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Tuesday, 15 November 2011

Hundreds of thousands of families in danger of defaulting on their mortgage: Is it true or just fear-mongering?!

Today, there was news on one of the hot topics of this blog: the ability and willingness of Dutch mortgage holders to remain paying the mortgage on their much too expensive houses.

The US credit rating agency Dynamic Credit warned that hundreds of thousands Dutch families will soon not be able anymore to pay their mortgage, when the fixed period of their interest rate matures and a new, higher interest rate has to be set.

To look at Dynamic Credit’s point-of-view from both sides in order to give you an unbiased impression, I print here the pertinent snips of two articles on the same subject. The first article comes from Het Financieele Dagblad ( and the second article from Z24 (, another online business newspaper in The Netherlands.

Also in The Netherlands banks issued risky mortgages to households that actually can’t bear a large loan.

Hundreds of thousands of families are in peril of getting into financial misery, when their current, favorable mortgage interest matures and they are also confronted with the consequences of all kinds of austerity measures.

This warning comes from Dynamic Credit, the agency that warned the Federal Reserve in the summer of 2008 about the emerging problems with the subprime and Alt-A mortgages, that would bring so many banks into difficulties.

‘There is a lot going on, currently. Interest revisions will be carried out soon, unemployment is increasing and the economic climate is poor. Payment arrears in 2011 will presumably be moderate, but in 2012 this could be a whole different story. This is inevitable’ , according to Managing Director Tonko Gast of Dynamic Credit in an interview with the FD, after his hearing by the Parliamentary Investigation Commission De Wit.

Already in 2009, the Dutch Authority Financial Markets (AFM) warned that 430,000 households can only just bear their mortgage burdens, a fact that attracted too little attention, according to Gast. A privately held investigation of Dynamic Credit showed that 300,000 households have no financial leeway whatsoever. Gast: Existing mortgages from vintages 2005 until 2007 will be vulnerable. These are the canaries in a coalmine, that can barely survive if even the slightest thing happens’.

The investigation showed that especially the incomes around €35,000 will get stuck first. ‘These 300,000 mortgage loans are a category that you could easily call subprime’, according to Gast. The risks on these kind of borrowers are stacked; a high loan to income ratio, often a redemption free jumbo loan and a house that is bought at the peak of the market’.

A whole other tone-of-voice is presented in the Z24 article:

Hundreds of thousands of Dutch families get into trouble with their mortgage, according to the FD. Is this really true?

About 300,000 Dutch households are in peril of getting into financial misery, when the mortgage interest rate will increase and austerity measures are implemented at the same time. This warning by Dynamic Credit was printed in the FD on Tuesday.

But the question is if things will go that far in The Netherlands. First, the mortgage interest is still extremely low. It rose slightly during the early months of 2011, but remained stable afterwards. The recent decrease of the refi rate by the ECB can be an extra impulse to drop the interest rate slightly. When kooking at the awkward economic situation, it seems that an interest raise is not very plausible in the near future.

Second, the number of forced housing sales in The Netherlands is still exceptionally low, in spite of the crisis. In 2010, it were just 1341 cases of houses with a National Mortgage Guarantee (NHG) that needed to be sold, as the owners could not bear the mortgage burden.

The Guarantee Fund Owned Houses (WEW), that operates the NHG in The Netherlands, expects that the number of forced sales will be 2000 in 2011. This is still only a fraction of the millions of resident-owned houses in our country. 45% of these forced sales are caused by divorces, while only 15% of the forced sales is caused by unemployment.

Both Dynamic Credit and the WEW see house-owners with €35,000 income per year as the group in danger. However, a repeat of the American situation, where defaulting houseowners caused banks to default, is very unplausible in The Netherlands. In the US you can drop the key at the bank, when you can’t afford your house. This is impossible in The Netherlands. As long as people in The Netherlands get not involved in massive divorces, the vast majority of the house-owners can go on paying their mortgage.

Sometimes, you have to read financial lunacy (especially the red text) more than one time, to believe that someone really said it. The Dutch people get through all kinds of difficulties to pay their mortgage bills, as not paying them turns them into financial zombies, because of the negative quotation at the Bureau of Credit Registration (BKR). So when people are finally in arrears, this means that they are financially exhausted already.

As also the banks are scared of letting houses being auctioned, due to the bad yields and high residual debts, in combination with the mandatory asset revaluation, they rather help people to kick the can down the road by letting the arrears grow and grow.

The people that eventually get their houses sold via an auction, were at the end of a long, long road.

Read here for instance the letter of an American reader that is desperate from her failed attempts to sell her house in The Netherlands. Or read various other posts on this subject via my search engine.

But this ‘reporter’ of Z24 thinks that it is normal for people to be drowning in debt, without a straw that they can clutch at. And as long as people sacrifice everything else to pay their mortgage debt, there is no problem for the banks. Hence: no problem at all?!

I am sure that next year a lot less than 300,000 people will be in arrears. And I don't even talk about 300,000 forced sales next year. This won’t happen.

But I do have the conviction that these 300,000 families will be suffering from the weight of the debt millstone hanging around their necks, while they know that the value of their houses is dropping and might even be dropping more rapidly in the future. All of their attempts to sell their house for a price that can repay the debt have been in vain yet and will be in vain in years to come. What options do these people have?! Actually: none!

Thanks to politics and to the ‘journalists-in-denial’ of newspapers like Z24, the full gravity of this problem will only submerge when it is almost too late to do something about it. And that is bad news for the Dutch economy.

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