EU Mortgage Markets

Market trends & regulatory developments

European Mortgage Federation Matthias Tiemer Amsterdam, 13 March 2007

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The Voice of the EU Mortgage Industry

    Founded in 1967, the European Mortgage Federation (EMF) is the Voice of the Mortgage Industry at EU level; Groups together both national associations and individual lenders from EU27; Together its members grant approx. 75% of residential & commercial mortgage loans in Europe; Total value of outstanding residential mortgage loans was EUR 5.1 trillion at end 2005, which amounts to 47.5% of EU GDP.

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Market Trends

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Value of EU Residential Mortgage Market 1996-2005

6,000,000 16% 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 14% 12% 10% 8% 6% 4% 2%    €5.1 trillion in debt outstanding as at end 2005 Growth rate in 2005 was 11%, over the average growth rate over the past 5 years (8.5%) Market has more than doubled in size over past 10 years (from 2.3 trillion in 1996 to 5.1 trillion in 2005) 0 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 EU 25 % change

Source: European Mortgage Federation

0% 4

Outstanding Mortgage Loans in the EU 25 in 2005

UK Germany France Netherlands Spain Italy Denmark Sweden Ireland Belgium Portugal Finland Austria Greece Poland 0 500,000 1,000,000

Source: European Mortgage Federation

1,500,000    The UK has the EU’s largest mortgage market in the EU with € 1,4 trillion outstanding. It overtook DE in 2004. Together DE and the UK represent 50% of the market New Member States have the smallest markets but they are growing very quickly 5

Mortgage Debt as % of GDP - 2005

Netherlands Denmark UK Sweden Ireland Portugal Germany Spain EU 25 Finland Luxembourg Belgium Malta France Greece Austria Cyprus Estonia Italy Latvia Hungary Czech Republic Lithuania Poland Slovakia Slovenia 0% 20% 40% 60% 80%

Source: European Mortgage Federation

100%    European average around 47.5% of mortgage debt to GDP. It increased from 44.5% in 2004.

New Member States average is only around 8% of mortgage debt to GDP (It increased from approx. 5% in 2004).

Highest debt to GDP ratio is in the Netherlands (97%) and lowest in Slovenia (1.4%).

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Mortgage Markets’ Growth in 2005

Latvia Lithuania Estonia Czech Republic Slovenia Poland Cyprus Slovakia Greece Ireland Spain Malta Hungary Italy France Luxembourg Finland Denmark Belgium   In the EU 25 the fastest growing mortgage markets are in CEECs; the fastest are in the Baltic countries. The fastest growing markets in the EU 15 are Greece, Ireland and Spain.

Netherlands Austria Portugal EU UK Sweden Germany  Germany is still experiencing very low mortgage market growth (0.4%).

80% 100% 0% 20% 40% 60%

Source: European Mortgage Federation

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House Price Growth- 2004 and 2005

Latvia Estonia Denmark Belgium Luxembourg France Spain Slovenia Ireland Malta Sweden Euro-zone Greece Finland UK Austria Portugal Germany -0.10

0.00

   0.10

0.20

2004

0.30

2005

0.40

0.50

The Baltic States recorded the highest house price growth rates in 2005.

However, in 2005 a slowdown has become visible in some countries, including Malta, Spain, France and the UK

(however end 2005 and 2006 prices picked up again in the UK).

In 2006 lower house price inflation is also evident in Denmark and in the Nordic countries.

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Source: European Mortgage Federation

Housing Completions/1000 Inhabitants-2005

Ireland Cyprus Spain Finland Portugal EU Denmark Hungary Netherlands UK Czech Republic Slovenia Poland Germany Estonia Slovakia Sweden Lithuania    In Ireland (19.7), Cyprus (14.4) and Spain (12.2) housing completions/1000 inhabitants are the highest in the EU.

The countries with lowest housing completions are the new Member States. They are slightly above or below 2 per 1000 inhabitants.

Private developers in these countries tend to target wealthier households or commercial construction.

Latvia 0 5 10 15

Source: European Mortgage Federation

20 25 9

Mortgage bonds as a % of residential lending outstanding

Denmark Czech Republic Sweden Hungary Spain Germany Switzerland Austria France Ireland Poland Finland UK Latvia Lithuania

EU 17.5%

    In Denmark most mortgage loans are funded by the issuance of covered bonds (≥ 90%). Hungary and Czech Republic are the only new Member States issuing substantial volume of mortgage bonds. In Spain the market is growing at a sustained pace and mortgage bonds are assuming increasingly importance as a funding instrument.

Mortgage bonds markets vary greatly across Europe, in the same way as do primary mortgage markets.

