn 39 48 23% Finland Nov-Nov Euros mn 1,383 1,679 21% Czech Nov-Nov 39,385 45,390 15% CZK bn 65,901 75,738 15% Sweden Nov-Nov SEK bn 1,839 2,002 9% Denmark Nov-Nov DKK bn 26 27 5% Slovenia Nov-Nov Euros mn 92 92 0% UK Nov-Nov 58,000 47,000 -19% UK £ mn 12,324 11,362 -8% Portugal Nov-Nov Euros mn 837 727 -13% Australia Nov-Nov Australian $ mn 24,243 20,385 -16% Ireland Q4-Q4 9,946 5,624 -43% Euros mn 1,760 982 -44% Spain Sept-Sept 702,714 585,070 -17%

Housing market transactions 2006=100

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010

Australia

Belgium

Czech

Denmark

Ireland

Finland

France

Netherlands

Norw ay

Portugal

Russia

Spain

Sw eden

UK

Changes in mortgage availability: market driven

Australia: Subprime mortgages no longer offered

UK: Lenders much more conservative—requiring higher down payments and documents verifying income

Ireland, Spain: Lenders have tightened criteria

Poland: Sharp change in domestic banks’ perception of exchange rate risk and credit risk for housing loans

Portugal: Higher-risk loan types less available; LTVs down

What should governments do?

• Has the market self-corrected? (CML: yes)• Is the answer better information?

(Shiller: yes)• Or do behavioural biases mean

consumers should be protected from themselves?

National regulations in placeInformation

Finland: Stress tests for borrowers at 6% interest rate, inform them about consequences of higher rates

Poland: More information for borrowers in foreign currencies

Lending practices

Netherlands: Tighter rules on loan-to-income ratios

Ireland: No loans to households in negative equity (subsequently loosened)

Sweden: LTVs capped at 85%

Poland: Increased collateral required for foreign-currency loans

EU proposal: Directive on Credit Agreements Relating to Residential Property

• Information to be provided through examples & info sheets, but also in a ‘personalised manner’

• Lenders should assess creditworthiness—member states invited to limit LTVs or LTIs

• Borrowers must be permitted to repay loans early, but lender may be entitled to ‘fair and objectively justified’ compensation

• Intermediaries & non-credit institutions to be licensed

Conclusions (1)

• Post-crisis developments depended on institutional and cultural factors in each country, as well as on global financial trends

• Mortgage lending is now growing again in most countries, especially eastern Europe, but continues to fall in some

Conclusions (2)• Lenders have become significantly

more conservative in their lending practices

• Governments (national and EU) have become more interventionist. New regulations 1. Limit ‘risky’ product types and loan

features2. Require lenders to provide more

information to consumers

What does it all mean for ‘sustainability’?

For householdsMore sustainable for those who do

achieve home ownership--but at the cost of closing

off options for others

For lenders Limits downside risk; a forced return to more

traditional models of housing finance.