Number of people in arrears on their mortgage increased by 20% Y-o-Y. “Only the tip of the iceberg”, according to chairman Bureau of Credit Registration (BKR).

Today, the Dutch Bureau of Credit Registration (BKR) presented disturbing data on the Dutch mortgage market in their so-called Mortgage Barometer for October, 2012.

In October, the number of mortgage holders-in-arrears has risen by 20% y-o-y to 72,000 and this was not the only disturbing news from this barometer. Here are the pertinent snips from the press release issued by BKR:

BKR Mortgage Barometer: Over 72,000 homeowners in arrears on their mortgage

The number of payment arrears on mortgages increased further in 2012. At this very moment, 72.367 homeowners experience difficulties in paying their mortgage. An increase of about 10,000 people since January 1, 2012.

Based on the latest data, BKR expects that the number of homeowners in arrears on their mortgage will reach 76,000 at the end of this year. Although still a limited number in terms of percentage, it is a serious signal. ‘Not paying your mortgage is one of the last things that you do. This is surely preceded by a lot of other financial misery’, according to general manager of BKR Peter van den Bosch. ‘Please keep in mind the consequences of a foreclosure. As a consequence of the dropping housing prices, increasing numbers of houses are underwater. A foreclosure would certainly leave people with high residual debt’.

Problems caused by excess debt have been on the rise for years already. Most arrears are measured at the Dutch internal revenue service, utility companies, building cooperatives and healthcare insurers. ‘BKR doesn’t have plain sight on these arrears. Credit suppliers don’t see those either when someone comes around for a loan’, says Van den Bosch. ’BKR only looks after 20% of the arrears. That is too little. We should enter new ways, like an early-warning system, to be able to help people’.  

A number of 72,000 homeowners in arrears doesn’t sound like an awful lot, as the number represents only 1.3% of the approximately 5.5mln homeowners in The Netherlands.

However, the message of general manager Peter van den Bosch of BKR was that the mortgage redemption is the last bill that homeowners refuse to pay. Before they stop paying the mortgage, a lot of other bills have become in arrears first.

Van den Bosch further explained this in an interview with BNR business radio, of which I print a transscript here:

“The current arrears situation is twice the number it was, back in 2008. In the years before 2008 when people couldn’t pay the mortgage anymore, it was possible to sell the house relatively easy and against a good price.

Today is different: selling houses is very hard nowadays and often a residual debt remains after the transaction.

In my opinion, the mortgage debt is only the tip of the iceberg. Therefore don’t underestimate the signal we got today: mortgages and banking debt are at a relatively low position in the Arrears Top Ten. Normal bank loans, like revolving credit are only at the seventh place, when it comes to the size of debt in arrears.

The biggest creditor nowadays is the Dutch internal revenue service (IRS): more than 300,000 people can’t pay their tax-debt anymore, making the sum of this debt about 7 times higher than the outstanding mortgage debt in arrears. Other large creditors are utility companies, telecom companies and health insurers.”

I’m convinced that Peter van den Bosch is right about tax and utility debt, although he stated earlier in the press release that he doesn’t have a clear view on the tax data yet. People, knowing the risk of foreclosure and residual debt, rather wait with paying their tax and energy bills than letting their mortgage get in arrears, as the latter could have grave consequences.

That, in spite of the previous finding, the number of mortgages in arrears will grow by about 20% in 2012 is a clear sign that the financial situation of private citizens is deteriorating rapidly.

Former Dutch County Council delegate Ton Hooijmaijers (VVD) faces trial on multiple charges of bribery, forgery and money laundering. Delegate reputedly received €1.6mln in bribe money in return for business favors.

Erst kommt das Fressen, dann die Moral!

(Food comes first, morality afterwards)

Bertold Brecht – The Threepenny Opera

Next week, a highbrow trial starts against the former Country Council delegate Ton Hooijmaijers, who represented the Dutch province of Noord-Holland. Hooijmaijers, of the liberal-conservative government-party VVD, reputedly rendered favors and services to small and large businesses in exchange for bribe money.

