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EU Mortgage Markets Suarez 1992-2003

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WorkingPaper
WPNo562June,2004
EUROPEANMORTGAGEMARKET:ANOVERVIEW1992-2003
JoséLuisSuárez*AmparoVassallo**
*ProfessorofFinancialManagement,IESE**ResearchAssistant,IESE
IESEBusinessSchool-UniversidaddeNavarra
Avda.Pearson,21-08034Barcelona.Tel.:(+34932534200Fax:(+34932534343
CaminodelCerrodelÁguila,3(Ctra.deCastilla,km.5,180-28023Madrid.Tel.:(+34913570809Fax:(+34913572913Copyright©2004,IESEBusinessSchool.Donotquoteorreproducewithoutpermission
Electroniccopyavailableat:http://ssrn.com/abstract=673249

EUROPEANMORTGAGEMARKET:ANOVERVIEW1992-2003
Abstract:
ThedevelopmentoftheEuropeanmortgagemarket,itscurrentsituationintermsof
volume,growth,prices,interestratesandnewproducts,andananalysisofmortgageintegrationarethefocusofthispaper.
TherecentcreationoftheEuropeanMortgageFinanceAgency(EMFA,asan
attempttobuildasingleEuropeansecuritizationmarket,isanimportantsteptowardintegrationwithinthewidergoalofEUfinancialintegration.Obstaclestointegration,potentialmembersoftheEMFA,anditsmaingoalsandadvantagesarediscussedintheforward-lookingsectionofthispaper.
Inaddition,thepaperdealswiththreeimportantaspectsoftheEUmortgagemarket,
takenasawhole:
–
Howitoperates.Otheraspectsconsideredincludetransactioncosts,transparencyrequirementsaffectingcreditinstitutions(EuropeanCodeofConduct,andaclassificationofmortgageproductsonthemarket.
RefinancinginEurope(ascomparedtotheUSA.Thesecondarymarketforthefundingoffinancialinstitutions,inrelationtomortgagebondsandmortgage-backedsecurities,includingexplanationsoftheirmaincharacteristicsandthedifferencesbetweenthem.
HowEuropeanmortgagemarketsinfluencetheeconomyandhowtheymayaffectprivateinvestmentandconsumption,householddebt(whichcontinuestoincreaseeachyear,andtheperformanceoffinancialinstitutions(highcompetitiveness.
–
–
Keywords:Europeanmortgagemarketintegration;Europeanmortgagemarket;Mortgageloansoutstanding;MortgagesasapercentageofGDP;Growth;Interestrateapplied;Transactioncosts
Electroniccopyavailableat:http://ssrn.com/abstract=673249

EUROPEANMORTGAGEMARKET:ANOVERVIEW1992-2003*
1.Introduction
Inmanyways,themaincharacteristicofEuropeanmortgagemarketsnowadaysis
theirdiversityinregulation,producttypes,andlenders.Althoughtheyhavepointsincommon,eachcountryworksdifferently,whichmakesitdifficulttointegratetheirmarkets.Theperformanceofthesemarketsoverthelasttenyearshasbeenpositive,despite
therecenteconomicweaknessinsomeEuropeancountries.AccordingtodataprovidedbytheEuropeanMortgageFederation,mortgagecreditoutstandingincreasedfrom1.86trillioneurosin1992to4.49trillionin2002(thisincludesoutstandingresidentialandcommercialmortgages.Theincreaseisduetothetrendinprices,especiallyhouseprices,whichhaveriseninallEuropeancountriesexceptGermany;thelargedropininterestrates;andinsomeEuropeancountries,taxadvantagesandtheincreaseindisposableincome.
MortgageloansoutstandinginEuropeasapercentageofGDPwas30%in1992,
risingto40%in2002,whichindicatesthatmortgagecreditisbecomingmoreimportantinEuropeaneconomies.Atthesametime,thepercentageofmortgagesinrelationtototalloans,whichwas31%in1992,increasedto36%in2002,againreflectingthegrowingimportanceofthemortgagemarketinthefinancialsystem.
Asaresultofthesedevelopments,creditinstitutionshavebeentryingtocreate
innovativenewproductstogainmarketshare.Theseincludeflexiblemortgages,self-certifiedproducts,andinterest-onlymortgages.
Thegrowthofthemortgagemarketalsocontributedtotheriseinhouseholddebtin
Europe,whichincreasedby20%overtheperiod1991-2001.Theloansgrantedtohouseholdsbycreditinstitutionswereused:60%forhome-buying;16%forconsumption;and20%forotherpurposes.
Despitethisimportantdevelopment,cross-borderlendingbetweenEuropean
countriesisstillverylow,whichisoneofthereasonswhytheEuropeanCommissionhasemphasizedtheimportanceoftheintegrationofEuropeanmortgagemarkets.Twoimportantstepswere:theAgreementonaEuropeanCodeOfConduct,drawnupbytheEuropeanCreditSectorAssociations,ledbytheEuropeanMortgageFederation,andEuropeanconsumerorganizations,andnegotiatedandsignedonMarch5,2001underthe
*
Papersubmittedtothe11thEuropeanRealEstateSocietyConference,heldinMilan,Italy,onJune2-5,2004.

2
aegisoftheEuropeanCommission;andthestudycommissionedbytheEuropeanMortgageFederationandpreparedbyMercerOliverWyman,entitled“StudyontheFinancialIntegrationofEuropeanMortgageMarkets.”Thecodeofconductwillpermitthestandardizationofconsumerinformation,makingthemarketmoretransparentfortheconsumerandboostingEurope-widecompetition.TheMercerOliverWymanstudyidentifiesbarrierstomortgageintegrationandexploressolutionstoachievethebenefitsofintegration.Thebenefitsforborrowersmightincludegreaterchoiceandcheapermortgages,and
forlenders,lowerfundingandriskmanagementcosts.
Finally,fundingofmortgagelendinginstitutionsinEuropeissustainedbyretail
deposits,mortgagebonds,saving,andmortgage-backedsecurities.AccordingtotheratingagencyMoody’s,amortgagebondisa“fullrecoursedebtinstrumentsecuredbyapoolofspecifically-identified,eligiblemortgageassetsorclaimsagainstpublicsectorentities.”Whenamortgagelenderissuesmortgagebonds,itkeepsboththebondsandtheloansonitsbalancesheet,thatistosay,mortgagebondsarean“on-balance-sheetinstrument.”
Currently,mortgagebondsarethesecondmostimportantfundingsourcefor
mortgagemarketsinEurope.AmongthecountriesthathaveastrongpresenceinthemortgagebondmarketareGermany,Denmark,SwedenandFrance.
Anotherlessimportantbutactivefundingsourceismortgage-backedsecurities,
whichoriginatedintheUnitedStates.Whenacreditinstitutionissuesmortgage-backedsecurities,itisolatesthereceivablesandtheirassociatedcashflowsfromitsotherassetsbysellingthemtoaSpecialPurposeVehicle,whichthenissuesthesecurities.Amongthemoreactivecountriesinthemortgage-backedsecuritiesmarketaretheUnitedKingdom,Spain,France,IrelandandItaly.Inthelastfewyears,therehasbeenfastergrowthinUK,SpainandtheNetherlands.
Inthiscontext,fivebanksfromSpain,UK,Ireland,PortugalandFrancehave
createdtheEMFA(EuropeanMortgageFinanceAgency,whichworkstowardthecreationofasinglepan-Europeansecuritizationmarket,financedbyprivatecapital,verysimilartotheAmericanFannyMaeorFreddieMac.Givenorganizationsofthiskind,mortgagelenderswouldbeabletoobtainnewfundsandfinanceonbetterterms.
2.SizeoftheEuropeanMortgageMarket
ThemainfeatureofthemortgagemarketinEuropeisitsfragmentation.Ineach
country,thereisagreatvarietyofproducts,pricesandcustomers,aswellasdifferencesinthetypesofcontractsavailableandtheinstitutionsoperatinginthemarket.“Thedifferencesincontractsandinstitutionsaretheresultofhistoricaldifferencesindemographyandpoliticalandregulatoryframeworks,aswellasinconsumerpreferences.Thetypesoflendersineachcountryareverydifferent,asalsoarethetypesofproductsoffered,particularlywithrespecttotheratiooftheamountoftheloantothevalueoftheproperty(whatisknownastheLTVorLoantoValueratio,thedurationoftheloan,andtheadjustmentoftheinterestrateoverthelifeoftheloan.Ineachcountry,mortgageloansmayincludefinancialandnon-financialservices.Theseareadditionalservicesrelatedtothemortgage,suchasassociatedinsuranceproducts.Ineachtypeofloan,rightsandobligationsvary.”1
1
“Elcrecimientodelmercadohipotecarioeuropeo,”‘laCaixa’ResearchDepartment.

3
Overall,inthelastdecade,thebalanceofmortgageloansoutstandinghasincreased
inallEuropeancountries.Thisisduebasicallytothefactthatinmostcountriestherehasbeenagrowingtendencyforpeopletobuytheirownhomes.Whilemortgageloansmaybegrantedforpurposesotherthanhousepurchase,accordingtodatapublishedbytheEuropeanMortgageFederation(EMF,in2002around80%ofmortgageloanswereresidential.Thistrendhasbeenencouragedbyfiscalpoliciesthatfavorhomebuyingoverhomerental,asforexampleincountriessuchasHollandandPortugal,andbyenhancedincomeexpectationsduetolowerinterestrates,whichreducesthecostofborrowingandboostsconsumerconfidence2.AnotherimportantfactorbehindtheriseinmortgageloansoutstandingisthegeneralriseinhousepricesinmanyEuropeancountries.
Eachyear,theproportionofmortgagesinrelationtototalbanklendinghas
increased.From31%in1992,itroseto36%in2002.TheincreasehasbeenparticularlynotableinSpain(15.62%,Holland(12.26%andGreece(10.26%.Thishasledtofiercercompetitionamongfinancialinstitutionstomaintainorexpandtheirmarketshare.Toachievethatgoal,theyhavecontinuedtocreatenewproducts,suchasmortgageloansthatcanbeusedasconsumerloans,loanslinkedtopensionfunds,orflexiblemortgagesthatcanbeadaptedtouncertainincomeflows3.
ThegrowthoftheEuropeanmortgagemarketisclearifweconsiderthatmortgage
loansoutstandingincreasedfrom30%ofGDPin1990to40%in2001.ThegrowingimportanceofmortgagecreditisoneofthereasonswhyeffortsarebeingmadetolaythefoundationsforEuropeanintegration,whichitishopedwillfurtherstimulatemarketdevelopment.
Despitethefactthatmortgageloansoutstandinghasincreasedyearafteryearand
themarketsareexpandingasnewproductsareintroduced,theindividualcountrymarketsarequiteseparateandunrelatedtooneanother.“In2001,cross-borderloansaccountedfor1%ofthetotal,mostofthemloansoriginatedinGermany,whichissufferingfromwhatisknownas‘overcapitalization,’forcingbankstolookabroad.InNorway,cross-bordermortgagelendinghasalsoincreasedslightly.InSpain,IrelandandFrance,therehavebeenhardlyanyloansofthistype,andinItalynoneatall.Themainreasonfortheunderdevelopmentofcross-borderlendingistheexistenceofmultiplebarriers,suchasdifferentlegislationgoverninglandregistration,foreclosureandinsolvency.ThatiswhytheEuropeanCommission,withintheframeworkoftheFinancialServicesActionPlan,hassetitselfthegoalofachievinggreaterintegrationofthemortgagelendingsectoraspartofthedrivetowardsasinglemarketforretailfinancialservices.”4
Asfarasthelendersareconcerned,accordingtodatapublishedbytheEuropean
MortgageFederation5,insomecountries,suchasItalyandPortugal,themortgagemarketisdominatedbyuniversalbanks,andinothersbycommercialbanks,notablyBelgium(wheretheyaccountfor95%ofgrossresidentialloans,Greece(80%,Ireland(79%andFinland(46%.Universalbanksprovidebankingservices,properlyspeaking,andtendtobeinvolvedinenterprisepromotion,oftenholdinganequityinterestincompanies.Commercialbanks,ontheotherhand,arespecializedbanks,alongwithmerchantandindustrialbanks;theyobtaintheirfundsfromsightdepositsandtheirlendingactivityconsistsofshort-termloansandthediscountingofreceivables.
2345
“Elcrecimientodelmercadohipotecarioeuropeo,”‘laCaixa’ResearchDepartment.Ibid.Ibid.Ibid.

