* Government institute to buy guaranteed RMBS
* New agency for Dutch capital market
* Public sector backing could cannibalise market funding
By Owen Sanderson
LONDON, Sept 20 (IFR) - Plans to lower the cost of Dutch mortgages could lead to issuers turning away from RMBS and covered bonds, shrinking these markets as cheap state-guaranteed funds flood into Dutch banks.
The mortgage reforms, which have been worked on for several months, were formally announced on Tuesday, though details have not yet been finalised.
The plan is based on an agency, Nationale Hypotheek Instelling (Dutch Mortgage Institute) buying the senior tranches of RMBS from banks, and funding these purchases with state-guaranteed hard bullet debt. Dutch pension funds, the theory goes, will be more willing to channel funds into mortgages via bonds issued by this agency than by buying whole loans, RMBS or covered bonds in the market.
However, only mortgages which already have a state guarantee (Nationale Hypotheek Garantie, or NHG, mortgages) will be eligible to back the bonds. There are EUR159bn of these mortgages outstanding, representing under 25% of the Dutch market. The representation in RMBS pools is smaller.
To fund the rest of their mortgage books, banks will continue market-based wholesale funding, but will probably start stripping NHG mortgages from collateral pools for public RMBS and covered bonds.
“The establishment of the NHI is unlikely to result in substitution by RMBS/covered bond investors,” said Rabobank’s ABS analysts in a research note. “From the issuance side however, there will be some cannibalisation to other funding instruments. The exact degree of substitution is dependent on the costs of the explicit guarantee that will be charged by the government to the originators.”
The analysts envisage a materially lower share of NHG loans (or even none), and a likely gradual shift to fewer NHG mortgage loans in covered bond pools too.
According to Moody’s, EUR40.32bn of NHG loans back RMBS, 19.6% of the total. Last year, the proportion was 17.6%. However, this increase probably reflects the rapid shrinkage of the Dutch RMBS market more than a shift towards using NHG loans - ING’s Orange Lion programme shrank more than EUR20bn year on year.
The cost of the new programme is the big remaining question. KPMG estimated in a report that the government would charge between 0bp and 8bp in guarantee fees for the bonds, while borrowers themselves currently pay 85bp to get the underlying mortgages guaranteed. There would also be a margin between funding spread and asset spread to pay the agency’s costs, and a liquidity premium to pay over the Kingdom of the Netherlands.
The Rabobank analysts break it down as follows. Government bonds are trading roughly 30bp through asset-swaps, with top-tier covered bond issuers at around plus 15bp and five-year second pay RMBS bonds around 90bp over Euribor.
They say: “In our view, funding levels of the NHI could be very close to current covered bond levels of tier-one issuers,” although it would be less collateral-intensive.
A treasury official at one Dutch bank with RMBS and covered bond programmes questioned whether it was entirely necessary.
“It is designed for the conditions which prevailed two years ago, when the markets were not open or expensive,” he said. “Vanilla RMBS funding in the market is still excessively expensive in my view, but NHG-only funding and covered bonds are open. It does not hurt but it solves a problem that does not really exist.”
The government commission which has designed the scheme expects mortgage rates to fall 50bp.
Dutch RMBS and covered bonds showed little reaction following the announcement, with the recent Storm 2013-IV deal from Obvion bid around 100.03 and 100.06 - no more than a couple of basis points from reoffer. ABN AMRO’s EUR1.5bn 10-year covered bond, priced at the end of August, was reoffer bid this week.
By confining the scheme to NHG-guaranteed mortgages and senior tranches of RMBS, the government ensures it bears little credit risk. However, it will be exposed to maturity mismatch risk, as it will be funding true pass-through RMBS with hard bullet bonds. This makes it more like Canada Housing Trust than Fannie and Freddie in the United States.
At the same time, the NHG scheme, which was originally intended to help first time buyers and low income households, will be reformed.
The size of the NHG guarantee available to borrowers will be cut to EUR225,000 from EUR265,000 by July 1 2016, which will “reduce the scope of the NHG scheme (and the government’s exposure as back stop) and limit the market distortion it causes”. The tax relief on mortgage repayments, blamed partly for encouraging Dutch households to take on debt, will be cut in 28 0.5% steps from 2014 onwards, down to 38%.
Dutch mortgages have some of the highest loan-to-value rates in Europe, partly because the convention is to peg it to foreclosure value, not to presumed market resale value. But this leaves Dutch mortgages vulnerable to a house price crash.
S&P placed 29 Dutch RMBS tranches from 11 deals on CreditWatch negative on Thursday, following an 8.5% year-on-year decline in house prices during the second quarter of 2013. Cheaper mortgages could help arrest this decline.
The Dutch mortgage scheme needs to tread a fine line between supporting the market and charging an arm’s length price for the guarantee. This avoids consolidating the risk in state accounts, while the structure also has to navigate EU state aid rules and receive European Commission approval.
The new issuer will join Bank Nederlandse Gemeenten and Nederlandse Waterschapsbank in the Dutch agency market, but the new bonds should trade inside these two implicitly guaranteed structures, thanks to the explicit state guarantee.
The government commission expects the new agency to have a minimum funding size of around EUR50bn, likely to be raised over five years. (Reporting By Owen Sanderson, editing by Anil Mayre, Julian Baker)