Annik Lambert reports on the findings of two expert bodies and various bilateral discussion groups regarding the future of European Union mortgage market integration.

Year ends often mark the deadline for ongoing projects. The end of 2006 was no exception for the European mortgage industry with the conclusion of the work undertaken by the European Commission’s two expert groups – the Mortgage Funding Expert Group (MFEG) and the Mortgage Industry and Consumers Dialogue Group (MICDG) – the conclusions of which will feed directly in to the drafting of the commission’s white paper due to be published on May 31.

The expert groups were tasked with investigating the further integration of European mortgage markets, an initiative launched by the commission in 2003. The establishment of the groups was the result of the wide consultation conducted by the commission following the publication of its green paper on mortgage credit in July 2005, with the MFEG, in particular, being launched after a specific request by the industry

Secondary market issues

The green paper summarised the commission’s first reflections on this subject, based mainly on the report by the Forum Group on Mortgage Credit published at the end of 2004, and it was the industry’s feeling that the secondary market issues – the funding side of mortgage lenders’ activities – needed to be granted much more in-depth examination.

The MFEG subsequently focused its attention on three main areas: primary market issues (origination, servicing, property valuation, early repayment, foreclosure and registration, tax and portfolio standardisation); secondary market issues (residential mortgage-backed securities, covered bonds, temporary loans, whole loan sales and third-party enhancement); and investor issues (data and reporting/standardisation of definitions, Basel II, repos and tax).

Given the breadth of issues examined, it was with keen interest that the industry awaited the findings of the MFEG. There was clearly less room for manoeuvre in the MICDG because the issues that it examined (pre-contractual information, advice, early repayment and the annual percentage rate of charge) had already been addressed in detail by the Forum Group. Nevertheless, its discussions were constructive and the industry played an active part in the dialogue with consumer representatives.

The commission also held bilateral discussions with interested stakeholders on a series of other issues, including valuation, land/mortgage registers, credit databases and enforcement.

Efficient markets

The final reports of the two expert groups, together with the results of the bilateral discussions, are intended to feed into the drafting of the commission’s white paper, which will, in principle, present its conclusions in terms of its policy for European mortgage markets and potentially shape their future. In this context, the Kok Reports focus on the importance of the integration of mortgage markets with respect to the achievement of the financial single market and in meeting the commitments set out by the Lisbon Agenda must be considered in the light of evidence that European mortgage markets are already largely efficient and competitive. Against this background, there is clearly little margin for further reduction in the costs of mortgage products.

Indeed, the introduction of the single currency in 2001 and the European Central Bank’s interest rate policies ever since have provided Europe with a new impetus for the integration of its mortgage markets. Thanks to sound macro-economic policies, housing finance has become affordable for many people who were previously excluded from home ownership. Europe’s mortgage markets have been booming, growing on average by more than 9.4% annually and by 11% in 2005, with the total volume of outstanding loans having more than doubled in nominal terms in the past decade to stand at €5100bn by the end of 2005.

Commission initiatives, such as the Financial Services Priorities 2005-2010 have been central in stimulating the industry’s growth. A lower cost of capital and intensified competition stemming essentially from financial deregulation are also key factors in this growth.

This impressive growth has also triggered the development of Europe’s secondary mortgage markets and, in particular, the growth of covered bonds. During the past five years, covered bonds have emerged as the most important segment of privately issued bonds on Europe’s capital markets, with the volume outstanding at the end of 2005 amounting to more than €1800bn.

Today, there is covered bond legislation in 19 out of 25 EU jurisdictions ,and the UK and Netherlands are expected to introduce covered bond regulations shortly. The European Covered Bond Council, which was launched by the European Mortgage Federation (EMF) in 2004 as a response to this development, has now become the recognised voice of the European covered bond industry, representing more than 80 members from the different covered bond market segments across 16 member states.

A further key development for European mortgage market policy has been the adoption of the Capital Requirements Directive, which comes into force on January 1 and which will govern the amount of capital that banks have to hold to guard against unexpected losses.

The directive marks an overdue change towards a more risk-sensitive approach which, by reflecting the low-risk nature of mortgage lending more adequately, will result in substantial decreases in the capital required for mortgage loans.

Further integration

Against this setting, the EMF was extremely active in 2006 and has devoted significant resources to participating in the commission’s expert groups, bilateral discussions with the commission and other market participants, and on following-up the work undertaken by the European Parliament in preparing its own initiative report on the commission’s green paper on mortgage credit. Indeed, it is the EMF’s belief that the developments brought about by the follow-through of these initiatives will be decisive for the future of the European mortgage industry.

The industry is in favour of further integration provided there is evidence of concrete benefits for consumers and lenders. The London Economics Report, commissioned by the Directorate-General Internal Market and published in August 2005, fails, however, to provide any evidence on how to achieve further integration. As a consequence, the industry insists that any concrete measure considered should first be submitted to a specific cost/benefit analysis.

Overcoming obstacles

Should action be deemed necessary, obstacles to be addressed first are those that deter lenders from going cross-border – evidence shows that cross-border activity depends on lenders going abroad. Another area that could be explored is the opening up of European markets to sub-prime lending. This would, however, depend on national culture and traditions and member states’ standpoint with regard to this type of lending.

Based on a long tradition of working positively with the EU institutions, the EMF is confident that its positions on the numerous issues at stake constitute well-balanced and positive contributions to the current period of reflection and that they will help discussions to arrive at well-informed and satisfactory conclusions.

At the end of the day, it is in the interests of all stakeholders – consumers and lenders alike – that mortgage markets are competitive and efficient so as to enable all citizens to reap the benefits of the single market.

Annik Lambert is secretary general of the Brussels-based European Mortgage Federation.

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