4
InSpain,GermanyandAustria,animportantroleisplayedbysavingsbanks,which
accountfor54%,40%and38%,respectively,ofgrossresidentialmortgageloans.InDenmarkandSweden,bycontrast,mortgagecreditinstitutionscontrol90%ofthemarket.Cooperativeandmutualinstitutionsaremajorplayersinsomecountries,suchastheBausparkasseninGermany,whichhold23%ofgrossresidentialloans,andsimilarinstitutionsinAustria(27%andFinland(22%,andthebuildingsocietiesinIreland(21%andtheUnitedKingdom(16%.Lastly,insurancecompaniesandpensionfundsareactiveparticipantsinthemortgagemarketintheNetherlands(10%,Germany(8%,Finland(7%andBelgium(3%.
2.1.VolumeofMortgagesinEuropeandGrowthinMortgageVolume
TheEuropeanmortgagemarkethasevolvedindifferentwaysinrecentyears.Onthe
onehand,inmanycountriestherehasbeenamarkedgrowthinlending.Overtheperiod1991-2001,thevolumeofmortgageloansoutstandinginEuropedoubledtoreach3.9trillioneuros,havinggrownatarateof8%peryear,representing40%ofthecombinedGDPofallEuropeancountries.Mostmortgagelending(3.4outofthe3.9trillioneuros,or87%ofthetotalconsistedofloansforhousepurchase.Theremaining0.5trillioneuroswerefornon-residentialmortgages.Grossnewresidentialmortgagelendingin2001amountedto564millioneuros,morethantwicetheamountin1990.In2002,thetotalvolumeofmortgageswasaround4.2trillioneuros,continuingthe8%growthandrepresenting40%ofGDP.AccordingtotheEuropeanCentralBank,theoutstandingbalanceofmortgageloansgrantedbymonetaryfinancialinstitutionsin2002was2.18trillioneuros,representingannualgrowthof7.7%,comparedwith6.9%growthin2001.Growthslowedslightlyinthefirstquarterof2003to7.3%.
Chart2.1.1showsthemortgagebalanceoutstandingineachEuropeancountryin
2001and2002.
Chart2.1.1.MortgageBalanceOutstanding,2001-2002
20012002
1,6001,4001,2001,0008006004002000
Netherlands
Belgium
Italy
Ireland
Luxembourg
Portugal
Germany
Denmark
Sweden
Norway
Finland
Austria
Greece
France
Spain
UK
Source:Hypostat1992-2002,EuropeanMortgageFederation,ownelaboration.
*FortheUnitedKingdom,Holland,France,Norway,BelgiumandFinland,onlyresidentialmortgages.
BillionEuros

5
Thecountrywiththelargestresidentialmortgagebalanceoutstandingin2001was
Germany,followedbytheUnitedKingdom,HollandandFrance.Spainlayinfifthplace,withatotalof312.12billioneuros.In2002,Germanystillheadedthelist,followedbytheUnitedKingdom.SpainappearedtobeonalevelwithHolland,andaheadofFrance,butconsideringthatthedataforHollandandFrancewereforresidentialmortgagesonly,wemayassumethattheywereinfactaheadofSpainintheranking.AscanbeseeninTable2.1.2below,mortgagelendingincreasedinallthecountries,moreinsomethaninothers.ThemodestgrowthinGermany(1.5%,Belgium(5%andLuxembourg(2.4%palesincomparisontoGreece(35.6%,Norway(23.44%andSpain(18.5%(seeTable2.1.2.
Table2.1.2.GrowthofMortgageLoansOutstanding,2001-2002
(inmillioneurosandpercent
2001
2002
Growth
GreeceNorwaySpainIrelandHollandPortugalDenmarkAustriaItaly
UnitedKingdomFinlandFranceSwedenBelgiumLuxembourgGermany15,65282,278220,91338,343340,86057,365127,44052,800123,831945,44643,370324,600113,54169,1383,9321,122,80921,225101,568261,92147,212389,00064,838136,68458,438142,8441,031,70844,411350,700121,62872,6294,0271,139,83035.61%23.44%18.56%15.83%14.12%13.03%12.09%10.68%10.38%9.12%8.86%8.04%7.12%5.05%2.42%1.52%
Source:EMF(Hypostatandownelaboration.
Chart2.1.3comparesthemortgagebalanceoutstandinginthedifferentcountriesin
1992andin2002.

6
Chart2.1.3.MortgageLoansOutstandinginEurope,1992/2002
19922002
1,6001,400BillionEuros
1,2001,0008006004002000
Netherlands
Belgium
Ireland
Greece
Luxembourg
Italy
Germany
Denmark
Portugal
Sweden
Norway
Finland
France
Spain
Austria
UK
Source:EMF(Hypostatandownelaboration.*Belgium:For2002,residentialmortgagesonly.
*France:Nodataavailablefor1992;for2002,residentialonly.
*Luxembourg:Nodataavailablefor1992;for2002,residentialonly.*Holland:For2002,residentialonly.*Finland:Residentialmortgagesonly.
*UnitedKingdom,Norway:Residentialmortgagesonlyinbothyears.
Overthe10-yearperiod,thevolumeofmortgagesincreaseddramaticallyinGreece,
Portugal,IrelandandSpain:inGreeceandPortugalbyaround600%,inIrelandby500%,andinSpainby400%,aspectacularleapcomparedto140%intheUnitedKingdomandHolland,and90%inGermany.SpainandGreecebothjoinedtheEuropeanUnionsomewhatlaterandindifferentcircumstancesthantherest,andtheirmortgagemarkets,alongwiththoseofPortugal,IrelandandItaly,expandedsignificantlyovertheperiod,andcontinuetoexpand,inanattempttocatchupwithcountriessuchastheUnitedKingdomandGermany,whichstillhaveamuchlargervolumeofmortgageloansoutstanding.

7
Table2.1.4.AverageAnnualGrowthandGrowth1992-2002
AverageAnnualGrowthGrowth1992-2002
GreecePortugalIrelandSpainItalyUK
NetherlandsNorwayGermanyBelgiumDenmarkFranceFinlandSwedenAustria21.94%21.37%19.29%17.50%15.81%9.53%10.70%8.73%6.54%6.19%5.74%4.66%3.90%2.33%1.12%607%574%480%399%265%141%138%125%86%81%73%50%46%22%10%
Source:Hypostat1992-2002,EMF,ownelaboration.
*InBelgium,residentialmortgagesonlyfortheyears1998-2002.*InFrance,residentialonlyfor1993-2002.
*InLuxembourg,residentialonlyfor1994-2002.*InFinlandandUK,residentialonly.
*InHolland,dataavailablefor1992-1998only.
MortgagelendinggrewfastestinGreece.Withtheintroductionoftheeuroandthe
preparationsfortheOlympics,theGreekeconomygrewby4%in2002,whilehousepricesroseby13%,contributingtotheincreaseinmortgagelending.Greekfinancialinstitutionsmadeeffortstoinnovateandcreatednewproductssuchasmortgageswithafixedpreferentialinterestrateforoneyear,mortgagesbasedonratessetbytheEuropeanCentralBank,andmortgageswithextendedmaturity(30years.TheGreektaxsystemfurtherstimulatesmortgageborrowing.“Thegovernmentannouncedthatitwillreducetheamountofincometaxreliefonhousinginterestfrom100%to15%ofimputedrentalincome,uptoamaximumloansizeof200,000euros.”6
ThesituationinIrelandissimilar.In2002,theIrisheconomygrewbyaround6%,
thehighestrateofanyEuropeancountry.TheIrishmortgagemarketcontinuedtogrowveryfavorably,duemainlytostrongdemandandlowinterestrates,whilehouseprices,afteraperiodofrapidincreases(around30%in1999,continuedtorisein2002butatamoremodest4%7.
During2002,economicgrowthinSpainwas2%,which,bearinginmindtheoverall
situationinEurope,wasquitegood.ThiswasaccompaniedbygrowthintheSpanish
67
Hypostat1992-2002,EMF:Greece.Hypostat1992-2002,EMF:Ireland.

8
mortgagemarket,whichcontinuedin2002,encouragedbygoodincomeprospectsandlowinterestrates8.
Portugal,bycontrast,hadGDPgrowthofjust0.4%.Despitethis,itsmortgage
marketcontinuedtogrowstronglyand,accordingtotheBankofPortugal,residentialmortgagelendingincreasedby15.4%,whichmayseeminconsistentconsideringthatthenumberofbuildingpermitsfellby9%in2002whilethenumberofnewhousescompletedfellby2.3%.“Theexplanationmaybethattherewasanincreaseinmortgagelendingforthepurchaseofhousesthatwerealreadybuiltbutunsold(apartfromanyapparentinconsistencyresultingfromthelackofactualsalesfigures.Portuguesenationalaccountsrecordhousinginvestmentatthetimeofconstruction,soloansfornewhousespurchasedin2002andreflectedinthelendingfigureswerealreadyreflectedinthefiguresforhouseconstructioninpreviousyears.”9
InItaly,despiteweakeconomicgrowthof0.4%in2002,mortgagetransactions
increasedby14%,thebiggestsuchincreasesincetheEuropeanMortgageFederationstartedtokeeprecordsin1983.Thisgaverisetoanincreaseinmortgagecredittofinanceboththepurchaseandtheconstructionofnewhouses.Infact,totalgrosslending10inItalyroseby20%11.Housebuyingwasalsostimulatedbythereductionininterestratesandrealestatetransfertaxes.Overall,theItalianmarketdevelopedsteadilyand,althoughin2002growthwassomewhatslower,overtheperiod1992-2002itrankedfifth,behindSpain12.
Thedevelopmentofthemortgagemarketinthesecountrieswasfurtherassistedby
thegrowthinthehousingindustry,populationtrends,andaveragehouseholdsize,whichwasslowlydeclining(in1999,2.5peopleperhousehold.ThegrowingindividualisminEuropeansocietieshasledtoanincreaseinone-personhouseholds.Anotherfactoristheincreaseinlifeexpectancy13.
EconomicgrowthinGermanyandHollandinthelatterpartoftheperiodwaspoor
(0.2%,andalthoughunemploymentwaswellbelowtheEuropeanaverage14,itneverthelessincreasedin2002to1.4%and2.7%,respectively15,leadingtoalossofconfidenceinincomeexpectations.HouseholdindebtednessinHollandwasveryhigh(189.9%16,increasingtheriskofdefault.TheGermanrealestatemarketwasinaslump,largelyowingtoeconomicrecession.Housepriceswerestagnantandinsomeregionshadevenfallen.
ThesameistrueoftheUnitedKingdom,whichalsohadsloweconomicgrowthof
1.8%overtheperiod,althoughinlinewithmanyotherEuropeancountries.Despitethis,housepricesincreasedby25%,andstrongdemandandrefinancingledtocontinuedgrowthinthemarket17.
8Hypostat1992-2002,EMF:Spain.9Hypostat1992-2002,EMF:Portugal.
10Grosslending:Totalamountofmoneyadvancedduringtheperiod(includingallloansconvertedintonew11121314151617
loansonthesameproperty.Hypostat1992-2002,EMF:Italy.SeeTable2.1.1.
“Elcrecimientodelmercadohipotecarioeuropeo,”‘laCaixa’ResearchDepartment.UnemploymentinEuropeaveraged8.4%.Hypostat1992-2002,EMF.
AccordingtoDataStream,unemploymentasapercentageofthelaborforceincreasedby0.5%inGermanyandby0.8%inHolland.
“Elendeudamientodeloshogaresespañoles,”AnadelRío,BankofSpain.
DataonGermany,HollandandtheUnitedKingdomarefromHypostat1992-2002(EMFand‘laCaixa’ResearchDepartment.

9
IninterpretingthefiguresforaverageannualgrowthinTable2.1.4weneedtobear
inmindthatdataforHollandareonlyavailablefortheyears1992-1998,andthatthedataforBelgiumfrom1998to2002areforresidentialmortgagesonly.ThatiswhytheorderofgrowthdoesnotcoincidewiththeordershowninChart2.1.5,producedbytheEuropeanMortgageFederation.
Chart2.1.5.AverageGrowthRate,1992-2002
25%20%15%10%5%0%
Netherlands
Belgium
Greece
IrelandPortugal
Italy
Denmark
Germany
France
Spain
Sweden
UK
Source:EuropeanMortgageFederation,“ThechallengesofdevelopinghousingfinanceinEurope–Aretherelessonstobelearned?”JudithHardtandCristinaCosta.
AccordingtotheEuropeanCentralBank,mortgagelendinghasgrownatthesame
rateashouseprices,andevenfasterinsomecountries,suchasSpain,PortugalandItaly,wheretheinitialdebtoutstandingwasnotveryhigh.Inrecentyears,thebiggestgrowthinmortgagecredithasbeeninSpain,Ireland,Portugal,GreeceandtheNetherlands,asthechartshows.
AccordingtoJudithHardtandCristinaCosta18,Europeanrealestatemarketscanbe
classifiedinthreegroups.First,southernEuropeancountriesthatjoinedtheEUlater,includingItaly,SpainandGreece,arestilltryingtocatchupwiththemoreadvancedmarketsintheNorth.“Theirhousingfinancemarketswerecharacterizedbypubliclyownedmortgagelenders,highlevelsofowneroccupation,hightransactioncosts,fewtransactions,relativelyfewproducts,andhighmortgageinterestrates.”AfterjoiningtheEU,thesecountriessawarapidchangeintheirmarketsandstartedtocatchupwiththemoredevelopedmortgagemarkets.AsecondgroupconsistsoftheScandinaviancountriesandtheUK:“theirmarketsarerelativelydevelopedandarecharacterizedbyhightransactionlevels,supportedbyhighlyliberalizedfinancialmarkets.”19Finally,therearecountriessuchasGermanyandAustria:“thishousingmodelinvolvesalargersegmentofthepopulationlivinginrentedaccommodationandlowerlevelsofowner-occupation(40%and50%,respectively.These
1819
“ThechallengesofdevelopinghousingfinanceinEurope–Aretherelessonstobelearned?”EuropeanMortgageFederation.Ibid.

10
countries’housingfinancesystemsaremorespecialized,highlyregulated,andintegrated,whichcreatesamorestablebutlessactivemarket.20”
2.2MortgageLoansOutstandingperCapitaandasaPercentageofGDP
Anothermeasureoftheintensityofmortgageindebtednessistheoutstanding
balancepercapita.Chart2.2.1showthismeasurefor2002.
Chart2.2.1.MortgageLoansOutstandingperCapita,2002
30,00025,000Euros
20,00015,00010,0005,000
0
Belgium
Italy
UnitedKingdom
Netherlands
Ireland
Portugal
Denmark
Germany
Finland
Norway
Sweden
Greece
France
Spain
Source:Hypostat,DataStreamandownelaboration.
AccordingtotheEuropeanMortgageFederation,thecountrieswiththehighest
mortgagebalanceoutstandingpercapitaareDenmark,theNetherlandsandNorway.DespitethefactthatDenmarkhasthehighestdebtpercapitainEurope,“giventhepredominanceoffixedrateloansacrossthewholeportfolio,themarketislargelyprotectedfrominterestrateshocks.”21Owneroccupancy22standsat53%(seeTable2.2.2,significantlybelowtheEuropeanaverage.OneofthereasonsforthishighlevelofindebtednessisthatDenmarkhasahighpercentageofcommercialindebtedness(23%.ItshouldalsobeborneinmindthattheDanishgovernmenthasplacedcertainrestrictionsonfinancialinstitutions,whicharenotallowedtograntmortgagesformorethan80%ofthevalueoftheproperty.
202122
Ibid.
Hypostat1992-2002,EMF:Denmark.
Owneroccupancy:Percentageofdwellingsownedoutrightorbeingpurchasedwithamortgageinrelationtototalhousingstock.