Among his ‘customers’, according to the District Attorney, were the former Dutch SIFI bank Fortis Bank (currently ABN Amro), the large building company Ballast Nedam (BALNE:NA) and many other project developers and Commercial/Residential Real Estate companies. However, both Fortis and Ballast Nedam denied the allegations.

Hooijmaijers has not only been bribed, according to the district attorney, but is even said to have actively asked for bribe money in return for favors: you can get what you want, if you pay what I want. The total amount of bribe money exceeds €1.6mln.

The County Council delegate came on the retina of the district attorney after the province of Noord-Holland lost €120 mln in reserves during the Icesave drama. Hooijmaijers had all by himself taken the decision to stash the province’s money at the doomed Icelandic bank, weeks before Icesave defaulted.

Before the Icesave drama happened, Hooijmaijers had boasted to various people about his power and influence, allowing him to take this decision without further consent. Afterwards, he was forced to leave the County Council, leaving behind a number of faulty declarations and credit card expenses that could not be accounted for. All in all Hooijmaijers behaviour as delegate for Noord-Holland had been so opaque that the District Attorney started a criminal investigation 2.5 years ago.

The Dutch newspaper NRC (www.nrc.nl) wrote on this story. Here are the pertinent snips:

Fortis Bank bribed Ton Hooijmaijers in return for favors from Noord-Holland.

The former bank Fortis has bribed Ton Hooijmaijers in order to become the house banker of the province Noord-Holland. This is written in the indictment that was issued in the criminal case against the former delegate, according to the Dutch national broadcasting corporation NOS (www.nos.nl).

Hooijmaijers would receive €6000 for this favor. Besides that, he would receive commission fees on other transactions. The total amount in bribe money that has been paid to Hooijmaijers, is said to be €7000.

Fortis is one of the parties mentioned on a long list of companies and persons that would have bribed Hooijmaijers in return for favors from Noord-Holland. Also building company Ballast Nedam is mentioned on this list, just like smaller project developers and real estate companies.

Hooijmaijers, his wife and a realtor will be prosecuted for accepting bribe money, committing forgery and money laundering. This involves a total amount of almost €1.6 mln.

The delegate, at that time responsible for finance and regional planning, is accused of sending fraudulent invoices through the consultancy firm of his wife and a real estate agent. Since the investigation started 2,5 years ago, official raids have been executed at the homes of Hooijmaijers and his mother, where the consultancy firm of Hooijmaijers wife was established. Besides that, six companies have been raided. Possessions to the tune of €1.8 mln have been seized from the liberal. His trial starts on October 18.

Hooijmaijers (of course) frantically denied the accusations from the DA’s office. The Dutch business magazine Quote wrote the following snips:

Hooijmaijers informs Quote that the indictment of the DA’s office is not correct:’I am innocent. Things have been taken completely out of context and the DA’s office sums up projects and amounts that have nothing to do with me. Sadly, I can only state now that I’m innocent and want to be heard by the judge’.

Of course, everybody is innocent until proven guilty in the court of law. Therefore Ton Hooijmaijers deserves a fair trial, just like everybody else and doesn’t deserve to be judged by the public before his trial starts.

However, according to journalist Vasco van der Boon of Het Financieel Dagblad (www.fd.nl), the district-attorney seems to have an ironclad case against Hooijmaijers with an overwhelming amount of evidence. He stated this in an interview with BNR business radio (www.bnr.nl). Here is the English transcription of this Dutch interview:

“The indictment contains a bunch of misdemeanours. It is not one single accusation of bribery, but an enumeration of dozens of bribery actions, by Fortis, Ballast Nedam and a whole bunch of other project developers and real estate companies. Briberies that he reputedly even asked for himself.

It is truly mindboggling, if it is indeed true that nobody at the Province Hall noticed these events. However, notables from the Noord-Holland business society knew where to go for a favor, services, business assignments or leaks of secret, strategic information on building projects and development plans. Hooijmaijers even changed development plans himself, overriding definitively approved advices from the province’s most important civil servants

It looks strongly as if Hooijmaijers is caught with his hand in the province’s cookie jar. This case seems to be so much more than only a politically motivated accusation against an adversary.

