The Dutch housing market is NOT further locked-up by the new rules for handing out mortgages: ING statement totally misses the point

Yesterday on March 1, I wrote in An SMS from Ernst about the €130,000 penalty that ING Bank got from the Authority Financial Markets (AFM) for handing out irresponsible mortgages. I stood up for ING, stating that it was almost impossible to hand out a mortgage that is not too high for starters on the housing market, as even the smallest house is incredibly expensive in The Netherlands.

Today, however, ING issued a statement that misses the point totally. Michiel Kwaaitaal , senior manager retail at ING and responsible for marketing on mortgages, states according to the Financial Dagblad (Dutch language): The increasing number of rules prevents more and more people to receive a mortgage

Here are some snips from the article:

“The increasing number of rules prevents more and more people to receive a mortgage. This further locks up the housing markets”. Kwaaitaal observes that politics and supervisors want to further reduce the risks of providing mortgages. “But the arrears on Dutch mortgages are still among the lowest in the world?” […] ING critizes the stricter rules after they received the €130,000 penalty from the AFM[…]

Providing mortgages is more subject to laws and rules than strictly necessary, according to the ING Manager. He points out the stricter rules of budgetting bureau ‘Nibud’ and the increased standards for the ‘National Mortgage Warranty’ (NHG). “And then there is the applicable AFM market standard that limits the provision of jumbo mortgages (mortgages of more than 100% of the execution value of the house)”.

 According to Kwaaitaal, the decision of the AFM to penalize ING discloses that the code of behavior for banks concerning mortgages is further restricted. “There is less room for banks to make their own judgment on risks. Every time something is taken away. It’s like being forced to drive 30 miles everywhere, while 55 miles is normally allowed”.

[…]

 The AFM not only penalized ING for applying criteria that offered too little protection against overcrediting. The bank actually provided too high mortgages to their customers

With 5 of 20 investigated cases the AFM concluded that ING didn’t follow the banking industries’ own code of behavior (GHF). This led directly to mortgages that were too high. Overcrediting varied from 3.2% up to 18.5%.

 The bank continued to claim that the 5 cases were advised “meticulously and in the best interest of the customer”.[…]

I don’t want to judge ING for providing mortgages that were too high. As I wrote yesterday, I can imagine that these mortgages were justified in these situations.

Where Michiel Kwaaitaal of ING is dead wrong, however, is that the AFM rules are responsible for the fact that the mortgage market is locked-up further.

THE main cause for the housing market being locked-up is that the PRICES are TOO HIGH.

I can’t explain to people that in Germany, close to the border with Holland, you buy a residence with 8 rooms and 10,000 Sqr ft of ground for €200,000, while a starters home in The Netherland with 3 rooms and 1350 Sqr ft of ground costs also €200,000

When I tell this to people, they all react like:

-     “houses are scarce here in Holland”

-     “in the provinces Friesland of Groningen houses are much cheaper too, but there is no work”

-     “it is inevitable because so many people are looking for a house”

My standard reaction is: “if houses are that scarce in Holland, why houses with the current prices are often for sale for up to two years or more”. They reply:”you are right, but we can’t lower the price, as we can’t pay off our mortgage then”.

There you got it! The main reason that the Dutch housing market is locked up is: Many people are up to their neck into debt, due to the fact that their mortgage is way too high, but they don’t want to sell their house for a lower sales price as they can’t afford then to pay off their mortgage.

Yes, we have had a housing bubble in The Netherlands before the crisis in 2008, due to the extremely low interest rates of for instance 3,2% on a floating rate mortgage.  Everybody in their right mind knows it!

Icing on the cake is the Mortgage Interest Deduction (or MID) that makes that housing prices in The Netherlands are much higher than in our surrounding countries, as people can borrow more money with the MID, without paying more interest. No right-wing politician wants to get rid of that, as their grassroots support with their million dollar residences will be disproportionately hit by this decision

As a consequence house prices are kept artificially high, as people remain underwater (i.e. current sales value of the house is lower than the mortgage principal), but keep paying their interest on their (interest-only) mortgage.

This asks for an explanation: In contrary to the USA it is impossible in The Netherlands to leave your house key at the bank and wave your mortgage goodbye. The mortgage here is a personal loan and if you don’t pay it off:

-     Either it will be with you for the rest of your life as a residue debt.

-     Or you get declared bankrupt and then you have a cooldown period of at least 5 to 10 years in which you are obliged to repay your debts to a certain amount.

In both cases you get a negative registration at the Bureau of Credit Registration (BKR) also for at least 5 to 10 years, meaning:

-     You can’t get a new mortgage

-     You can’t get any loan whatsoever

-     You can’t get a creditcard

-     You can’t even get a customer card in any shop

-     You can’t buy a mobile phone with a subscription

-     Hence: You are virtually a renegade

This makes that the paying ethics in The Netherlands are extremely high: people don’t want to turn into renegades and keep on paying their (way too high) mortgages, while it would be much better if they could sell their house and start to live cheaper.

The large mortgage banks themselves are also slow with putting pressure on people in arrears. They know very well that currently the mortgages are often way higher than the execution value of the house. People defaulting on a large scale would mean that the banks would have to revaluate their asset portfolio, which would have substantial consequences for the bank’s core tier one capital.

Therefore the banks “help” the people in arrears by temporarily accepting lower payments and not forcing them into a sale under distress.

The result is that the prices remain high, the people remain paying too much on their mortgage and the banks remain covering up the problems of their customers and showing off with the high paying ethics.

That is the recipe for the perfect lock-up of the housing market. The only thing that the new AFM rules do, is emphasizing the problem as-is.