11
Owneroccupation,2002
Country
Percentage
BelgiumDenmarkGermanyGreeceSpainFranceIrelandItaly
LuxembourgNetherlandsAustriaPortugalFinlandSwedenUKNorway71%51%42%83%81%56%77%80%72%53%50%66%61%61%69%77%
Source:Hypostat1992-2002,EuropeanMortgageFederation.
AttheoppositeextremeisGreece,with83%owneroccupancyandthelowestdebt
percapita,despitethegrowthinmortgageborrowing.AccordingtotheBankofGreece,borrowingisconcentratedamongthewealthiesthouseholds,andoutstandingloansdonotexceedannualincome23.Thismeansthatthereareunlikelytobeproblemswithdefaults.Allthesame,theBankofGreecehasbeencautiousandhasraisedtheratiosofprovisionsforloansandarrears.
InsecondplacebehindDenmarkistheNetherlands,wherelowerinterestratesand
risinghousepriceshelpedtoboostlendingin2002.Therateofowneroccupancywas53%,closetotheEuropeanaverage24.ItisimportanttonotethatinDenmarkandtheNetherlandsthenumberofhousingtransactionshasincreasedduetomortgagerefinancingandmortgageloansforconsumptionortoreplaceotherconsumerdebt.
In2002,therateofowneroccupancyinNorwaywas77%,theseventhhighestin
Europe.ThisfactandthefallinmortgagelendingratesexplainwhyNorwayhasthethirdhighestmortgagedebtpercapita.
ThecountrieswiththelowestdebtpercapitaareGreece,ItalyandFrance.Aswe
saidearlier,Greecehashadthebiggestgrowthinmortgageborrowing,but“itsratioofhouseholddebttothebankingsystemattheendof2002was22.3%25,comparedwithaEuropeanaverageof47%.”26
23242526
Hypostat1992-2002,EMF:Greece.
Hypostat1992-2002,EMF:Netherlands.
Householdindebtednessasapercentageoftotalbankborrowing.Hypostat1992-2002,EMF:Greece.

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Italyhasexperiencedrapidgrowthinowneroccupancy,from68%in2000to80%
in2002.Despitethis,mortgageindebtedness,at11%,isnothigh,whichreducestheriskfromanysuddenriseininterestratesorweakeningoftheItalianeconomy27.
France’sowneroccupancyrateof55%in2002partlyexplainsitslowerdebtper
capita,butifwelookatmortgageloansoutstandingin2002,wefindthatFranceranksfourthinEurope,whichmeansthatthereisstillplentyofroomforgrowthinthismarket.However,theFrencheconomyattheendof2002wasgoingthroughadifficultperiod.Anincreaseinunemploymentto9.1%from1.6%thepreviousyeardepressedincomegrowth,whichhadadampeningeffectontheperformanceofthemortgagemarket.28
Chart2.2.3showsmortgageloansoutstandingasapercentageofGPD.As
mentionedearlier,in1992mortgagesrepresentedaround30%ofGDP,risingto40%in2002.
Chart2.2.3.MortgageLoansOutstandingasaPercentageofGDP,2001-2002
20012002
100%90%80%70%60%50%40%30%20%10%0%
Europ.average
Netherland
Belgium
Ireland
Luxembourg
Greece
Denmark
Germany
Finland
PortugalSweden
Norway
Austria
France
Spain
Italy
UK
Source:Hypostat,ownelaboration.
In2002,theEuropeanaveragewas40.97%.Thecountrieswithanabove-average
ratioofmortgageloansoutstandingwere:theNetherlands,with87.6%in2002,anincreaseof8.4%over2001;Denmark(74.8%;UnitedKingdom(62.2%;Germany(54.1%;Norway(50.3%,whichhadovertakenPortugalandSwedenin2002,witha5.7%increase;Portugal(50.2%,whichitselfhadovertakenSweden,thankstogrowthof3.6%;andSweden(47.6%,withnegativegrowthof-0.9%.
2728
Hypostat1992-2002,EMF:Italy.Hypostat1992-2002,EMF:France.

13
Inallofthecountrieswithabelow-averageratioofmortgageloansoutstanding,the
ratioincreasedin2002,exceptinLuxembourg,wheretheratioofmortgageloansoutstandingtoGDPfellby-0.5%,andFinland(-0.3%.ThisgroupcomprisedSpain(37.7%,Ireland(36.8%,Finland(31.8%,Austria(27%,France(23.1%,Luxembourg(18%,Greece(15%andItaly(11.4%.TheincreasewasparticularlysignificantinSpain(3.8%,Ireland(3.6%andGreece(3%,thethreeEuropeancountrieswhosemortgagemarketsweredevelopingmoststrongly.
2.3RatioofMortgageLoansOutstandingtoTotalLoans
Thisratioshowstheweightofmortgageloanswithintotalbanklending.
Chart2.3.1.MortgageLoans/TotalLoans
19922002
70%60%50%40%30%20%10%0%
Netherlands
Europeanavg.
Belgium*
Germany
Ireland*
Luxembourg*
Finland*
Greece
France*
Portugal*
Spain
Italy
Austria*
Sweden
UK
Source:Ownelaboration,EMF.
TotalLoans:ObtainedfromDataStream.
ForFrance,Spain,Italy,Germany,Holland,USA,Ireland,Greece,SwedenandAustria,“Banklendingtotheprivatesector.”FortheUnitedKingdom,“BankandBuildingSocietyLendingTotal.”ForIrelandandFrance,thedataarefor1993and2002.ForAustria,thedataarefor1992and2001.
ForBelgium,Finland,LuxembourgandPortugal,“DomesticCredit,”butthedataarefor1999and2002.
TheratioincreasedinallthecountriesexcepttheUKandAustria.Thatisbecausein
Austria,althoughtotalloansincreasedconsiderably,mortgageloanshardlyincreasedatall,whileintheUnitedKingdomtheriseintotalloanswasgreaterthantheriseinmortgageloansoutstanding.TheincreaseinmortgagelendingasapercentageoftotalbanklendingwasespeciallyhighinSpain.TheratiodecreasedinFinlandandLuxembourg(datafor1999and2002,where,asintheUnitedKingdom,theincreaseintotalloanswasgreaterthantheincreaseinmortgages.InBelgium,theweightofmortgagelendingincreasedin2002.

14
Chart2.3.2belowshowstheweightofmortgagelendinginbillioneuros.
Chart2.3.2.WeightofMortgagesinTotalLoans,1992
MortgagesRestofloans
1,6001,4001,2001,0008006004002000
Belgium*
Netherlands
Luxembourg*
Portugal*
Germany
Finland*
Austria*
Ireland*Ireland*
France*
Sweden
GreeceFinland*
Greece
Italy
Spain
UK
Source:EuropeanMortgageFederation,DataStream,ownelaboration.BE,PT,LX,FN:data1998.IR,FR:data1993.
Billioneuros
Chart2.3.3.WeightofMortgagesinTotalLoans,2002
MortgagesRestofloans
3,0002,500Billioneuros
2,0001,5001,000500
Netherlands
Luxembourg*
Belgium*
Italy
Portugal*
Germany
France*
Spain
Austria*
Sweden
UK
0
Source:EuropeanMortgageFederation,DataStream,ownelaboration.Austria:dataarefor2001.

15
Theweightofmortgagesintotalloansincreasedinalmostallcountries.Thismeans
that,overall,themortgagemarketshavedevelopedverywellinrecentyears,andthatcreditinstitutionsarecompetingtoobtainthemaximumnumberofmortgages.Agoodwayforthemtodothatistocreatenewtypesofmortgages,withdifferentfeatures,dependingonthetypeofconsumer.Andindeed,manynewtypesofmortgageproductshavebeendeveloped,especiallyintheUK,theU.S.,theNetherlandsandFrance.2.4ImpactontheEconomy•Householdindebtedness
Thefollowingtableshowsaninternationalcomparisonofhouseholdindebtedness
inEuropeintermsofgrossdisposableincome.
Table2.4.1
Householdindebtedness:countrycomparison
(asa%ofgrossdisposableincome
Year
1991
1995
1999
2001
FranceGermanyBelgiumHollandNetherlandsFinlandItalySpainPortugalIrelandEMUUKUSA
55.583.996.581.324.84.360.1102.83.9
55.699.658.8124.958.963.825.645.740.966.996.689.356.1109.965.2153.159.358.52855869.260.374.199.593.158.6111.562.2189.966.870.433.776.796.674.580.3111.9103.9
Source:“Elendeudamientodeloshogaresespañoles,”AnadelRío,BankofSpain.
Ascanbeseeninthetable,thelevelofhouseholdindebtednessintheUnited
Kingdom,theUnitedStates,GermanyandHollandisconsiderablyhigherthanhouseholdgrossdisposableincome.In2001,theratioofindebtednesswas112%intheUnitedKingdom,104%intheUnitedStates,111%inGermany,and189%inHolland,wellabovetheEuropeanaverageof80%.Ontheotherhand,somecountrieshadamuchlowerratio,notablyItaly,AustriaandBelgium.AccordingtoGuisoandJapelli(2000,inItalythiswasduetocertainpeculiaritiesintheregulationoftheItalianfinancialsystemandtheexistenceofhighcosts,whichintheeventofdefaultledtotheenforcementofguarantees29.
Overtheten-yearperiod1991-2001,householdindebtednessinEuropeasawhole
increasedby20%,moreorlessasintheUnitedStates.InGreatBritain,however,itdecreasedoverall,althoughtherewasaslightrisein2001,reaching111.9%.InSpain,PortugalandIreland,householdindebtednessgrewveryconsiderably,aboveallbecauseofthesteadydevelopmentofthesecountries’financialmarketsandtheboosttheyreceived
29
“Elendeudamientodeloshogaresespañoles,”AnadelRío,BankofSpain.

16
frommembershipofEMU.Anotherfactorwastherapidincreaseinmortgagelending.InFrance,bycontrast,thelevelofindebtedness,whichalreadywasbelowtheEUaverage,didnotincrease,whileinAustriatherewasanincrease,butthelevelstillremainedwellbelowtheEUaverage.
Hollandhadahighrateofhouseholdindebtedness,ascanbeseenfromthevarious
chartsandtablesshowingthemortgagebalanceoutstanding,whereitranksthirdbehindGermanyandtheUnitedKingdom.ThemortgagebalanceoutstandingisalsoquitehighinGermany,contributinghighlevelsofhouseholdindebtedness,althoughtherateofowneroccupancyisamongthelowestinEurope.Thissuggeststhatthereisahighpercentageofnon-residentialmortgagedebt.
Atpresent,themainsourceofhouseholdborrowinginEuropeisbankloans,which
accountfor85%ofthetotal,althoughotherinstitutionssuchasinsurancecompaniesalsoplayarole.InHolland,AustriaandBelgiumtheselatteraccountforaround25%ofborrowing.Theentryofnew,non-bankinginstitutionsintothismarkethasbeenfundamentalfortheexpansionofprivate,andinparticularhousehold,borrowing.Italsomeansthattheriskassociatedwiththeloanportfolioisnotconcentratedinonesector.Securitizationisalsohelpingbankstoreducetheriskoftheirloanportfolioandfreeupfundstomeetthedemandsofborrowers30.
Thegrowthofmortgagelendinghasplayedanimportantpartintheoverallincrease
inhouseholdindebtednessinrecentyears.Infact,thebulk(specifically,64%ofbankloansgrantedtohouseholdsareforhousepurchase(seeTable2.4.2.
Table2.4.2
(Averagepercentages,1996-2001
BankLoansasa%ofTotalLoans
BankLoans(%GDI
ApplicationTerms
ConsumerHousingOthers
Uptoayear
BetweenoneandfiveyearsMorethanfiveyears
GermanyBelgiumNetherlandsAustriaFinlandItalySpainPortugalIrelandEMU
France
52.9102.451.2137.445.762.430.172.392.674.571.4
90.491.882.472.468.386.491.995.695.8n.a.23.30%16.50%10.80%5.40%38.40%11.60%8.70%17.40%11.50%24%16.20%
63%63.50%65.40%86.40%46.50%66.60%39.00%63.50%75.40%76%63.70%
13.70%20.00%23.90%8.30%15.10%21.80%52.30%19.10%13.10%0.00%20.10%
5.10%8.10%8.20%7.50%12.30%4.80%20.10%7.50%9.70%19.80%8.70%
18.10%8.00%12.30%4.20%9.60%8.10%24.60%13.20%11.10%12.30%11.40%
76.90%83.90%79.50%88.30%78.10%87.10%55.30%79.40%79.20%67.80%79.90%
Source:“Elendeudamientodeloshogaresespañoles,”AnadelRío,BankofSpain.
30
“Elendeudamientodeloshogaresespañoles,”AnadelRío,BankofSpain.

17
Wecanseefromthetablethatthispercentageisfairlyhomogeneous,exceptfor
ItalyandAustria,whereitismarkedlylower.Thismightbeexplainedbytherateofowneroccupancyinthesetwocountries,butifwelookatChart2.4.3,weseethatthereisnotreallymuchcorrelation:althoughAustriahasaverylowlevelofindebtednessandasimilarlylowlevelofowneroccupancy,Italyhasalowpercentageofhouseholdindebtednessbutaveryhighlevelofowneroccupancy,muchhigherthanFrance,forexample,whichhasahigherlevelofindebtedness.
Chart2.4.3.HouseholdIndebtednessasaPercentageofGrossDisposableIncome(GDI
andOwnerOccupancyRate,2001
Residentialmortgageloansas%DiposableincomeOweroccupationlevel2001140120100806040200
Belgium
Italy
Ireland
Netherlands
Germany
France
Finland
Portugal
Spain
Austria
EMU
Source:EuropeanMortgageFederation,BankofSpain.
GoingbacktoTable2.4.2,weseethatHollandranksfirstinborrowingforhouse
purchase,with86%,followedbyIrelandandPortugal,inbothofwhichtherehasbeenanotableexpansionofthemortgagemarket.
InSpain,inthethirdquarterof2003,householdborrowingamountedto500billion
euros,quitehighcomparedwiththeEuropeanaverage.Ofthattotal,393.46billionwaslong-termloans,thatis,mortgages,whichshowshowtheunstoppableriseinhousepricesinSpain(whichhasseenthebiggestincreaseinEuropehasdriventheincreaseinhouseholddebt,bearinginmindthatatthattimemortgagesrepresented66%oftotalbankloans.Spainisoneofthemostheavilyindebtedcountriesintheeuroarea.Withhouseholdindebtednessequalto60%ofGDPin2003,SpainisabovetheEuropeanaverageof51%,followedbyGermany,Holland,LuxembourgandPortugal.Despitethishighlevelofindebtedness,theBankofSpainremainsunconcerned,asthewealthofSpanishhouseholdsalsoincreasedin2003,thankstothestockmarkets.BetweenJulyandSeptember2003,financialwealthincreasedby11.2%,reaching719.12billioneuros31.
31
“Laviviendadisparaladeudadelasfamiliashastamáximoshistóricos”(“Housingcauseshouseholdborrowingtorisetohistoriclevels”,EstelaS.Mazo,Expansión.

