How Much Do Banks Lend For Mortgages

How Much Do Banks Lend For Mortgages – The residential mortgage markets in Britain and Europe are going through a period of transformation as new financing models emerge and new players continue to enter the ranks of the Dutch mortgage market. As long-term institutional capital plays an increasingly important role in the pursuit of attractive returns and diversification potential, the advent of innovative non-bank platforms will help challenge the status quo and create a more diversified credit landscape.

In most of Europe, residential mortgages are mainly provided by the retail banks that have these mortgages on their balance sheets. Mortgage loans are long-term guaranteed forms of financing that outperform bank balance sheets for several reasons.

How Much Do Banks Lend For Mortgages

One reason for this is the change in maturity. Most of the home loans provided by the banks are financed with short-term deposits, which can be withdrawn by customers at any time. The bank goes bankrupt, which jeopardizes loans to households and businesses, and therefore the real economy.

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“Banks still control the majority of the mortgage market in Europe and Britain, but this is gradually changing as more non-bank lenders enter the market and disrupt the status quo.”

Over the past decade, European regulators have also required banks to finance themselves with more capital by imposing stricter capital requirements on their lending activities, reducing the incentives for certain parts of banks to increase lending. After the mortgage risk measure is gradually introduced, it will become more expensive for banks to keep mortgage loans on their balance sheets.

Recently, regulators in the Netherlands and Germany increased the amount of capital banks must hold for mortgages in an effort to moderate the sharp rise in real estate prices in recent years. German financial regulator BaFin has increased the countercyclical capital buffer for German banks to 0.75% of their domestic assets until February 2023, and an additional 2% buffer will be introduced for residential mortgages. In response, German banks may have to increase the interest rates they charge their customers to keep their mortgage portfolios profitable. For potential property buyers, the relatively high financing costs can effectively limit the price that many people can afford.

Finally, the capital requirements from stress tests for credit risk (larger losses) and interest rate risk (for long-term fixed-rate mortgages) also contribute to the capital burden.

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Asset managers have provided more long-term capital to this market on behalf of institutional investors seeking attractive returns and diversification away from corporate risk. To manage their balance sheets and capital effectively, retail banks periodically sought to transfer exposure to current, performing loans and other assets on their balance sheets to carefully selected institutional investors to meet regulatory capital requirements. maintaining credit assets and relationships with end users for a fee.

The long investment horizon of institutional asset owners such as insurance companies and pension funds makes them particularly suitable as a complementary source of sustainable mortgage financing and a good match for their long-term obligations – as policymakers know. In the long term, institutional investors could play a greater role in the mortgage markets, for the benefit of the financial system.

Regulations such as Solvency II have certainly played a role in stimulating direct demand for residential mortgages. Although mortgage loans are not eligible for adjustment support, the capital approach of investing in a portfolio of unsecured residential mortgages is very attractive to insurance companies compared to traditional fixed income investments of equivalent risk. Residential mortgages are covered by the standard counterparty module for calculating Solvency Capital Requirements (SCR) according to the standard formula, and SCR is a function of the loan-to-value (LTV) ratio rather than duration and creditworthiness. Residential mortgages also offer diversification potential, as the primary risk lies not with companies or governments, but with individuals, most of whom are exposed through corporate and equity loan portfolios.

Dutch and Belgian insurers are heavily exposed to mortgages, in some cases accounting for 25% or more of their investment portfolios, as the focus is on high-yield assets and mortgage default rates are historically low. Investors also have access to a regular, stable income stream because borrowers pay off their mortgages over time and with low delinquencies. Investors can get a variable interest rate on the asset class (after interest rate swaps on fixed-rate mortgages), which can provide protection against inflation as yields increase as interest rates rise. These pools are backed by real estate assets that can appreciate in an inflationary environment, limiting losses in the event of default.

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In the Netherlands, mortgage loans dominate investment strategies, and the increasing role of insurers and pension funds in the mortgage loan market over the past decade has contributed to the diversification of the investor base. Institutional investors were responsible for 87% of the total increase in Dutch household mortgage loans since 2014, while pension schemes account for 6.6% of total Dutch mortgage investments, DNB said.

, the country’s pension regulator. DNB further notes that more than 80% of mortgage investments are made through third-party funds.

Furthermore, investing in a strategy with an asset manager that buys portfolios of residential mortgages and consumer loans in different regions offers asset owners the opportunity to gain diversified exposure and increase exposure to the asset class, including mortgages. diversify the sponsor/promoter, country and type of assets in the investment portfolio.

If investors can invest in securitization without being subject to a capital penalty, investment funds that use term financing (for example by issuing tranches of senior asset-backed security (ABS)) can be an efficient, cost-effective method that is efficient and resource-free is). financed. purchasing mortgage portfolios – and giving potential investors access to risk-adjusted returns.

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As banks become risk-averse and scale back their lending activities in certain segments, non-banking, tech-savvy players often step in to fill the gaps. This would contribute to the development of an American “market-based” system that would include a greater share of non-bank mortgage lenders and servicers. In 2007, 80% of mortgages came from American banks; Within a decade, however, non-bank organizations emerged quickly, accounting for more than half – a share that rose to 68% in 2020.

Over the years, non-bank platforms have entered the specialist buy-to-let (BTL) and specialist mortgage lending segments – a sector that was dominated by retail banks before the global financial crisis. This created an opportunity for institutional capital to fund these platforms so they could increase their market share. Borrowers, on the other hand, have more choice in lenders and choose the lender that not only offers the best rates, but also the best services and flexibility.

A viable alternative to warehouse financing is the emergence of future flows, where asset managers purchase emerging loan pools from banks and non-bank lenders. Forward flow contracts can be structured according to specific criteria and predefined characteristics.

For example, seeing an opportunity to offer attractive returns with strong take-up in the Irish mortgage market, we entered into an exclusive mortgage partnership with Ireland’s largest non-bank lender, Finance Ireland, to facilitate their entry into Ireland. residential mortgage market.

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Banks and non-bank lenders are looking to launch new and innovative products in the mortgage market, including longer-term fixed-rate mortgages, as borrower demand for longer-term solutions increases due to rising inflation and higher interest rate expectations.

Long-term fixed-rate mortgages give borrowers the opportunity to get a fixed interest rate for the long term. Greater security of repayments and mortgage payments, which represent one of the largest parts of a household’s disposable income, could be very valuable in a high inflation environment if secured over the long term.

Expanding the traditional fixed-rate mortgage market is a priority for many governments. In the UK, most mortgages have a fixed rate agreement, but the fixed rate term is typically no longer than ten years, with products offering shorter upfront terms of two, three and five years. However, this may be starting to change. Until recently, long-term deals were more expensive than short-term deals, but in the UK ten-year deals with lower interest rates are being introduced for home buyers with a lower LTV.

Conversely, in other countries, long-term contracts are becoming the norm as borrowers opt for fixed-rate loans with terms of twenty years or more.

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For example, in Belgium, mortgage loans often have a fixed interest rate for the entire term of the loan – up to 30 years, and the average term of a mortgage loan is about 20 years – not one. an initial period of two, three or five years. Since 2007, lenders have continued to provide long-term mortgages to their customers.

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