Mortgages are regarded as key to unlocking the benefits of an integrated single market for financial services. Philip Williamson, president of the European Mortgage Federation, looks at market developments and how covered bonds, once the preserve of housing finance, are emerging as one of Europe’s major funding instruments.
The next two years willbe exciting for the mortgage industry in Europe. Growth will continue at individual national levels, set against a changing regulatory framework at the European level.
Mortgage lending has been growing rapidly in most EU member states, particularly in those that joined in 2004, where mortgage markets are expanding at exponential rates. The volume of mortgage loans outstanding in Europe has more than doubled since 1993 and exceeded €42,000bn at the end of 2003, a 7% increase on the previous year. This maintains a 10-year track record of an average 8% annual rate of growth.
Last year, a new era began for the EU with the arrival of 10 new member states, a newly-elected European parliament and the nomination of a new European Commission. This year, the new arrivals will make their mark, with mortgages at the top of the agenda for financial services regulation.
Mortgages are key
A European Council report (Facing the Challenges – The Lisbon Strategy for Growth and Employment) urges the EU to “unleash the dynamism of financial markets” and mortgages are regarded by many as the key to unlocking the benefits available from an integrated single market for financial services. In terms of regulatory challenges, the next two years are a crucial period at EU level because they mark the final stages of the Financial Services Action Plan and the adoption of the European version of the Basel II framework, the Capital Requirements Directive.
These two issues have dominated the regulatory landscape over the past five years, and the agenda is moving decidedly towards the practical aspects of creating a single market for financial services and how to implement the new capital adequacy regime. The industry is pleased that the new capital proposals will better reflect the nature of the risks involved with mortgage lending and will result in lower capital requirements for mortgage loans.
The European Mortgage Federation (EMF) is the voice of the mortgage industry at EU level. Together, its members grant more than 75% of residential and commercial mortgage loans in Europe. It will continue to play a constructive and prominent role in the development of the new agenda and will continue to represent lenders’ interests at all levels of the decision-making process.
For the EMF, 2005 will also be a challenging year. The publication of a green paper on mortgages is expected, which will be based on the work of the commission’s forum group on mortgage credit. The group presented 48 recommendations to facilitate the integration and the efficiency of Europe’s mortgage markets. These recommendations cover a number of areas, including consumer confidence, legal issues, mortgage collateral, distribution and mortgage funding.
Single integrated market
In parallel with the work on policy proposals, the commission will be conducting a cost/benefit analysis to determine the scale of potential benefits arising from the creation of a European mortgage market.
In 2003, the EMF commissioned its own cost/benefit analysis from Mercer Oliver Wyman. This showed that, although prices had converged substantially with the introduction of the euro, there were still gaps in terms of product choice and the range of borrowers served. These are often driven by regulation, consumer preferences, taxation and other factors such as market size and structure, and product cross-subsidies. The study concluded that substantial benefits would accrue to both consumers and lenders from a more integrated, efficient and complete mortgage market, with integration as the most likely method of achieving this.
In 2005, there will be an increasing focus on covered bonds and alternative funding methods to traditional retail deposits. Covered bonds were once the preserve and pride of the German and Danish housing finance systems but are now emerging as one of Europe’s major funding instruments. Covered bond legislation has already been, or is in the process of being, introduced in more than 20 European countries.
Covered bond council
In response to these developments, the EMF launched the European Covered Bond Council (ECBC) last November, with the aim of improving the positioning of covered bonds at EU level. It provides a platform for the covered bond industry that will bring together issuers, credit analysts, investment bankers, rating agencies and other interested market participants.
The ECBC will focus on the developments shaping the economic and regulatory environment of covered bonds at EU level. More than 60 institutions from across Europe have joined the council, making it Europe’s most representative platform. The initial focus will be to seek more favourable treatment for covered bonds under the proposed Capital Requirements Directive.
Competition in Europe’s covered bonds market is likely to intensify in the coming years, especially in light of the HBOS covered bond issue in the UK in July 2003. The issue took many by surprise as this “structured” covered bond was issued without having any specific UK legislation in place. It opens the door to new investors and a cost-efficient funding source for UK lenders. It also enables mortgage lenders to raise long-term funding, which was one of the issues explored in the Miles report on the UK mortgage market.
Elsewhere in Europe, issuance is set to surge ahead in the next few years as new jurisdictions join the market. Last year, the first internationally-targeted Finnish covered bond was launched, and the first ever mortgage covered bond emerged from Bank of Ireland in September. The first Norwegian covered bond is under way and Belgium, Italy and Portugal all have draft legislation in the pipeline. In addition, Germany is in the process of amending its current mortgage bond legislation, which will abolish the specialist banking principle. This means there will be new players and issuers in the marketplace.
At the end of my two-year term as president of the EMF, I anticipate that the foundations will be in place for a single market in financial services. It is vital that every effort is made to get this right so that the benefits of integration can be shared right through the mortgage value chain. Consumers should have access to a wider product range at competitive rates while lenders will benefit from the opening up of new markets and new funding opportunities.
Philip Williamson is chief executive of Nationwide Building Society