The case reminds me strongly of the famous proverb from Bertold Brecht's Dreigroschenoper (i.e. the Threepenny opera): ‘First comes the food, afterwards the morality’.

 

It seems that the morality never has set in with Ton Hooijmaijers, making him a political vulture, feasting on the dearly paid tax-money from the Noord-Holland citizens. Allegedly, he betrayed his colleagues and his province and he has betrayed the people that he had to represent. When the accusations are true, it is a disgusting case of abuse of power.

However, let us not forget the people that are at the other end of the Euro: Fortis Bank, Ballast Nedam and many, many others. If these companies are indeed guilty of bribing, they should also pay dearly for these crimes. It are exactly these kinds of crimes that mean the difference between a civilized country and a banana republic.

Dutch SNS Bank seems on ‘the Road to Nowhere’, according to Fitch. Will it be the first large victim in The Netherlands of the enduring misery on the (inter)national CRE-markets?

We're on a road to nowhere

Come on inside

Takin' that ride to nowhere

We'll take that ride

Talking Heads – Road to Nowhere

The Dutch bank/insurer SNS Reaal and especially its banking subsidiary SNS Bank seem to be on a dead end road, due to enduring problems with the vast Commercial Real Estate (CRE) portfolio of the bank.

Last year, the bank/insurer entered  the news bulletins with their CRE misery and with the request of CEO Ronald Latenstein to his personnel to ‘voluntarily’ reduce their remuneration by 10%, as ‘their wages were too generous to meet the demands for solid yields on the bank’s services’.

In those days, I expected Latenstein’s request for more austere remuneration of banking personnel to start a new trend in the banking industry, but that didn’t happen until now.  However, this doesn’t mean that this won’t happen in the foreseeable future anyway.

Nevertheless, the problems with the CRE portfolio of SNS Bank have not been solved yet and yesterday, this caused Fitch to downgrade their viability rating by one notch to bb from bbb-: a junk status.

Here are the pertinent snips from the Fitch press bulletin:

Fitch Maintains SNS REAAL's BBB+ on RWN; Affirms SNS Bank's IDR at 'BBB+', Downgrades VR to 'bb'   

The downgrade of SNS Bank's VR [Viability Rating – EL] to 'bb' from 'bbb-' and removal from RWN reflects the heightened risks carried by the bank's commercial real estate (CRE) loan book (EUR4.2bn property development and, to a lower extent, the EUR3.6bn property investment - in total around 4x book equity at end-June 2012) in the view of the data published by the bank in its first-half results and the latest commercial property market trends in the Netherlands (around 80% of the total exposures) and across Europe.

Fitch expects that the difficulties in the highly cyclical commercial property markets will protract if not worsen, notably in the Netherlands, as the public and private sectors are undertaking a substantial deleveraging process, given the reducing refinancing opportunities as financial institutions turn away from property lending and as the economic conditions remains weak. Unlike other major Dutch banks, SNS Bank's CRE portfolio is dominated by exposures to property development (Property Finance) which is, by nature, much riskier than property investment. In addition, SNS Bank has property development exposures to countries that have experienced severe real estate shocks (Spain and US), although these have been largely written-down and/or foreclosed.

The quality of the Property Finance loan book in run-off (EUR4.2bn) has further weakened with impaired loans and average loan-to-value ratios deteriorating again during H112 to high levels (39.6% and 105.4% respectively). In addition, the less risky property investment loan book (Property Finance SME) has started to experience some deterioration and the relatively low 4.3% impaired loan ratio reported at end-June 2012 is expected to increase, causing higher loan impairment charges. Along with earnings strains in the bank's retail activities due to continued pressure on net interest margin and higher, but still low, loan impairment charges, the CRE exposures will cause significant further losses for the bank over the foreseeable future and, ultimately, pressure on capital. The bank has so far succeeded in mitigating the negative impact on its capital position through deleveraging (but also through some support from the group's insurance operations) but would not be able to continue doing so if the current adverse conditions on the CRE markets protracts, if not worsen.

