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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 EUR44bn.
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.