It was announced today that the Netherlands has nationalised SNS Reaal, one of the country’s largest financial institutions. With no private capital available to a level required to “guarantee the stability of the Dutch banking system” the government has intervened to compensate for heavy losses in the bank’s real estate holdings, particularly in Spanish assets, at a cost to Dutch taxpayers of €3.7 billion.
I believe there is more trouble to come. For individuals in the Netherlands, mortgages have been ubiquitous for many years and a well understood product. However, compared to most other markets there are some unique features about the Dutch market that seems destined to create a serious dislocation.
To begin with, the Dutch mortgage market is dominated by interest only mortgages, with many of those mortgages at loan to value (LTV) rates of over 100%. This proliferation of interest only mortgages was largely driven by the ability to offset interest payments against income, creating an incentive to maximise borrowing. In addition, through the boom leading up to 2008, some of the processes around underwriting these high LTV mortgages were sub-optimal and so many of these mortgages were written at over six times income. With the exception of the interest only element, this is not massively dissimilar to other markets such as the US and the UK.
The challenge in the Dutch market is what happens at the point of re-mortgage. Across the Eurozone, interest rates are at historically low levels and so for many people, re-mortgaging from a fixed rate loan actually creates an opportunity to reduce interest servicing costs and hence increase repayment. However, in the Dutch market, mortgage rates remain stubbornly high and are now in many cases higher than at the height of the mortgage lending bubble.
The rise in Dutch mortgage lending rates is fascinating given the general decline in the underlying Eurozone interest rate and is driven by the huge funding gap exhibited by most Dutch banks. Historically, in most countries, mortgage lending is paid for through a combination of savings, deposits and wholesale funding with securitisation acting as a bridge. In the Dutch market, deposit rates are very low, with savers preferring to use their pension fund as a saving tool. Those pension funds then invest around 90% of their assets in foreign markets. As a result the Dutch market was extremely reliant on securitisation to bridge the funding gap. With that tool removed for their arsenal, the banks have been forced to rely heavily on the wholesale market, which is applying real premiums to high LTV mortgage assets.
As a result, when many of the 5-10 year fixed rate mortgages written at or around 2007/8 come to re-mortgage, the individuals may find their servicing costs increasing rapidly. This coupled with rising unemployment and increasing premiums on the compulsory government backed mortgage insurance scheme is likely to see many home owners unpleasantly surprised as their repayments spiral.
By Stuart Bungay, Managing Director - Strategy, Marketing and International, TDX Group.