0% 20% 40% 60% 80% 100%

Source: European Mortgage Federation

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Green Paper follow-up

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Chronology – The story so far

         Dec ‘04: Forum Group Mortgage Credit Rep June ‘05: COM Green Paper Mortgage Credit Nov ’05: EMF Position on Green Paper Dec ‘05: Public hearing on Mortgage Credit Nov ’06: European Parliament Own Initiative Report Dec ‘06: Mortgage Funding Expert Group (MFEG) Report Jan ’07: Mortgage Industry & Consumer Dialogue Group (MICDG) Report Jan/Feb ’07: EMF Positions on MICDG & on MFEG Rep June ‘07: Expected publication of COM White Paper on Mortgage Credit 12

MFEG Report (1) – Primary Market Issues  

Early repayment (ERP; issue addressed by MFEG & MICDG):

 MFEG Rep makes link between retail & funding side;   Rep clearly shows ERP has a cost & MFEG believe lender must be compensated for all losses incurred with no caps; Majority of MFEG in favour of ERP being a contractual option, a position initially put forward by the Industry;  Consumers want legal right & cap on indemnity (MICDG).

Property valuation:

   MFEG endorse EMF Recomm. & EMF would welcome COM Recomm. to achieve convergence in specific areas; EMF furthermore supports mutual recognition of national valuation methodologies (complemented by application of European or internationally-recognised standards); MFEG Rep highlights importance of consistent property valuation & LTV ratios in context of CRD.

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MFEG Report (2) – Primary Market Issues  

Land registration:

 Need for security: Rep calls for discontinuation of hidden overriding preferences/mortgages;    Calls for cross-border equal access to land registers; MFEG Recomm. reflect EMF ones in this respect; EULIS’ important & innovative work to be recalled here.

Foreclosure:  Vital for security of lender & value of collateral;   MFEG recommends EU scoreboard & setting of max target for duration; EMF very supportive of presentation – in parallel to its own recomm. & scoreboard covering 14 EU Member States – of official COM scoreboard providing info for EU27.

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MFEG Report (3)

  Secondary Market Issues:  Covered Bonds, RMBS, Temporary Loans, Whole Loan Sales: MFEG request for improved transferability of collateral, transparency & legal framework;  EMF supportive of MFEG’s recommendation that Member States that do not as yet have CB legislation consider introducing one.

Investor Issues: Request for improved availability of data & reporting; standardisation of definitions & transparency. 15

Credit intermediaries

    MFEG Recomm. on alternative distribution channels: MFEG expressly supports COM’s intention to undertake a study on credit intermediaries – as announced by COM in its Dec 2005 White Paper on Financial Services Policy (2005-2010).

Distribution:   Key element in mortgage value chain; Increasingly important: Indirect distribution via credit intermediaries or brokers; vs. repres. offices/branches; Intermediaries currently dealt with in:  Insurance Mediation Directive; and  2005 COM Proposal for Dir on Credit for Consumers.

In context of mortgage credit:   Forum Group Rep & GP Mortgage Credit highlighted role & importance of credit intermediaries; European Parliament also recognised beneficial role of credit intermediaries in its Nov 2006 Report.

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MICDG Report (1)

   Content of pre-contractual info/Code of Conduct: Industry willing – in principle – to adapt Code’s content:   Risk warnings & foreign currency loans (& Equity Release?); Provided: Evidence of consumer benefit;  And: No information overload.

Timing for handing over pre-contractual info:  «Conceptual definition» for handing over of ESIS;  «Sufficient time to compare offers»: Split views.

Industry interested in continuing exchange with consumers.

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MICDG Report (2)

   Advice:  Industry opposed to duty to advise; Consumers in favour;  Advice according to Industry: different, tailor-made service to be requested and paid for separately by borrower.

Early repayment: See above Annual Percentage Rate of Charge (APRC):    Industry supports single harmonised APRC for mortgage credit to provide consumers with an adequate tool to compare offers; Only those costs levied by the lender for the loan for his benefit to be included (i.e. narrow APRC); Consumers: All inclusive APRC. 18

Upcoming White Paper

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White Paper:Possible content

    Basis for COM drafting White Paper:  Outcome Green Paper consultation;    European Parliament Own Initiative Report; MFEG & MICDG Reports & outcome of consultation on these reports; Internal COM impact assessment.

COM always said: « Policy mix » Decision as to status & adjustment of content of Code Infrastructural issues: Valuation; Land registries; Hidden preferences/mortgages; Foreclosure; Credit intermediaries.

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EMF Position on Integration

     EMF playing prominent role in this consultation; EMF in favour of further integration provided benefits for consumers & Industry alike; Any potential measure to be submitted to impact assessment to evidence its resulting in direct benefits outweighing the costs (better regulation principle); Obstacles deterring lenders from going cross-border should be addressed first as evidence tends to show that cross-border activity depends on lenders going abroad; Industry remains committed to the Code of Conduct, which it believes is an adequate tool for consumer information and which should be implemented in all Member States.

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Thank you

Contact details: European Mortgage Federation Matthias Tiemer Av. de la Joyeuse Entrée 14/2 B – 1040 Brussels Email: [email protected]

Web: www.hypo.org

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