Created in Brussels in 1967, the EMF represents more than 75% of the European mortgage industry which, at the end of 2010, was worth over €6.4trillion, more than 50% of EU gross domestic product. Our mission is to represent the interests of our members – mortgage institutions and associations such as the Building Societies Association and the Council of Mortgage Lenders in the UK.
Even where growth is expected to continue, new regulations could throw a spanner in the works
The EMF created the European Covered Bond Council in 2004.
The covered bond asset class is a major funding instrument for lenders in Europe and one which proved resilient through the economic crisis. The ECBC acts as a platform that brings together covered bond market participants, promoting their interests at international level, so we are the voice of the EU mortgage industry on both the retail and funding sides of the business.
It goes without saying that the EU mortgage industry has suffered from the global financial debacle but this has not stopped it growing. The boom years between 1997 and 2007 saw the market grow 7.5% per year. Although the onset of the financial crisis marked an end to this exceptional growth – with the market undergoing its first recession on record in 2008 – it was a one-off occurrence.
The industry saw growth in 2009 of 0.9% and in 2010 at 4.9% – a slower rate than before and at varying degrees across member states. Our aim, however, is to offer a sustainable housing environment for European citizens, not only providing access to housing through mortgage credit, but meeting the long-term objective of keeping them in their homes.
After a temporary increase – mainly caused by the external economic downturn – in the rates of arrears, doubtful loans and repossessions from exceptionally low levels, the EU has once more seen these levels drop.
This recently mitigated non-performing loans environment has appeared since 2009, and with the sole exception of Hungary, loans over three months in arrears did not account for more than 3% of total outstanding mortgage loans in member states at the end of 2010.
While persistent positive trends can be partly attributed to a continued, albeit moderate, economic recovery, the key role of monetary policies in providing financial relief to consumers and lenders should not be underestimated.
Policy rates have been cut to record lows by central banks in the euro area and other major EU economies and these cuts have been passed on to borrowers. Lenders have also largely benefited from central banks’ funding intervention as capital markets almost dried up and the inter-bank lending market nearly came to a standstill.
Although the EU mortgage market as a whole has shown comparative resilience in recent years, comparing individual markets from member states shows a few cracks in the woodwork.
With increasingly divergent performances, the EU picture has been varied – on the one hand, a group of markets recorded a quick and strong recovery both in new mortgage lending and in house prices. This can be said for Sweden, France, Belgium and Austria.
But a second majority group can be identified where mortgage and housing markets have not yet recovered. In this group, Ireland, the Baltic countries, Greece, Hungary and – to a lesser extent – Spain saw their housing markets severely affected by the harsh correction from the peaks of the last housing cycle, which in some cases witnessed a peak-to-trough fall of more than 15% to 20% in house prices in nominal terms.
These two groups broadly typify developments in housing and mortgage markets in the EU before and after the crisis but are not exhaustive in providing a full picture because national developments are varied and heterogeneous.
For example, it is worth stressing that the German market cannot be included in any of the two groups because its performance has been stable for years, with no boom cycle in the time preceding the crisis and no subsequent fall in house prices and lending.
So what lies ahead for EU mortgage markets? Two words – unknown territory. The decisive support provided by monetary policies is likely to continue but the outlook for mortgage markets remains uncertain – we have never before experienced the peaks and troughs we have seen in recent years.
Even in areas where growth is expected to be maintained or to stabilise, the new EU regulations the mortgage industry faces – especially in the form of the proposals for the Capital Requirements Directive IV and Credit Agreements Relating to Residential Property Directives – could put a spanner in the works, bringing the risk of a sudden halt to this moderately positive development.
If the proposed regulations continue along the path they are taking, we risk seeing a further, sharp strengthening of underwriting conditions and an equally sharp increase in the cost of loans for lenders which will be subsequently passed on to borrowers.
The amount of credit in the EU will therefore decrease because the number of consumers who qualify for credit will be reduced, while those able to meet the higher costs of the credit will also fall.
In my next column, I will elaborate on developments from a regulatory perspective – examining the files emanating from the European institutions that we deal with.
Annik Lambert is secretary-general of the European Mortgage Federation