18
Wecanconclude,therefore,thatthedevelopmentofmortgagelendinginrecent
yearshashadastronginfluenceontheincreaseinhouseholdborrowing,consideringthatmostoftheloansareusedtobuyhomes.
3.CharacteristicsofMortgageLoans
3.1ClassificationofMortgagesAccordingtoInterestRateandTerm
Therearemanydifferenttypesofmortgages,withdifferentintereststructures,but
generallyspeakingtheycanbeclassifiedinthreegroups:
Table3.1.1
ProducttypeFixedRateMortgages
Definition
ThemostcommoninEurope.Ingeneral,thesamerateispaidformorethanfiveyears,andafterthatitisadjustedduringthelifeoftheloan.
Thereisafixedratefor1to4years,andthentheinterestratechangesaccordingtothedealsestablishedinthecontract,ordependingonanexternalindex(referenceindex:Euribor,Mibor,etc.Insomecountriestheinterestratemayberenegotiated.
RateResetMortgagescouldalsobeincludedinthisgroup.
Afixedrateispaidforaperiodofoneyear,afterwhichtherateisestablishedbythelenderdependingonthefinancingcost.Thefrequencyofrateadjustmentvaries.Equally,theinterestratemaybeindexed.
MixedRateMortgages
VariableRateMortgages
Newkindsofmortgageproductsonthemarket:InterestonlyloansSub-primemortgages32
Theborrowerpaysonlyinterest(noprincipalrepaymentsduringthefirstyearsoftheloan.Badcreditmortgagesthatofferfastfundingwithminimumrequirements,thepossibletrade-offbeingsomewhathigherratesorfees.
32
www.crhome.com/sub-prime-mortgages.htm

19
Intendedforborrowerswhofinditdifficulttoobtainhomefinancingbecausetheirloanrequestdoesnotconformtoconventionallenderguidelines.
Self-certificationmortgages33
Usuallyfortheselfemployedand/orforthosewhoarehavingdifficultyingettingamortgage.Thistypeofmortgagerequiresnoproofofincome,nolengthofself-employment.
Mortgagesforpeoplewhowanttopurchaseahomebuthavelimitedfundstocoverthedownpaymentandclosingcost,marginalorirregularincome,overextendedcredit,orpastorpresentcreditproblems.
Forpeoplewhowanttobuyasecondpropertytolet.Therearethreemaindifferencesbetweenbuy-to-letandordinarymortgages:–
RentPotential:thedecisionwhetherornottograntthemortgagewillusuallybebasedontherentearnedbythepersonseekingthemortgage,aswellasthatperson’sotherincome,althoughinsomecasestheincomeisnotconsidered.
Interestrate:aslightlyhigherinterestrateischarged.
Largerdeposit:typically,aminimumof20%-25%oftheproperty’svalueisrequiredasadeposit.
Non-conformingloans34
Buy-to-letmortgages35
––
Otherimportantproducts
Subsidizedmortgages,flexibleloansandoffsetmortgages
Inoffsetmortgagestheborrower’ssavingsbalanceisoffsetagainstthemortgageloanforthepurposeofcalculatinginterest.
Thetermofmortgageloansvaries.Ontheonehand,inSweden,theNetherlands,
DenmarkandPortugal,periodsof30yearsarecommon,whereasinItaly,10-yearmortgagesarethenorm.InSpain,theaveragetermisaround20years.
Fixed-ratemortgagesareusualinmostEuropeancountries,exceptSpainandthe
UK.Inarecentpaper,ProfessorDavidMilesoftheUniversityofLondonexplainsthereasonsfortheUKmarket’spreferenceforvariablerates,theobstaclestotheadoptionoffixedrates,andtheconsequences.
333435
Reference:www.debt-consolidation-loan-uk.co.uk/self-certified-mortgages-uk.htmwww.ncua.gov/PALS/BP/PALSDocs/05536-32-1.htmwww.mortgages.co.uk

20
Chart3.1.2showstheproportionoffixedratemortgagesinEuropeancountries.
Chart3.1.2.FixedRateMortgagesasaPercentageofTotalMortgages,2001-2002
20012002
120%100%80%60%40%20%0%
Netherlands
Germany
france
Denmark
Italy
Spain
UK
Source:TheEconomist,SpecialReportontheMortgageMarkets.October18,2003.Hypostat(EMF,andownelaboration.
In2002,thepercentageoffixed-ratemortgagesincreasedintheUKandSpain,
whilethereverseoccurredinGermany,theNetherlands,France,ItalyandDenmark.TheUKgovernmentintendstoincreasethenumberoffixed-ratemortgages,especiallywithaviewtofutureadoptionoftheeuro,althoughinSpain,wherevariable-ratemortgagesarealsoverycommon,theintroductionoftheeurodidnotcauseanyproblems.Onthecontrary,housepricesinSpainhaveincreasedandthemarkethasnotexperiencedanyturbulence,althoughsomeexpertsmaintainthatthereisarealestatebubbleinSpainthatcouldburstatanymoment.Theseexpertsalsoaffirmthatthebestsolutionforanymortgagemarketisacombinationoffixedandvariable-ratemortgageswithdifferentterms.ThedifferencesintheproductsandtheeconomiccontextmakeitdifficulttocompareinterestratesbetweenthedifferentEuropeancountries.
Aswesawinsection2.3,theweightofmortgagesintotalloanshasincreasedyear
afteryear,andasaconsequence,competitionbetweenfinancialinstitutionshasintensified.Lendersthereforetrytocreatenewproductstoattractasmanycustomersaspossible.Table3.1.3showsthedifferenttypesofmortgageproductavailableinEurope,
accordingtoarecentstudyproducedbyMercerOliverWymaninSeptember2003incollaborationwiththeEuropeanMortgageFederation36.
36
“StudyontheFinancialIntegrationofEuropeanMortgageMarkets,”MercerWymanOliver,September2003.

21
Table3.1.3.MortgageProductsinEurope
CountryRangeofproducts
Spain•••
Variable-rate(indexedmortgages,reviewedevery6-12months,arethemostcommon.
Fixed-ratemortgagesareveryunusual,only5%oftotal.Innovations:
–Flexiblemortgages–CappedratemortgagesVeryactivemarket:
–Widerangeofhighlystandardizedproducts–Efficientfundingmechanism:Pfandbriefe–Bausparkassen:10%ofmortgageloans
Adjustablelong-termfixed-ratemortgagespredominate.Thetermoftheloansisbetween20and30years,withafixed-rateperiodof10to15years.
Variable-ratemortgagesareveryunusual,only5%oftotal.Indexedvariable-ratemortgagesarenotavailableforlegalreasons.
Interest-onlymortgages,whereborrowerpaysonlyinterestforagivenperiod,5-10-15years;repaymentisviaaninsurancepolicy.
Fixed-ratemortgagesdenominatedinDanishcrownsatmorethan30yearsarethemostcommon.
Variable-ratemortgagesdenominatedinDanishcrownsandineuros,withadjustmentfrequenciesbetween1and10years.Canbeconsideredasloanswithconstantprincipalrepayments.
Nowmore10-30yearvariable-ratemortgagesarebeginningtoappear.
Mortgagesavailable:
–Variable-rate(adjustablewithrespecttoareferenceindex–Fixed-rate–Mixed
Principalrepaymentsmaybe:
–Fixed–Increasing–DecreasingFlexiblemortgages
Interestonlymortgagesarealsoavailable
Loan-to-valueratioisverylow:50-60%,althoughMicosBancaisstartingtooffermortgageswithaLTVof100%,usingmortgageinsurancetocovertheborrower’sadditionalrisk.
High-risksub-primeloansarenotverycommon.
Germany•
•••••
Denmark••
•
Italy
•
•
•••
•

22
Holland••••••OneofthebroadestmortgagemarketsinEurope;furthermore,interestpaidonmortgagesisnottax-deductible.
InterestonlymortgageswithhighLTVdominatethemarket.
Lenderstrytoofferproductstailoredtoconsumerneeds;veryoften,theyincludemortgageslinkedtoasavingsorinvestmentproduct.
80%ofmortgagesarefixed-rate,andofthose,60%areat10years.
20%ofmortgagesarevariable-rate.
Sub-primeorself-certifiedproductsarenotavailable.Variable-ratemortgages(notindexedtoEuriborarethemostcommon.
Thetermtendstobebetween20and25years.
Fixed-ratemortgageshavealwaysbeenlesspopular,althoughtheyarebecomingmorecommon.
Aspecialfeatureissubsidizedmortgages,whichaccountforalargeproportionofmortgageloansoutstanding.
High-riskmortgagessuchassub-primeornon-conformingarenotavailable.
Mortgagesdifferaboveallin:
–Repaymentstructure:
-Repayment/Amortizationmortgages-Interestonlymortgages-Flexiblemortgages.–Ratestructure:
-Variable-rate
-Fixed-rate(veryshortadjustmentperiods-Capped-rate.
Thereareveryfewlong-termfixed-rateproducts,buttherearequiteafewshort-termfixed-rateproductstoattractnewbusiness.
Innovative,high-riskproducts:
–Offsetmortgages(whichallowsavingsandthemortgagetobeoffsetagainstoneanotherforinterestcalculations–Sub-prime–Buy-to-let
–Self-certifiedloans.Widerangeofproducts;subsidizedmortgages,0%interest,PEL,PAPloans,regulatedloans…Themostcommonarefixed-rate.
Variable-ratemortgagesaccountfor20%to30%oftotal.Flexiblemortgages,interest-onlymortgages,cappedrateandsub-primemortgagesareavailable,butthelatteronlyfromspecializedlenders.
Portugal•••••
UnitedKingdom•
••
France••••
Source:“StudyontheFinancialIntegrationofEuropeanMortgageMarkets,”MercerOliverWyman,September2003.

23
WithintheEuropeanUnion,basedontheMaastrichtcriteria,aprocessofinterest
rateconvergencehasbegunthatwillcreatetheconditionsforthethirdphaseofmonetaryunion.
In2002,thelowestinterestrateswereinSpain,Ireland,theNetherlands,Portugal
andGreece,whilein2003,SpainandFinlandhadthelowestrates.
Chart3.1.4.InterbankInterestRatesinEurope
1088420–2–4
1992
2002
SpainGermanyFranceUKItalyIrelandUSANetherlandsPortugal
Source:DataStream.
Table3.1.5.InterestRatesinEurope
19922002
SpainGermanyFranceUKItalyIrelandUSA
NetherlandsPortugalNorwaySwedenBelgiumFinlandGreece
Source:DataStream.
8.455.497.533.088.374.351.004.267.815.637.737.08-0.360.840.842.300.24-1.95-0.16-0.55-0.855.911.671.201.19-0.76

24
Overtheperiod1992-2002,interestrateswentdowndramatically.Insome
countries,theywereevennegative.Thisfact,togetherwiththegrowthoftheeconomyandconvergenceintheeurozone,hasmadeiteasierforhouseholdstoobtainmortgages.Inaddition,thecostofmortgageshasdecreased,andEUmemberstatesarebuildingthefoundationsfortheintegrationofEuropeanmortgagemarkets.3.2TransactionCosts
AccordingtothestudybyMercerOliverWyman,“transactioncostsarethepricethe
consumerhastopaywhenpurchasingamortgageloan,orchangingmortgageproviders,thatistosay,loancost.Loancostsincludepropertyvaluation,solicitor/notaryfeesassociatedwithloanpurchase,mortgageregistrationcosts,taxesassociatedwiththeloan,administrationagencycostsandotherloancostsincludinglenderchargesfortheloan.InsomeEuropeancountries,manyofthemortgage-relatedfeesareaddedtotheloan,whichimprovesmobility,butthecostsarestillbornbytheborrower.”37
Chart3.2.1belowshowstransactioncostsacrosstheEuropeanUnion;
Chart3.2.1.TransactionCostsAcrosstheEuropeanUnion
PurchasecostLoancost
181614121086420
Netherland
Italy
Ireland
Denmark
Greece
Portugal
Germany
Norway
Sweden
Media
Spain
UK
Source:“StudyontheFinancialIntegrationofEuropeanMortgageMarkets,”MercerOliverWyman.
AscanbeseeninChart3.2.1,thehighesttransactioncostsareinGreece,Spainand
theNetherlands,withahighdispersionfromtheEuropeanaverage.AttheoppositeextremearePortugal,DenmarkandtheUK,withverylowloancost.ItisinterestingtonotethattheUKhasrelativelylowtransactioncostsbecauseithasahighlydevelopedmarketwithintensecompetition.Incontrast,DenmarkandPortugalbothhavelowtransactioncostsdespitethefactthattheirmarketsareveryconcentrated.
37
“StudyontheFinancialIntegrationofEuropeanMortgageMarkets,”EMF,MercerOliverWyman.

25
Chart3.2.2showstheproportionoftaxesinloancosts.
Chart3.2.2.LoanCostasaPercentageofPropertyPurchasePrice
LoancostexcludingtaxesLoanrelatedtaxes
2.52.01.51.00.50
Netherlands
Italy
UnitedKingdom
Denmark
Germany
France
Portugal
Spain
Source:“StudyontheFinancialIntegrationofEuropeanMortgageMarkets,”MercerOliverWyman.
Thedifferentpricesandlevelsofdevelopmentofthemarketscanbeexplainedby
otherfactorsapartfromstructuraldifferences,notablytransactioncosts.Despiteconvergenceofmortgageinterestrates,ageneraldeclineininterestrates,andareductionofriskforlenders,cross-borderoperationsarestillveryinfrequent,oneofthereasonbeingtheexistenceofhightransactionscost.3.3MortgageRefinancing
Mortgagerefinancinghasbeendevelopingrapidlyinvariouscountries,especiallyin
theUnitedStatessince1992.Refinancingconsistsofpayingofftheoldmortgageandtakingoutanewonewithabetterinterestrate,bettertermsandconditions,orjustforalargeramount.Refinancingisnotsuitableforeverybody,andeachpersonmustweighuptheprosandconsbeforerefinancing.AccordingtoanAmericansBankersAssociationreportentitled“AConsumer’sGuidetoMortgageRefinancing,”refinancingisworthwhileifthenewinterestrateisatleast2%lowerthantheoldone(otherauthorsclaimthatitisworthwhilewithonlya1.5%difference.Thisisthe“safemargin,”whenthecostsofthetransactionandtheresultingsavingsareweighedup.Anotherfactortoconsideristhelengthoftimethepersonislikelytostayinthehouse,becausetherefinancingcostwillonlybeoutweighedbythebenefitsifthepersonstaysforatleastanotherthreeyears.
Normally,thepeoplemostinterestedinrefinancingaretheoneswhoobtaineda
mortgagewheninterestrateswerehigh,orwhotookonanadjustable-ratemortgageandnowwantadifferentsortonbetterterms.Asarule,theyareinoneofthefollowingsituations38:
38
“AConsumer’sGuidetoMortgageRefinancing,”www.pueblo.gsa.gov.

