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A reality check in Brussels

The UK has always displayed an air of arrogance about its mortgage market in comparison with the rest of Europe, but we Brits have been silenced in recent months and are no longer boasting of our mortgage market triumphs.

The European Mortgage Federation’s Annual Conference 2008 in November was an eye-opener for those of us who have not already woken up to the reality that Europe is in the depths of an economic crisis. Although some countries are in a far worse situation than others, it was apparent in Brussels that the UK is now one of the black sheep of Europe when it comes to its mortgage market.

Sub-prime has played a relatively small part in the rest of Europe and you can now feel the self-satisfaction of countries that stayed clear of the now-detested sub-prime market. But compared with Ireland, the UK seems to be not in such bad shape. The contrast between Ireland, which slipped into recession a few months ago, and the rest of Europe was so stark that when Jim Power, chief economist of Irish financial firm Friends First started describing the situation in his country he generated some shocked amusement among his European counterparts.

The conference was entitled Mortgage Credit at a Crossroads and as the two-day event unfolded it became apparent that the UK’s situation was among the worst in Europe.

The conference kicked off with a discussion on the effects of the crunch on mortgage lending practices and access to credit. The debate was chaired by Michael Coogan, director-general of the UK’s Council of Mortgage Lenders, who painted a dark picture of the UK and its rising repossession figures.

“We expect turmoil to continue for at least the next 12 months,” he said. “UK house prices have fallen by 15% and we may well be facing a decline not seen since World War II.”

Next to the microphone was Zbigniew Krysiak, vice-president of PKO Bank Polski, who gave us an idea of what is happening in Poland.

The picture in his country is not rosy. It has seen down payments on properties rise to 30% as well as fewer acceptances of loan applications.

At the top of the European class is the Netherlands, which is still offering 120% LTVs.

“The Netherlands is quite stable – only 1% of the population have experienced payment problems with their mortgages and that figure is now closer to 0%,” said Wim Mijs, managing director of the Netherlands Banking Association.

The Netherlands is taking the approach of offering loans based on income rather than value. Mijs believes that as long as it bases its ratios on income it will not suffer as much as those countries offering loans based on house prices, which are prone to rises and falls.

“You must innovate but also make the traditional mortgage market profitable,” he declared.

Bernhard Scholz, board member of German mortgage bank Munchener Hypothekenbank, says Germany has not seen big booms or busts, but is busy working on profit models for the future.

Belgium has also benefited from a conservative approach to lending.

“We are facing big economic challenges and have taken a conservative approach to mortgage lending in the past – we continue to do so,” said Freddy Van Den Spiegel, chief economist and director of public affairs at Fortis.

The future of the securitisation market was also on the agenda. When asked whether the market was now dead and buried, Scholz, said that the financial sector had to be careful it is did not polish off securitisation completely. “We should not make the mistake of killing off the market,” he warned. “Securitisataion is a valuable instrument in the financing process but you have to know what you are buying.”

Coogan enigmatically referred to the securitisation market as being asleep on the table, adding that it would awake Frankenstein-style in the future.

He then asked representatives from a number of countries whether they would be willing to kick-start the securitisation market, but found no volunteers.

“Before securitisation can happen, confidence must return to the market,” said Spiegel.

Coogan then quizzed delegates on their view of mortgage brokers and what their role would be in the market after the credit crisis.

“In Holland, you have experience of credit intermediaries,” he said to Mijs. “In the UK a number of years ago there was a code which covered both intermediaries and lenders. Is your experience of credit intermediaries that they are a good or evil distribution channel? The European Commission is studying the sector at the moment, so do you think there should be more or fewer intermediaries in Europe?”

Mijs replied that it depends on whether intermediaries come from an insurance or a banking background. He favoured those from an insurance background.

“The intermediary may play an important part in the market in future – I say may because I don’t know,” he said. “In the Netherlands intermediaries are suffering. I think there will be a shake-up of the market – small husband and wife intermediaries will disappear and larger firms will survive.”

Jorgen Holmquist, director-general internal market and services at the EC, said the credit crisis was only now starting to affect the wider economy and not until this happened more fully would the true impact be clear.

He said the market had been through the worst of the credit crisis but Europe now faces an economic crisis as the knock-on effects are realised.

“We need lenders and consumers that are confident they can trust each other,” he said.

Holmquist believes the EC White Paper on the integration of the European mortgage credit market is still valid and will put European markets on an equal footing. One aspect of this would be the regulation of all brokers.

“There are gaps in the regulatory framework in Europe – some member states have lenders and brokers that are regulated while others do not,” he said.

It was also the view of Annik Lambert, secretary-general of the European Mortgage Federation, that the White Paper had a place in the new world, but that it should be noted that problems in Europe are different from those in the US.

“We must ensure there is no confusion between the US and the European situations,” she cautioned.

Lambert believes that although the White Paper may need tweaking to adjust to the economic turmoil in Europe, the main aims still apply. She said the federation has refocused to take account of the changing marketplace. The White Paper was published in December 2007. It envisages a single residential mortgage market in Europe and its main objectives are to facilitate cross-border supply and funding of mortgage credit, increase product diversity, improve consumer confidence and facilitate customer mobility.

Eric Ducoulombier, deputy head of unit, internal market and services at the EC, said the paper was not designed as a quick fix.

“It is a long-term initiative and all the objectives set out in it are still valid,” said Ducoulombier. “The main priorities now are to restore confidence in the market and improve supervision of lenders and brokers.”

Inspired perhaps by chancellor Alistair Darling and Prime Minister Gordon Brown, Jean-Michel Six, managing director and chief European economist at Standard & Poor’s, said the mortgage market was seeing extraordinary times.

“The Bank of England is the lender of last resort in the UK, but at the moment it is the only one lending, which is making others reluctant to lend,” he said.

Delegates wondered if the economic problems being experienced in the UK and Ireland would spread to other member states.

Martin de Jong-Tennekes, senior economist at the economic research department of Rabobank in the Netherlands, revealed that people in his country did not see a home as an investment, which could be why home ownership was not as popular as in the UK.

Power said Ireland was slowly waking up to the reality of recession. He admitted that Ireland had relied too heavily on the housing market in the past, and had invested heavily in building properties for which there was not necessarily en-ough demand.

He predicted that Ireland would not see any kind of recovery until after 2010, due to the country’s heavy investment in the housing market.

“House prices fell by 10.6% in September but the real picture is much different to that,” said Power. “We do not know how much all house prices have fallen – only those that are up for sale. The real fall is likely be higher and Ireland is in for a slow, long and laboured recession.

It is clear that Ireland is one of the most severely affected European countries. And Power predicted that the situation in his country could yet become worse and that the downturn would continue until there was a correction in the mortgage market.

Thus it became apparent at the conference that Europe’s crisis is not only different from that in the US, but also that Europe has its own divisions between member states.

The solution for the UK will be very different to the solution for the rest of Europe, as each state has its own problems and will need different solutions to deal with them.

But this does not mean that members of the EMF won’t need to act in a united manner to find a way forward for the European mortgage market.

Perhaps one good thing to come out of the current economic crisis is that the UK’s European neighbours can now see clearly where it has gone wrong, and what they can do to prevent such a situation occurring in their own countries.

For once, the rest of Europe is not looking to the UK as an example of how to run LSa successful mortgage market.


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