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March 27 (The following statement was released by the rating agency)
A move by Dutch pension funds to enter the mortgage
market as direct lenders could boost credit availability and reduce the
relevance of the Nationale Hypotheek Instelling (NHI) scheme, Fitch Ratings
says. Although the initial investment is limited in size, it suggests that
pension funds are attracted by investing directly in mortgages that will offer
returns of 4%-5%, rather than the lower yields NHI bonds would offer due to
their double guarantee. We regard initiatives to unlock additional funding
sources as positive for the Dutch mortgage market.
Press reports indicate that pension funds are among the institutional investors
that have agreed to commit EUR800m to an origination platform announced last
week by Dynamic Credit Partners, an asset manager, and mortgage originator and
servicer Quion. The money will be invested directly in mortgage loans via
Quion's broker network.
The pension funds expressed particular interest in non-Nationale Hypotheek
Guarantee (NHG) loans that provide higher margins, but have had virtually
identical origination standards to NHG loans since August 2011. This is
reflected in the converging payment performance between NHG and non-NHG loans
for more recent vintages in our performance monitoring, although recovery rates
remain higher on NHG loans. The preference for non-NHG loans would be consistent
with the Dutch government's aim of gradually reducing the proportion of NHG
loans in the mortgage market back towards their typical pre-crisis level of
around a third of total originations.
The Dutch government plans to finalise details of its NHI scheme this year after
several years of negotiations. The NHI would fund residential mortgage lending
by issuing government-guaranteed bonds backed by NHG loans and sold to pension
funds. This would support the housing market and provide an additional source of
funding to banks.
Dutch life insurers have been increasing their exposure to mortgages because of
their need to outperform the discount rate on their liabilities. The Dutch
central bank said last week that the residential mortgage loan portfolio of
Dutch life insurers rose by EUR4bn to EUR41bn, or 11.5% of total assets, in
4Q13. Adding indirect investments, including securitised debt, the figure is
Greater involvement by institutional investors, combined with the recent
agreement made between existing lenders and the Dutch supervisor to grant more
loans outside the lenders' Code of Conduct (which sets a maximum loan to market
value for collateral, for example), supports our prediction that Dutch mortgage
lending will increase by around 10% in 2014, and possibly by more next year. A
sustained increase would support our view that Dutch house prices are nearing
the bottom of the cycle.
A sluggish macroeconomic backdrop, a roll-off of unemployment benefits, and
greater use of forbearance mean we expect three-month plus arrears to increase
this year and peak next. But as long as new lenders adopt the stricter
application of tighter underwriting criteria used since the financial crisis,
and the increase in "exception" lending is accompanied by a solid case-by-case
analysis, we do not expect these developments to contribute to a further decline
in mortgage performance.