26
––
Peoplewhowanttobenefitfromalowerinterestrateandwillbeinthehouselongenoughtooffsettheadditionalrefinancingcost.
Peoplewhohaveacquiredanadjustableratemortgageandarelookingtoreplaceitwithafixed-ratemortgagesothattheyknowexactlyhowmuchinteresttheyaregoingtohavetopayeachmonth.
Peoplewhowanttoturntheiradjustable-ratemortgageintoalowerinterestratemortgagewithmoreprotectionistconditions.
Peoplewhowantfastergrowthoftheirrealestateassetportfoliobyreducingtherepaymentperiod.Higherrepaymentswillacceleratetheprocess.
Peoplewhowanttousetheirmortgageloaninsurancetoobtainnewfundsthatwillallowthemtofinancenewtransactionsorpayoutstandingdebt.
–––
ThislasttypeofmortgagerefinancingisverycommonintheUnitedStates.It
consistsbasicallyofwithdrawingpartofthevalueofthepropertytopayoutstandingdebts.AccordingtoastudycarriedoutbyMGICCapitalMarkets,adivisionofMortgageGuarantyInsuranceCorporation(aMilwaukee-basedprivatemortgageinsurancecompany,“cashobtainedthroughmortgagerefinancingwillbeusedtopayoffnon-tax-deductible,high-interestdebtssuchascarpurchases,creditcarddebt…Therestofthedebtwillbeconsolidatedintoatax-deductible,low-interestmortgagepayment.”
Lendersrequirethatborrowershaveprivatemortgageinsurance(PMIwhentaking
outamortgageloan,althoughthisrequirementmaybewaivediftheborrowerdeposits20%ofthepropertyvalue.Currently,manyconsumersusePMIasmeansofadministeringtheirdebt.AnMGICstudyontheexpansionofmortgagerefinancingintheUnitedStatesrevealstwoamazingtrends39:
–
Interestratesformortgagerefinancingwere0.6%higherthanthepreviousyear.Why,then,hasmortgagerefinancingincreasedinthepastfewyears?AccordingtoMarkMarple,VicepresidentofmortgagebankingstrategiesatMGIC,consumersprefertopayahigher(tax-deductiblemortgageinterestratethanthecurrent9%fornon-tax-deductibleconsumerloansandcreditcardborrowing.
Theaveragehome-ownerreducedherrealestatecapitalbyincreasinghermortgagebalanceoutstandingby$41,000afterrefinancing.
–
PeoplewhoalreadyhavePMIbeforerefinancingkeepitafterrefinancing.And
peoplewhodonothaveit,takeoutPMIforthepurposeofrefinancing.TodayalargenumberofAmericanstakeadvantageoftheirrealestatecapitaland,thankstoPMI,obtainhighLTVmortgagesthatallowthemtosettleotherdebts.AccordingtoMichaelZimmerman,VicepresidentofMortgageBankingStrategiesatMGIC,“consumersnowadaysconsidermortgageloansasasourceofcashandfinancialflexibility.Theyaremoreconsciousoftheiroptionsintermsofdebtadministrationorreductionofinterest.”Inaddition,Zimmermanaffirmsthat“halfofborrowersthatuserefinancingaremotivatedbydebtconsolidation.
39
“Refinanciaciónconsegurohipotecarioprivadoparadueñosdecasa,paraquesaquenmásprovechodesuscasas,”www.Micanews.com.

27
Throughmortgageinsurance,consumersareabletomanagetheirpersonalfinanceanddebts.”
Aswealreadysaid,refinancingisnotworthwhileforallborrowers.Whenweturn
theoldloanintoanewone,wewillhavetopayvariouscosts.Accordingto“AConsumer’sGuidetoMortgageRefinancing,”abookletpreparedbyagroupofU.S.organizations(seebibliography,therefinancingcostsareasfollows:
Table3.3.1
CostofMortgageRefinancing
a.ApplicationFee
Imposedbythelendertocoverthecostofprocessingtheloanrequestandcheckingtheapplicant’screditreport.
Titlesearchwillcoverthecostofexaminingthepublicrecordtoconfirmownershipoftherealestate.Titleinsurancecoversthecostofapolicy,usuallyissuedbyatitleinsurancecompanythatinsuresthepolicyholderinaspecificamountforanylosscausedbydiscrepanciesinthetitleoftheproperty.
Thisischargedbythelenderinrelationtofeespaidtothelawyerorcompanythatconductstheclosingforthelender.Theborrowermayalsoberequiredtopayforotherlegalservicesrelatingtotheloanwhichareprovidedtothelender.Loanoriginationfeesarechargedforthelender’sworkinevaluatingandprepayingthemortgageloan.Pointsareaprepaidfinancechargeimposedbythelenderatclosingtoincreasethelender’syieldbeyondthestatedinterestrateonthemortgagenote.
Thisfeepaysforanappraisal,whichisanestimationofthevalueoftheproperty.
Achargeofmoneyforanearlypay-offoftheexistingmortgageloan.Itvariesbystate,typeoflender,andtypeofloan.Prepaymentpenaltiesareforbiddenonsomeloans.
Dependingonthetypeofloanandotherfactors.
b.TitleSearchandTitleInsurance
c.Lender’sAttorney’sReviewFees
d.LoanOriginationFeesandPoints
e.AppraisalFeef.PrepaymentPenalty
g.Miscellaneous
Source:“AConsumer’sGuidetoMortgageRefinancing,”www.pueblo.gsa.gov

28
Aborrowerwhowantstorefinancehermortgagewillhavetopayatleast3%-6%of
theoutstandingprincipalincosts,prepaymentpenalty,andthecostofpayingthetotalamountofasecondmortgage.
Dependingontheintendedpurpose,severaldifferenttypesofrefinancingare
available40.Ifthepurposeistoobtainliquidityfromtheloanorpayoffdebts,itiscalleda“debtconsolidationloan”,“homeequityloan”or“cashoutrefinance”.Iftheborrowerwishestoobtainsomecapitalgainfromherhometomakesomeimprovementstoit,itiscalleda“homeimprovementloan.”Iftheborrowerseeksacreditlinesecuredbyherhome,itiscalleda“homeequitylineofcredit”(HELOC.
ThesituationinEuropeisdifferentandmortgagerefinancingislesswidespreadthan
intheUnitedStates,althoughitisbecomingmorepopular.AccordingtodataprovidedbytheEuropeanMortgageFederation,Belgium’sgrosslendingin2002was21%higherthanintheprevioustwoyears,butonethirdlessthanin1999,whilenetlendingwas7%higher.Takingintoaccountthefactthatgrosslendingisthetotalamountofmoneyadvancedduringtheperiod(includingallloansconvertedintonewloansonthesameproperty,andnetlendingisthechangeinoutstandingmortgageloansduringtheperiod,ifwecomparegrossandnetlending,weseethatrefinancingaccountsforasignificantproportionofmortgagelendinginBelgium.41
InDenmark,too,therewasamarkedincreaseingrossandnetmortgagelending
(25%and6%,respectivelyin2002,whilethenumberofhousingtransactionshardlyincreased,whichsuggeststhattheboosttolendingcamefromrefinancingandmortgageloansforconsumptionortoreplaceotherconsumerdebt.42
ThesituationintheNetherlands,withgrossandnetlendingof25%and12.4%in
2002,wassimilartothatofDenmark.Thenumberofhousingtransactionwasverymodest(1.5%,suggestingthatmortgagerefinancingwasbeingusedas“additionalborrowingwithoutmovinghouse,whichitturnsuggeststhathomeownerscontinuedtousesomeoftheequityintheirhomesforconsumerspendingin2002.”43
Finally,intheUnitedKingdom,highdemandforpropertywasaccompaniedbyhigh
levelsofrefinancing,partlytofinanceconsumption.3.4TransparencyEuropeanCodeofConduct
TheEuropeanAgreementonaVoluntaryCodeofConductforPre-contractual
InformationonHomeLoanswassignedonMarch5,2001bytheEuropeanCreditSectorAssociations,ledbytheEuropeanMortgageFederation,andconsumerorganizations.ThenegotiationsaswellasthesignatureoftheAgreementwereconductedundertheaegisoftheEuropeanCommission.44TheEuropeanCodeofConductisanimportantstepontheway
4041424344
“Elvocabulariohipotecario:Muchosnombres,muchavariedad,”www.terra.comHypostat1992-2002,EMF:Belgium.Hypostat1992-2002,EMF:Denmark.Hypostat1992-2002,EMF:Netherlands.EuropeanMortgageFederation.

29
towardstheintegrationofEuropeanmortgagemarkets.Itsaimsaretoensuretransparencyofinformationandfacilitatecomparisonbetweendifferentmarkets(comparability.AccordingtotheEuropeanMortgageFederation,“TheobjectoftheCodeistoimproveandstandardizeconsumerinformationandhelpprospectiveborrowerschoosethemortgageloansbestsuitedtotheirneeds.Bystandardizinginformation,theCodeisintendedtohelpdevelopcross-bordermortgagetransactionsandboostcompetitioninthestillfragmentedEuropeanmortgagemarkets.”
Theagreementprovidesbackingforavoluntarycodeofconducttobeimplemented
byanyinstitutionofferinghomeloanstoconsumers.BelowisasummaryoftheAgreement:45
CoverageoftheCode:
Domesticandcross-borderhomeloans.
Definitionofa“HomeLoan”forthepurposesoftheCode:
“Acredittoaconsumerforthepurchaseortransformationoftheprivateimmovable
propertyheownsoraimstoacquire,securedeitherbyamortgageonimmovablepropertyorbyasuretycommonlyusedinaMemberStateforthatpurpose.HomeloanscoveredbytheConsumerCreditDirective(87/102areexcludedfromthescopeoftheCode.”TermsofImplementation:
TheEuropeanCreditSectorAssociationssubscribingtotheCodewillmakean
officialpublicannouncementoftheircommitmenttoit.Afterthat,eachassociationwillsendanofficialrecommendationtoitsnationalmembers,invitingthemtosubscribetotheCode,andinturn,eachnationalmemberwillinviteindividualinstitutionstoannouncetheircommitmenttotheCodewithin6monthsofratificationoftheagreement.ThedateofimplementationoftheCodeshouldbewithin12monthsofthedateofnotification.EachbranchoftheindividualinstitutionssubscribingtotheCodewillmakecopiesavailabletowhoevermayrequestone.ConsumerswillbeinformedoftheCode’sexistenceandavailabilitybyaspecialnoticeintheEuropeanStandardizedInformationSheet,andtheEuropeanCreditSectorAssociationswillpublishanannualprogressreportonimplementationoftheCode.Inaddition,theEuropeanCommissionwillmonitortheuptakeandeffectivenessoftheCodeandensurethatacentralregisteriskept,indicatingwhichinstitutionsofferhomeloansandwhichofthemhaveandhavenotadoptedtheCode.OtherinstitutionswhicharenotmembersoftheEuropeanCreditSectorAssociationsmayadheretotheCode.
VoluntaryCodeofConductonPre-contractualInformationforHomeLoans:
TheCodedealswithpre-contractualinformationtobeprovidedtoconsumers
regardinghomeloans.InstitutionssubscribingtotheCodeundertaketoprovidetheconsumerwiththefollowinginformation:
45
“EuropeanAgreementonaVoluntaryCodeofConductonPre-contractualInformationforHomeLoans,”EMF.

30
–
Generalinformationabouthomeloansonoffer.Forexample,thelender’sidentityandaddress,detailsabouthomeloans(purposesforwhichhomeloansmaybeused,formofsurety,differentinterestrates,etc.
Personalizedinformationatapre-contractualstagetobepresentedina“EuropeanStandardizedInformationSheet”(ESIS.Thisincludesadescriptionoftheproduct;nominalrate;annualpercentagerateofcharge(APRCbasedonthenationalregulationoreffectiverate,whererelevant;amountofcreditadvancedandcurrency;durationofagreement;numberandfrequencyofpayments;forrepaymenthomeloans,amountofeachinstallment;additionalnon-recurringcosts;additionalrecurrentcosts.
–
Theup-fronttextwouldmakeitclearthat,“Thefiguresareprovidedingoodfaith
andareanaccuraterepresentationoftheofferthatthelenderwouldmakeundercurrentmarketconditionsbasedontheinformationthathasbeenprovided,howeverthefigurescouldfluctuate.Theprovisionofthisinformationdoesnotobligethelendertograntacredit.”46
ApplicationoftheCodethroughoutEuropehasbeenverysuccessful.Bytheendof
2002,morethan3,600creditinstitutionshadsubscribedtotheCode.Table3.4.1belowshowsthenumberofsubscribedinstitutionsineachcountry,andthepercentagetheyrepresentofthetotal.
Table3.4.1
NumberofCreditInstitutionsRegisteredPercentageofthetotalnationalmortgagemarket
BelgiumDenmarkGermanyGreeceFranceIrelandItaly
LuxembourgNetherlandsAustriaPortugalFinlandSwedenUKNorway
Source:EuropeanCodeofConduct(EMF.
3661,454219114921611660721350901441090%94%90%88%30%95%95%90%99%90%99%100%95%98%40%
46
“EuropeanAgreementonaVoluntaryCodeofConductforPre-contractualInformationonHomeLoans,”EMF.

31
ThecountrywiththelowestrateofregistrationisFrance.Thisisduetonational
difficulties,particularlyinthehandlingoftheEuropeanregister.TheprocedureforadheringtothecodewasinitiatedonFebruary27,2003,andinthatyearthepercentagerosetoaround50%.Itwillnotincreaseuntilthe“FrenchGovernmentrespondstotheofficialrequestmadebytheFédérationBancaireFrançaise(FBFinSeptember2002thattheESISbeconsideredasanequivalenttothe‘offrepréalable’.”47
Spainistheonlycountrythathasnotregisteredyet.Thisisbecauseof
incompatibilitiesbetweenSpanishlegislationandtheCode.Nevertheless,theSpanishauthoritieshavepromisedtosolvethisproblemandtheCodewillbeappliedinSpainassoonaspossible,thankstonewlegislationwhichendorsesit.Since1994therehasbeeninSpaina“MinisterialOrder”requiringtransparencyofinformationinmortgageloansandguaranteeingalevelofconsumerprotectionequalorsuperiortothatprovidedbytheCode.48ImplementationoftheCodehasbeenonthewholeverysuccessful.InBelgium,
Denmark,Germany,Greece,Italy,Luxembourg,theNetherlands,Portugal,Finland,SwedenandNorway,adoptionhasbeenalmost100%.InIrelandthefigurewas90%,duetosomeinstitutionsapplyingthecodelater,andinAustria,15%-20%.
IntheUnitedKingdom,incontrast,implementationhasbeenlesssuccessful.Thatis
becauseofaregulationontransparencythathasbeeninforcesince1997andissimilartotheEuropeanCodeofConduct,butthatdoesnotincludesomeaspects,suchasthe“EuropeanStandardizedInformationSheet.”Consequently,creditinstitutionsintheUKhavenotyetappliedtheentireCodeandarewaitingforanewlawonmortgagecredit,duein2004,thatwillallowthemtodoso.
Toconcludethissection,itisimportanttopointoutthattransparencyisanessential
requirementformortgagemarkets.AccordingtoJudithHardtandCristinaCostaoftheEuropeanMortgageFederation,Europeanmortgagemarketswillberegulatedby“bankcapitaladequacyrequirements:”“ThecurrentdiscussionsinBaselandBrusselswillleadtoanewsetofprudentialrulesthatwillapplytoallcreditandfinancialinstitutions.Thenewregulatoryownfundsrequirementswillrevisethecurrentriskweightingregimetotakeintoconsiderationabroaderrangeofrisk(creditandmarketriskbutalsooperational,legalandreputationalrisks.Internalratings,marketdisciplineandsupervisoryrelatedissuesarealsoafocusofbothregulators.”
“Forthemarkettooperateefficiently,goodaccesstoreliable,publiclyavailable
informationisrequired.Transparentvaluationmethodsorhousepriceindices(forsellersandbuyerswouldbegoodmeansofachievingthis.Itwillalsobenecessarytosolvesomeoftheproblemswithlandregistration,whichtendstobeverycomplicatedandslow,asinthecaseofItaly,andthehighvariablecostofnotaries,asinFranceandGermany.Agoodsolutionwouldbetostandardizeinformationorsupporton-lineaccess.”
4748
EMF,EuropeanCodeofConduct,“Registration.”EMF,EuropeanCodeofConduct,“Registration.”

32
4.SecondaryMarket
4.1FundingofCreditInstitutions
Creditinstitutionsattractshort-termfundsfromthepublicandlendthemlong-term
toinvestorswiththemortgageassecurity.Thefinancialresourcesofcreditinstitutionsarethereforehighlyvolatile,whiletheirfinancialinvestmentsaretiedup.Thisgivesrisetointerestrate,refinancingandopportunityrisk,whichthecreditinstitutionpassesontoborrowersbyincreasingthecostofcreditandthevariabilityofinterestrates.Ifcreditinstitutionscouldattractlong-termfundsormobilizetheassetsontheirbalancesheet(thatistosay,theirmortgageportfoliosbygrantingloansorissuingsecuritiesguaranteedbythoseportfolios,thentheywouldhaveeliminatedthoserisks.Theywouldalsobeabletograntmoremortgageloansatlowercost.
Generallyspeaking,therearethreewaysinwhichmortgagelendinginstitutions
obtainfundinginEurope:
1.2.3.
RetaildepositsMortgagebonds
Mortgage-backedsecurities
AccordingtoEuropeanMortgageFederationestimates,in199862%ofcredit
institutionfundingcamefromretaildeposits,19%frommortgagebonds,and1%frommortgage-backedsecurities(MBS.MBShavegrownconsiderablyinimportancesince1998,especiallysincethedevelopmentofmarketsecuritizationasaninstrumenttoobtainnewandmorediversifiedfunding.Securitizationpermitsthelendertotransfersomeoftherisksofthemarket.
Chart4.1.1.FundingofCreditInstitutionsinEurope,1998
Others:13%MBS:1%
MortgageBonds:
19%
RetailDeposits:
62%
Savings:5%
Source:EuropeanMortgageFederation.

33
Mortgagebondsarethesecondmostimportantfundinginstrument.Mortgagebonds
aresecuredbytheirunderlyingasset,inthiscase,themortgageloanwhichthebankhasonitsbalancesheet.AccordingtoastudypublishedbytheEuropeanMortgageFederation,“TheWeightingofMortgageBonds,”in2002mortgagebondsrepresented18%oftheEuropeancapitalmarkets,whichmeansthatapproximately15.24%ofmortgageloanswerefundedbymortgagebonds.Attheendof2000,accordingtodataprovidedbyHypostat,thevolumeofmortgagebondsoutstandingwas559.43billioneuros.market.
Chart4.1.2showsthedifferentcountries’shareoftheEuropeanmortgagebond
Chart4.1.2.ShareoftheEuropeanMortgageBondMarket,2002
Denmark33%
Netherlands
0%
Spain4%
Norway2%
Germany35%
Austria1%
France8%
Finland0%
Sweden12%
Switzerland
5%
Source:“Theeconomicandfinancialimportanceofmortgagebonds,”EMF.
AccordingtoChapter1,“Theeconomicandfinancialimportanceofmortgage
bonds,”ofthefourtheditionof“MortgagebanksandmortgagebondsinEurope,”GermanyistheEuropeanleaderinmortgagebonds.ThetypeofmortgagebondsknownasHypothekenpfandbriefe,andpublicmortgagebonds,oröffentlichePfandbriefe,addedupto1,100billioneuros.JumboPfandbriefeamountedto410billioneuros49.AlthoughmortgagebondsarenottheprincipalsourceoffinanceinGermany,Chart4.1.3showsthattheyneverthelessaccountfor19%ofthetotal.
ThesecondlargestmortgagebondmarketisDenmark,wheretheoutstanding
volumereached190billioneurosattheendof2002,representing33%ofthetotalEuropeanmortgagebondmarket.“InDenmark,onlyspecializedmortgagebanksareallowedtoissueRealkreditobligationer.Inpractice,eightmortgagebankscovernearly100%oftheDanishmortgagemarket.”50
4950
“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Germany.“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Denmark.

34
Swedenwasinthirdplacein2002,withabalanceofmortgagebondsoutstandingof
70billioneuros,representing12%oftheEuropeantotal.MortgagebondsissuedinSweden,knownasHypoteksbanksobligationer,areunlikethoseinmanyotherEuropeancountriesinthattheyarenotsubjecttospecialregulationandarenotdirectlycollateralized.“Instead,theyarecoveredbythebank’sentirebalancesheet,andtheprivilegedpositionofthebondholderisenhancedbythestrictlimitationofthemortgageinstitution’sassetstomortgagelending.”Around70%ofthefundingobtainedbySwedishcreditinstitutionsisobtainedviatheissuanceofmortgagebonds.51
InFrance,attheendof2002,thevolumeofmortgagebondsoutstandingwas71
billioneuros,representing8%oftheEuropeantotal,makingFrancethefourthlargestmarketinEurope.“SincetheinceptionoftheFrenchMortgageActin1999,FrenchObligationsfoncièreshavebeenissuedbyspecialistcreditinstitutions(SociétésdeCréditFoncier,SCFandarecollateralizedbymortgageandpublicsectorloans,whichtogetherconstituteasinglecoverpool.SCFsaredesignedasfundingvehicles(generallywithoutstaffandareusuallymanagedbyanothercreditinstitution,generallytheholdingparentbank.Theydonotusuallyrunassetoriginationontheirown.”52AccordingtodatafromHypostat,in2002mortgagebondsfundedaround16%ofresidentialmortgageloans.
ThefifthlargestmarketisSwitzerland,with31billioneurosofmortgageloans
outstanding.ThemaindistinguishingfeatureoftheSwissmarketwithrespecttotherestofEuropeisthatithasnomortgagebanks,butinsteadtwoinstitutionsknownasPfandbriefzentrale,whichfinancetheirmemberinstitutionsbyissuingPfandbriefe(theinstitutionsarepublicandprivatecommercialbanks53.
AfterSwitzerlandcomesSpain,with25billioneurosofmortgagebondsoutstanding
in2002,representing4%ofthetotal.“InSpain,anycreditinstitutionregulatedbytheBankofSpainisallowedtoissueCédulashipotecarias.Aftertaxationruleschangedin1999,theSpanishcoveredbondmarketexperiencedarenewal,withanactive20billioneuroJumbomarketsegment.Sinceearly2003,bankshavealsobeenallowedtoissueCédulasterritorialessecuredbypublicsectorloanstopublicentitieswithintheEEA.”54InSpain,7%ofmortgageloansarefinancedbymortgagebonds.
InAustria,51%ofmortgageloansarefinancedbymortgagebonds.Mortgagebonds
outstanding(propertyascollateralattheendof2002amountedto5billioneuros(10billionofAustrianPfandbriefe.Thelawthatregulatestheissuanceofmortgagebondswaspassedin1938,basedinlargepartontheGermanlaw.“AlthoughtheAustrianMortgageBankActisbasedonthespecialistbankprinciple,allAustrianmortgagebond-issuinginstitutionstodayareeithermixedmortgagebanksorpublicbanks(Landeshypothekenbanken.Inaddition,acentralizedmortgagebond-issuinginstitutionheldbyLandeshypothekenbanken,thePfandbriefstelle,isalsoallowedtoissuePfandbriefe.”55
5152535455
“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Sweden.“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:France.
“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Switzerland.“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Spain.“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Austria.

35
Chart4.1.3.MortgageBondsvs.MortgageLoans
120%100%80%60%40%20%0%
100%
65%
51%
19%
9%Norway
7.13%Spain
0.50%Netherlands
Denmark
Source:“Theeconomicandfinancialimportanceofmortgagebonds,”EMF.
Herewecanseetherelationshippointedoutabove.ItisworthnotingthatNorway
hasalargemortgagebondmarket,biggerthanAustria,with9billioneurosofmortgagebondsoutstanding,althoughtheproportionofmortgageloansfundedbymortgagebondsisonly9%,wellbelowthecorrespondingfigureforAustria(51%.“Norwegianmortgageinstitutionsissuebondsinforeigncurrencyininternationalmarkets.ThetotaloutstandingvolumeofNorwegianmortgagebondsandothercreditinstitutions’bondsamountedtoabout25billioneurosattheendof2002.”56
Chart4.1.4showsthevolumeofmortgagebondsoutstandinginthedifferent
countriesofEurope.
Table4.1.4.MortgageBonds(propertyascollateral
(inmillioneurosMortgageBondMarket(propertyascollateral
GermanyDenmarkSwedenFrance
SwitzerlandSpainNorwayAustriaNetherlandsFinlandTotal
Germany
Sweden
Austria
208,694191,37370,90644,35131,78025,2669,7225,85987647588,874
Source:“Theeconomicandfinancialimportanceofmortgagebonds,”EMF.
56
“Theeconomicandfinancialimportanceofmortgagebonds,”EMF:Norway.

36
Chart4.1.5belowshowsmortgagebondfundingasapercentageofresidential
mortgagelendingin2000and2002,calculatedfromHypostatdata.Performancevariedconsiderablyfromonecountrytoanother.MortgagebondfundingincreasedinDenmark(21%,Spain(3%andFrance(1%,anddecreasedinSweden(6%,Germany(5%,Norway(2%,theNetherlands(0.2%andAustria(2%.
TheDanishmortgagebondmarketisthesecondlargestinEurope,behindGermany,
andhasbeengrowingsteadilysince1992.Germany’smortgagemarketshavebeenfallingsignificantly;forexample,“grosssalesofbondsandfixedincomesecuritiesissuedbymortgagebanksfellduetothemortgagebanks’fundingthroughuncoveredpaperbecomingmoreexpensive,andthevolumeofbondsoutstandingissuedbymortgagebanksin2002fellby4.9%to701billioneuros,whilemortgagePfandbriefeoutstandingfellby7.5%to432.5billioneuros,”accordingtotheEuropeanMortgageFederationreport.
TheSpanishmarketexpandedconsiderablyintheyears2000-2002,andtheyear-on-yearincreaseisevenmorenoteworthy.InJune2002,accordingtotheEMFreport,thevolumeofmortgagebondsoutstandingwas16.49billioneuros,whileinJune2003itwas36.01billioneuros,anincreaseof118%.
Chart4.1.5.MortgageBondsvs.ResidentialMortgageLoans,2000/2002
20002002
180%160%140%120%100%80%60%40%20%0%
161%140%
64%
58%
22%16%23%
20%15%18%
8%6%
6%9%
0.20%
0.4%
Source:Hypostat,EuropeanMortgageFederation.
Normally,theissuersofmortgagebondsarethemortgagebanksthemselves,
althoughthatdependsonthecountry.Table4.1.6showsthetypesandnumberofissuersineachcountry.meet:57
57
The1998UCITSdirectivesetsoutanumberofcriteriathatmortgagebondsmust
“WhatareMortgageBonds?”EMF.
Netherlands
Denmark
Germany
France
Sweden
Norway
Austria
Spain

37
–––
Theymustbeissuedbycreditinstitutions,andinaccordancewithlegalprovisionstoprotectbondholders.
Theyaresubjecttospecialsupervisionbypublicauthorities.
Thesumsderivingfromissuanceofmortgagebondsmustbeplacedinassetsthatprovidesufficientcoverfortheliabilitiesderivingfromthebondsuntilmaturity.
Intheeventofbankruptcyoftheissuer,sumsderivingfromtheissuanceofmortgagebondsmustbeusedasaprioritytorepayprincipalandinterestbecomingdue.
IssuesmustbenotifiedtotheEuropeanCommission.
Table4.1.6
–
–
–––––––––––
Denmark
Country
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
MortgageBanks(23pureand2mixed,publicsectorcreditinstitutions(12Landesbanken,DGZDekabankand6publicsetorrealestatecreditinstitutions,shipmortgagebanks(2
Anycreditinstitution(commercialbank,savingsbanks,creditcooperatives,andspecializedfinancialinstitutionsMortgageBanks
TypeofIssuer(s
–––––––––––––––––––––––––––––
4510
NumberofIssuer(s
–––––––––––
Germany
–––––––––––
Spain
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
MixedMortgageBanks(2,andthe8
Landeshypothekenbanken,issuingviatheircentralmortgagefund(PfandbriefstellederösterreichischenLandeshypothekenbankkenMortgagecompaniesMortgageCreditbankMortgagebank
Sociétédecréditfondier(realestatecreditcompanyandCaissederefinancementdel’Habitat
––––––––––––––––––––––––––––
3
–––––––––––
France
–––––––––––
Luxembourg
––––––––––––––––––––––––––––
33
–––––––––––
Austria
–––––––––––
SwedenFinland
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
CentralPfandbriefinstitutions
––––––––––––––––––––––––––––––––––––––––––
225
––––––––––––––––––––––
Switzerland
Source:“TheWeightingofMortgageBonds,”EuropeanMortgageFederation.
AccordingtotheEuropeanMortgageFederation,mortgagebondsareanessential
instrumentoffinancialintermediationforraisingthefundsrequiredbyfamilies,corporations,andinsomecountries,publicbodiestofinancehousepurchasesorpublicsectorloantransactions.58
58
“TheWeightingofMortgageBonds,”EMF.

38
Whenacreditinstitutionhasamongitsassetsacertainnumberofmortgageloans,it
canmobilizethembyissuingmortgagebonds,andsoattractmorefunds.Todothat,theinstitutionsetsupafundwithalltheloansandthenissuesbondsthataresoldtothepublic,towhomthecreditinstitutionpaysinterest.Boththemortgageloansandthemortgagebondsremainontheissuinginstitution’sbalancesheet,thatistosay,thisisan“on-balance-sheetprocess.”Thatisoneofthemaindifferencesbetweenmortgagebondsandmortgage-backedsecurities.
“Mortgagebondsareregulatedbylaw,whichdefinesthecriteriaforeligibleassets
andotherspecificrequirements.Insomecountries,theassetsservingascollateralfortheoutstandingcoveredbondsarekeptinaseparatepool(thatisthemostcommonprocedure,whileinothercountriesallthemortgagesorallthebalancesheetassetsserveascollateralforthebonds.”59
Inaddition,thereisa“coverprinciple”whichsaysthat“mortgagebonds
outstandingmustbesecuredatalltimesbyfirstmortgagesorpublicsectorloansofatleastequalnominalamountandyieldingatleastequalinterest.”60Inthisconnection,somecountrieshaveintroducednetpresentvalueasset/liabilitymatchingrules.
Ingeneral,mortgagebondsdonothavehighrisk.Thatisbecausetheyare
guaranteedbytheissuer,andalsobecausetheyarehighlyregulatedandsupervisedbylaw.Thelevelofsecurityofferedtomortgagebondholdersenablescreditinstitutionsto
raisefundsfromthecapitalmarketsatlowcost,sothattheycangrantmoremortgageloansatattractiveinterestrates.
Themortgagebankgrantsamortgageloantotheborrowerinordertopurchasea
residentialproperty,acommercialproperty,oralsotothepublicsector.Theborrowergivesthelenderafirstrankingmortgageorpublicsectorguarantee,whichservesascollateraltomobilizethoseassetsthroughtheissuanceofmortgagebonds,whichwillbeacquiredbyprivateorinstitutionalinvestors.Thisisaneffectivewayofobtainingnewfundsandrefinancing.Inshort,mortgagebondsarebasedonthecreditinstitution’smortgageloans,whichareusedascollateralfortheissuanceofsecuritiesonthecapitalmarkets.Atallstagesofthisprocess(fromthegrantingoftheloantothesaleofthebonds,thisisan“on-balance-sheetprocess,”andiscarriedoutbythecreditinstitution,whichadditionallybearsthecreditriskofthebonds.
Thebondsshownasliabilitiesonthecreditinstitution’sbalancesheetarelinkedtoa
specificamountofmortgageloansontheassetside,nottoaspecificsetofmortgageloans.Whenissuingmortgagebonds,creditinstitutionsareexposedtodifferentkindsofrisk,includingcredit,marketandprepaymentrisk,whicharedirectlyrelatedtotheloans.Inspiteoftheserisks,thecreditinstitutionisabletoobtaincheapfunding,thanksnotonlytothemortgageloansthatserveascollateralbutalsotoalloftheinstitution’sreservesandequity.Thisreducestheriskofthemortgagebonds,andconsequentlytherateofinterestthatispaidonthem.61
596061
EuropeanMortgageFederation.“WhatareMortgageBonds?”EMF.
“MortgageBondsvs.MortgageBackedSecurities,”EMF.

39
Fromthepointofviewoftheinvestor,mortgagebondshavethesamecreditriskas
thecreditinstitutionitselfandrepresentaclaimontheunderlyingmortgages.Theyarealsosubjecttoastrictlegalframework.Intheeventofbankruptcy,therearelegalprovisionscoveringtheassetpoolscreatedforthepurposeofbondissuance,apartfromthecollateralassetsthatareexclusivetothosepools,ensuringthecashflowstreamforbondholdersandtimelypayment.62
Table4.1.7showsdataonmortgagebondsissuedin1992,1997and2002(in
millionsofeurosinvariouscountries.
Table4.1.7MortgageBondsIssued
(millioneuros
Country
1992
1997
2002
Denmark11,70433,92676,063Germany21,90441,59640,857Spain1,4332,194n.a.France
5,30530217,000
Netherlands1592965Austria719681268Finland251349n.a.Sweden19,98224,02725,590Norway1,70947312,311
Source:Hypostat;EuropeanMortgageFederation.
1992-2002.
Chart4.1.8showstheaverageyear-on-yeargrowthinmortgagebondissuance,
Chart4.1.8.AverageYear-on-YearGrowthinMortgageBondIssuance,1992-2002
90%80%77.72%
70%60%50%40%32.98%
30%30.51%
20%10%10.18%
8.04%0%4.18%
–1.94%-10%
e
ck
n
d
y
n
–0.55%
s
a
rinaannedinrampaadtlrFnSnmeasiwlurreeDFSeAGhteNSource:OwnelaborationbasedonHypostat(EMFdata.*Spain:datafor2001and2002notavailable
*Finland:datafor1999,2000,2001,2002notavailable
62“MortgageBondsvs.MortgageBackedSecurities,”EMF.

40
AveragegrowthinmortgagebondissuancewasextremelyhighinFrance,witha
steeprisefollowedbyafall.Theincreasewasmostmarkedafter1998.AfterFrancecameDenmark,Spain,Finland,andGermany,wheregrowthinmortgagebondswasverylow,consideringthatGermanyhasthelongest-standingmortgagebondmarketinEurope.However,thisfindingisinlinewiththemortgagemarketasawholeandtheoveralleconomicsituationinGermanyduringthisperiod.Finally,Sweden,theNetherlandsandAustriahadnegativegrowthinmortgagebondissuance.
Charts4.1.9and4.1.10showthechangeinmortgagebondsoutstandingbasedon
dataprovidedbyHypostat(EuropeanMortgageFederation.
Chart4.1.9.MortgageBondsOutstanding,1992-1997-2002
199219972002
250,000Euromillion
200,000150,000100,00050,000
0
DenmarkGermanyFranceSweden
Source:OwnelaborationbasedonHypostat(EMFdata.
Chart4.1.10
199219972002
30,00025,00020,00015,00010,0005,000
0
NetherlandsAustriaFinlandNorwaySpain
Source:OwnelaborationbasedonHypostat(EMFdata.*DataforFinland:1992,1997,1998.*DataforNorway:1993,1997,2002.

41
Thegrowthinmortgagebondsoutstandingwasparticularlypronouncedin
Denmark,SpainandNorway.AccordingtoHypostat,inDenmark“thevalueofbondsoutstandingin2002was11%higherthanin2001andDanishmortgagebondsaccountedforapproximately13%ofallEuropeanmortgagebonds.”63
Inbothchartswecanseethatthemostimportantmortgagebondmarketsare
Denmark,GermanyandSweden,althoughGermanyhasnothadamajorincreaseinmortgagebondsoutstandingsince1997.Hypostatstatesthat,“AlthoughGermanyhastheleadinmortgagebondsoutstandinginEurope,duetotheweaknessoftheeconomythevalueofmortgagebondissuesfellby7%.Nevertheless,therewasanincreaseof4%inthetotalvalueofmortgagebondsoutstandingattheendof2002.”64
InSweden,althoughChart4.1.10showsamarkeddeclineinmortgagebonds
outstanding,mortgagebondsarestillthemostpopularfundingmethod.InJune2003,fundingthroughbondsincreasedtoaround65%(from58%thepreviousyear,duetothepopularityoffixed-rateloans,whichusuallyarebond-funded.Theotherfundingmethodsareloansfromcreditinstitutions(20%andshort-termcommercialpaper(15%.65
BehindSwedenwefindFrance,wheremortgagebondsoutstandingdecreasedin
1997,onlytoincreaseagainafter2000.Thenumberofissuesincreasedby8%in2002,raisingthetotalvolumeofbondsoutstandingby35%.66
ThesecondchartshowsthattheNorwegianandSpanishmarketsareverysimilar
andhavedevelopedveryrapidly.Bycontrast,inAustria,FinlandandtheNetherlandsgrowthhasbeennegative.
AccordingtodatafromanarticlebyRaquelLánder,publishedinExpansión,Spain
rankssecondinEuropeinthemortgagebondmarket,withitsCédulashipotecarias,andhasscopetoincreaseitsmarketshare.ThegrowthofthesesecuritiesintheSpanishmarketin2003was71.3%,reaching19.8billioneurosofbondsoutstanding.BehindSpaincomesFrance,with15.4billioneurosofmortgagebondsin200367.Thatisspectaculargrowth,consideringthatthetrendinEuropeasawholehasbeentheoppositeandthat2003sawa22%declineinissues,bringingmortgagebondsoutstandingto174billioneuros.Thisdeclinewasduebasicallytoaslowdownintherealestatemarket,leadingtoa30.5%fallinissues.Despitethis,Germanystillholdsfirstplace,with132.6billioneurosofmortgagebondsoutstandingin2003.4.2MortgageSecuritization
Securitizationistheprocessbywhichassetsthathaveacashflowstreamare
convertedintomarketablesecurities.“Inthesecuritizationprocessapackageofassetsistransferredtoaspecialpurposeentityandlegallyisolated,sothatthecashflowsgeneratedbytheassetscanbeusedtomakepaymentsonthesecuritiesissuedtoinvestors.”68Securitizationisameansofprovidingfundingtothemarketbyissuingsecuritieswhose
63Hypostat1992-2002,EMF:Denmark.64Hypostat1992-2002,EMF:Germany.65Hypostat1992-2002,EMF:Sweden.66Hypostat1992-2002,EMF:France.
67“España,númerodosenEuropaentitulizaciónycédulashipotecarias,”RaquelLánder,Expansión.68“Latitulizacióndeactivos,”technicalnoteFN-492,IESE.

42
paymentsarebackedbytheassetsoftheborrowinginstitution.Illiquidassetsarethusconvertedintosecuritiesthatcanbereadilymarketedamonginvestors.Companiesusesecuritizationtoobtainfinancingthroughtheissueofsecurities,segregatingtheirassetsintopackageswhosecashflowswillbeusedtoservicethesecurities.Theassetsalsoserveascollateral,securingperformanceofthepaymentobligationsassumedbytheissuer69.
Theparticipantsinthesecuritizationprocessare70:–––
Theoriginator/servicer,whichistheentitythattransferstheassetsandthatnormallyretainsresponsibilityforservicingtheassets.
SpecialPurposeVehicle(SPV,whichistheentitytowhichtheassetsaretransferredandwhichlaterissuesthesecuritiesthroughanintermediary.Theinvestorswhobuythesecurities(asset-backedsecurities.
Apartfromthesethreeparties,averyimportantroleisplayedbytheindependent
ratingagencies,whichevaluatethecreditqualityandintegrityofthesecuritizationstructure,thusprovidinganimportantservicetoinvestorsandparticipants71.
Forexample,ifaninstitutiondecidestosecuritizeasetofmortgageloans,the
paymentflowsfromtheloansareconvertedintopaymentflowstoinvestors,correspondingtotheprincipalandinterestonthesecuritiesthatareissued.Notethatthepaymentflowsfromtheloansmaybeuncertain,asthereisthepossibilityofdelinquency,whereasthepaymentflowstoinvestorsareconsideredtobecertain.Thatiswhyeachissueissubjecttoanexaminationtodetectanypossibilityofnon-paymentbyborrowers,sothatanydifficultyinmakingpaymentstoinvestorscanberesolved.Sometimesthisinvolvesbuyinganinsurancepolicy.
Thefundthatalendinginstitutionsetsupinordertosecuritizeitsassetscanbe
open-endorclosed-end.Open-endfundsarefundswhoseassetsandliabilitiescanbechangedafterthefundhasbeenconstituted.Theyallowforthesecuritizationofshort-termandmedium-termflows,whichareverycommoninotherfinancialsystems72.Closed-endfundsarefundswhoseassetsandliabilitiesarefixedfromthetimeofthefund’sconstitution.Mortgagesecuritizationfundstendtobeclosed-endfunds,althoughsubstitutionandrestructuringrulesmaybeestablishedinsomecases,suchasearlyrepayment.
InEuropeanmarketstherearethreetypesofsecuritization.Inon-balance-sheet
securitization,whichisthetypewesawinrelationtomortgagebonds,thelendinginstitutionsetsupafundandthenissuesthesecurities;theassetsremainthepropertyoftheissuerandremainontheissuer’sbalancesheet,alongwiththesecurities,whichareshownontheliabilitiesside.Off-balance-sheetsecuritizationiswhenthelendinginstitutionisolatestheassetsbackingtheissuefromtherestofitsassetsbysellingthemtoaspecialpurposevehicle,whichthenissuesthesecurities.ThisisthetypeofsecuritizationmostcommonintheUnitedStates,whereitwasfirstinvented.Infact,inSpanishitisalsoknownas“Americansecuritization.”Themainadvantageofthistypeofsecuritizationisthatoncethecollateralassetshavebeenisolatedbytransferringthemtoaseparateentity,theriskofthe
69707172
Ibid.
“MortgageBondsvs.MortgageBackedSecurities,”EMF.Ibid.
“Latitulizacióndeactivos,”technicalnoteFN-492,IESE.

43
securitieswilldependexclusivelyontheriskoftheassetsthemselvesandnotontheoverallriskofthelendinginstitution.
DependingonhowtheassetsaretransferredtotheSPV,wecandistinguish73:––
“Passthrough”:Theisolatedassetsaretransferredtoatrusteespecificallyforthepurposeofissuingtheasset-backedsecurities.
“Paythrough”:TheoriginatorsellstheassetstoanSPV,whichissuessecuritiesbackedbywhatarenowitsownassets,carryingthemortgageloansamongitsassets,andtheasset-backedsecuritiesamongitsliabilities.Consequently,neithertheassetsnorthesecuritiesremainontheoriginator’sbalancesheet.TherevenuestreamthattheSPVobtainsfromthesaleofthesecuritiesisusedtopaytheoriginator,whothusreplacesriskyassetswithliquidassets.
4.3Mortgage-BackedSecurities
Aswesaidearlier,securitizationemergedintheUnitedStatesinthe1970sasa
meansofstimulatingresidentialmortgagelending,andtodayhasbecomeoneofthemostimportantinstrumentsonthecapitalmarkets.ItstartedtobeusedinEuropeintheearly1990s,althoughitdidnotreallytakeoffuntilbetween1997and1998.Currently,creditinstitutionsinnumerousEUcountries,andaboveallintheU.S.,obtainfinancebyissuingmortgage-backedsecurities,whicharethesecuritiesissuedbySPVsinthesecuritizationprocess.
Butwhatisthedifferencebetweenmortgage-backedsecuritiesandmortgage
bonds?Weshallnowexplaintheissueprocessofmortgage-backedsecuritiesandpointoutthedifferenceswithrespecttomortgagebonds.
Mortgage
Originatingbank
IssuerSPV
Investors
Institutionseekingfinance
Mortgagefund
Obligationofborrower
SaleofMBS
Saleofmortgageloan
Chart4.3.1.IssueofMortgage-BackedSecurities(MBS
73
“Latitulacióndeactivos,”technicalnoteFN-429,IESE.

44
Source:“MortgageBondsvs.MortgageBackedSecurities”EMF.
First,thecreditinstitutioncreatestheSPV(SpecialPurposeVehicleandsellsthe
mortgageloanstoitsoastoisolatethesereceivablesandtheirassociatedcashflowsfromitsotherassetsandallowittomakeotheradjustmentssuchasrestructuringcashflows,etc.TheassetsarethustransferredtothebalancesheetoftheSPV,whichlaterissuesthesecurities.Dependingonwhetherthemortgagesareresidentialorcommercial,theSPVwillissueresidentialmortgage-backedsecurities(RMBSorcommercialmortgage-backedsecurities(CMBS74.Aswesaidearlier,despitesellingtheloans,theoriginatinginstitutionusuallycontinuestoservicetheloans,whichinvolvescollectingprincipalandinterestpaymentsandperformingothertasks.
Mortgagebondsdifferinthattheloansarenottransferred;insteadtheoriginating
institutionitselfsetsupthefundandissuesthesecurities.Ontheonehand,theresultingsecuritieshaveastrongguaranteebecauseintheeventofanyproblem,aswellasbeingcoveredbythecollateralassets,theyarealsocoveredbytheoriginator’sotherassets.Thishasadownside,however,inthatthebondsarealsosubjecttotheoriginator’sbusinessrisk.Withmortgagebonds,thecreditinstitutionretainsresponsibilityforthebond’screditriskuntilmaturity,andalsoforprepaymentrisk,whichmeansthattheriskassumedbytheinvestorissmall(onlymarketrisk.Andasthelowertherisk,thelowertheinterest,thecreditinstitutionwillbeabletoobtainfundingatafairlygoodprice,whichwillenableittograntfurtherloanstoitscustomersonadvantageousterms.
MBSaredifferentwithrespecttorisk.Ontheonehand,theyarenotsubjecttothe
originator’sbusinessrisk,astheyareheldbyanindependententity;ontheother,becausetheoriginatinginstitutiontransfersthecreditrisk,theearlyrepaymentriskandthemarketrisktotheSPValongwiththeloansthemselves,theserisksareassumedbytheinvestor,whowillnaturallyrequiremuchhigherratesofinterestthanonmortgagebonds.
Whilemortgagebondsarebackedbytheoriginator,asbondholdershaverecourse
againsttheunderlyingassets,andalsoarehighlyregulatedbylaw,MBSarequitedifferent.Whenaninvestordecidestobuyamortgagebond,sheconsiderstheissuer’screditstanding,businessstrength,etc.,whereasaninvestorwhobuysmortgage-backedsecuritieswillnotconsidertheoriginator’sstandingbutwillbaseherdecisiononherownjudgmentastowhethertheunderlyingassetsarecapableofgeneratingacashflowsufficienttomeetthepaymentobligationsonthesecurities,andthedegreeofprotectionbuiltintothestructureofthesecuritiesorthequalityoftheguarantor75.
Table4.3.2,producedbytheEMF,sumsupthedifferencesbetweenmortgage
bondsandmortgage-backedsecurities.
7475
“MortgageBondsvs.MortgageBackedSecurities,”EMF.“MortgageBondsvs.MortgageBackedSecurities,”EMF.

45
Table4.3.2.DifferencesBetweenMortgageBondsand
Mortgage-BackedSecurities
Criteria
MortgageBonds
Mortgage-BackedSecurities
Mortgagebondproduction
Typeofsecuritization(balancesheettreatment
SourceofprincipalandinterestpaymentsRiskexposure:-Creditrisk-Prepaymentrisk-MarketriskInvestorprotectionineventofissuerbankruptcy
Bundledprocess
Assetsremainonthebalancesheetoftheoriginatinginstitution
(“on-balance-sheetsecuritization”Issuercashflow
Unbundledprocess
Generally,assetsareremovedfromthebalancesheetoftheoriginatinginstitution
(“off-balance-sheetsecuritization”Collateralcashflow
IssuerIssuerInvestor
Bankruptcyprivilege:The
bondholderhasapriorityclaimonassetsintheeventthattheissuergoesbankrupt(quasi-bankruptcyremoteness
Inadditiontotheassetquality,itdependsmainlyonthestrengthoftheoriginatinginstitutionandthelegalframeworkDefinedbylaw
Subordinationisinherentinthesystem(e.g.requirementtorespectcertainLTVratios
Aguarantee(ifgivenwillbeprovidedbytheoriginatingmortgagecreditinstitution1.Individualcomponentsofthe
assetpoolaresubstitutable2.Mainlyheterogeneousassets3.Eligibleassetsdefinedbylaw
(requirementtorespectcertainLTVratiosandsoundpropertyvaluationmethodsTypicallyyearlyBulletform
InvestorInvestorInvestor
BankruptcyremotenessisbuiltintothestructureoftheMBS(bankruptcyoftheoriginatinginstitutiondoesnotaffecttheservicingoftheMBS
Inadditiontotheassetquality,itdependsmainlyonthestrengthofthestructurecreated
Usuallyrequiredforahighcreditrating
Astructuredistinguishingbetweenseniorandsubordinatingsecuritiesneedstobecreated
Guarantyprovidedbyathirdpartysuchasaninsurancecompanyorabank(“creditenhancement”1.2.3.
Individualcomponentsoftheassetpoolare(ingeneralnotsubstitutable
MainlyhomogeneousassetsEligibleassetsarenot
necessarilydefinedbylaw
Creditquality
Over-collateralizationTieredcapitalstructureGuaranty
Collateralpoolstructure
InterestpaymentPrincipalredemption
Typicallymonthly
Amortizationandprepayments
Source:EMF,“Theeconomic&financialimportanceofmortgagebonds.”

46
Chart4.3.3.AverageGrowthofMBSIssues,1992-2002700%600%500%400%300%200%100%0%
616%
165%
79%
Netherlands
Spain
UK
73%Ireland
49%France
2000-2002
Source:OwnelaborationbasedonEMFdata.*DatanotavailableonMBSissued:Spain:1992,2001,2002.
France:1992,1993,2000,2001,2002
Ireland:1992,1993,1994,1995,1997,2002Netherlands:1992,1993,1994,1995.UK:1995,1996.
ThestrongestgrowthwasinSpain,wherethefirstmortgage-backedsecuritieswere
issuedin1993.Thegrowthwascontinuous,withtheexceptionof1996,whenhardlyanyMBSwereissued(althoughthemarketrecoveredin1997,andof2000,whentherewasanotherdecrease.ThisstronggrowthofthesecuritizationbusinesshasbeenlinkedtothesteadydevelopmentoftherealestatemarketinSpainandtheincreaseinthevolumeofmortgages.Creditinstitutionshavefoundsecuritizationtobeanefficientwaytoraisefundsanddeveloptheirbusiness.
AfterSpaincomesHolland,whichhasseensteadygrowthinsecuritizationsince
1996,followedbytheUnitedKingdom,IrelandandFrance.AlthoughthegrowthintheUnitedKingdomwasnotasgreatasinSpainorHolland,itisstillthelargestmarketintermsofvolumeofissues.TheUKmarketcontinuestogrow,butmoreslowly,perhapsbecauseitisalreadyahighlydevelopedmarket,whereasHollandandSpainarestillintheearlystagesofgrowth.issued.
Chart4.3.4showssomestatisticsonrecentissues(arithmeticaverageofMBS
Chart4.3.4.Mortgage-BackedSecuritiesIssued(arithmeticaverage
(Inmillioneuros
1992-1997
1997-1999
SpainFranceIrelandNetherlandsUK3631,0302542271,6103,5012,7378292,0424,8283,059
01,82911,40425,842
Source:OwnelaborationbasedonHypostat(EMFdata.

47
Chart4.3.5comparestheoutstandingbalanceofMBSin1997and2002.
Chart4.3.5.MBSOutstanding,1997and2002
19972002
45,00040,00035,00030,00025,00020,00015,00010,0005,000
0
Belgium
Netherlands
Ireland
France
Spain
Source:OwnelaborationbasedonHypostat(EMFdata.
Unfortunately,wedonothaveanydatafortheUnitedKingdom.Thechartshows
rapidgrowthinallcountries,exceptBelgium.AlthoughwecanseeaslightdecreaseinFrance,thegrowthovertheperiod1992-1997wasaspectacular4.23billioneuros.Themostrecentdata,from2003,showthatSpain,besidesholdingsecondplaceinthemortgagebondmarket,alsorankedsecondintheMBSmarket.However,itisstillalongwayfromthevolumessoldintheUnitedKingdom,theundisputedleaderinthismarket76.
In2003,inEuropeasawhole,thevolumeofissueshitarecordhigh,beating2002’s
totalof157.7billioneurostoreach217.7billion.Whatisparticularlyinterestingisthat,lookingatquarterlyresults,weseethatthelastquarterof2003sawsalesof82.4billioneuros,morethantwicethevolumeinthepreviousquarter(39.7billion,and49.5%morethaninthesamequarterthepreviousyear77.Thisdramaticgrowthisduemainlytolowinterestrates,whichpromptedinvestorstolookforassetsthatofferedhigherreturnswithoutexcessiverisk.Atthesametime,theoutlookforcompanies’financialhealthandcreditqualityfavoredthegrowthofthesecuritizationmarket,whichhasbecomeamajordriveroftheeconomy,withannualgrowthofaround60%.Salesofasset-backedsecuritiesareexpectedtoreach235billioneurosin200478.
Chart4.3.6showsthemarketshareofthemortgagesecuritizationmarketofthe
differentEuropeancountriesinthelastquarterof2003.
767778
“España,númerodosdeEuropaentitulizaciónycédulashipotecarias,”RaquelLánder,.IbidIbid.
Millioneuros

48
Chart4.3.6.ShareofEuropeanSecuritizationMarket,2003
France:3%
Portugal:5%
OtherEuropeancountries:9%Holland:10%
Multinationals:
5%
UnitedKingdom:
35%
Italy:16%
Spain:17%
Source:DealoliBondware,ThomsonFinancialSecuritiesData.Expansión,RaquelLánder,April13,2004.
Aswecanseeinthechart,theUnitedKingdomisundisputedleaderinthismarket,
withashareof35%,followedbySpain,with17.4%,representingissuesworth37.8billioneuros,comparedtojust11.8%in2002.ClosebehindSpaincomesItaly,witha16%marketshare,andHollandwith10%.Inthesecondquarterof2003,Spainsettherecord,with8.7billion.AccordingtoHypostat,“IntheNetherlandsthenumberofMBSissuedincreasedsignificantlyin2002attheexpenseofmortgagebondissues.Inaddition,thedeclineinthestockmarketmeantthattherewassomeswitchofsavingsintoretailsources,whichagainbecameavailableformortgagefunding.”79InSweden,in2002and2003therewasagreatdealofsecuritizationbymortgagelenders,with2.5%ofmortgageloansbeingsecuritizedin2002.80
5.TheIntegrationofEuropeanMortgageMarkets
AccordingtoJudithHardt,secretarygeneraloftheEuropeanMortgageFederation,
andCristinaCosta,intheirstudy“TheChallengesofDevelopingHousingFinanceinEurope,”thereisnosinglemodelofhousingfinanceinEuropethatcouldbeimitated.DiversityistheruleintheEuropeanrealestatemarket,despitehavingbeensubjecttoregulationformanyyears.Thedifferenttaxregimes,lawsandculturalcharacteristicsofeachcountryhaveproducedamultiplicityofdifferentmortgageproductswithdifferentcostsandprices81.
798081
Hypostat1992-2002,EMF:Netherlands.Hypostat1992-2002,EMF:Sweden.
“TheChallengesofDevelopingHousingFinanceinEurope–AreThereLessonstobeLearned?”JudithHardtandCristinaCosta,EMF.

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