In Fitch's opinion, the continued, and potentially increasing, burden of the property lending on SNS Bank's earnings and ultimately capital (ahead of the implementation of tougher regulatory requirements) is not commensurate anymore with an investment grade standalone creditworthiness.

Fitch placed the insurance operating entities' ratings on RWE on 16 July 2012 reflecting SNS REAAL's announcement that it will take capital strengthening initiatives by the end of 2012. All scenarios are still under review by management and no final decision has been made yet. Consequently, Fitch has maintained the RWE on the insurance operating entities. Fitch expects to resolve the RWE once there is greater clarity about the future of the insurance operations in the context of the group's capital strengthening initiatives.

RATING DRIVERS AND SENSITIVITIES - VR

SNS Bank's VR reflects its solid franchise in Dutch retail banking, which has enabled it to maintain a healthy net inflow of customer deposits during H112, improving its funding mix while the bank is reducing its loan book (the loans/deposits ratio improved to 147% at end-June 2012 versus 162% at end-2011). This still high loans/deposits ratio indicates that the bank remains reliant on the capital markets for its funding needs (a structural feature of Dutch banks), but has regained access to secured funding in H212 with a EUR1bn covered bond and EUR960m RMBS placements. This has further strengthened an already solid liquidity position. The VR also incorporates the substantial strains of the property finance exposure on SNS Bank's earnings and the related significant challenges for its capital position.

SNS Bank's VR would be vulnerable to any deterioration in asset quality beyond current expectations causing heightened stress on capital, but also to a weakening of the bank's core retail franchise or to any material set-back in its liquidity profile.

After reading this Fitch report, I couldn’t agree more with the downgrade. The still enormous €7.8 bln CRE portfolio of SNS Bank (when compared to SNS Bank’s approx. €2 bln equity), makes the bank extremely vulnerable for deterioration of their CRE portfolio at especially the domestic market.

In my opinion this deterioration is inevitable, as the current vacancy of CRE at the domestic market is already hitting 17% and insiders even predict 25% vacancy (of which about 80% structural) for the near future.

Existing CRE is vacant in many, many occasions, especially at beneath AAA locations; for instance in commuter-driven cities like Amsterdam Zuid-Oost, Zoetermeer, Almere, Hoofddorp, Den Haag etc. Even at top-notch locations there is (structural) vacancy, albeit much lower. There is no way that this vacancy will be reduced soon. To the contrary, in my opinion the vacancy will only rise during the next 5-10 years. Reduction of CRE vacancy might be a process of many years to come.

Although the impaired loan ratio for the whole property investment loan book is still very low with 4.3%, I expect this number to rise in accordance with the structural vacancy on the Dutch CRE market. Commercial buildings that supply no rental or sales yields, but still have their fixed expenses will inevitably lead to arrears and foreclosures among investment companies and project developers. They will also lead to financial damage for SNS Bank itself. Another side-effect is the depreciation in the value of SNS Bank’s CRE portfolio.

Even more tricky is the property development portfolio of the bank. Many buildings are currently being built for (structural) vacancy, as the potential customers have gone bankrupt, or have simply vanished. On top of that, the supply on the Dutch CRE market is still overwhelming for the next few years, due to reckless investments of banks, local communities and central government. SNS Bank will inevitably suffer from this development as new buildings will fail to find tenants or buyers.

SNS Bank is still very much dependent on the capital markets, but it is also one of the banks that pays a much higher than average interest on saving’s accounts. This is – of course – not a sign of financial strength, but rather weakness. These higher interest rates on savings from private customers also make it more difficult to gain a solid yield on investments and loans.

Although Fitch still believes that the management of SNS Bank will deploy a kind of financial restructuring at the end of this year, I don’t see the problems of SNS to be solved soon:

• You can stop all future investments in the IT infrastructure, fire all excess (?) personnel and run the bank with a skeleton crew, but this will lead to deterioration of service and quality and in the end to mounting losses, due to failed business operations.
  
• With the current high costs of capital and low yields on investments, the financial situation of the bank will rather deteriorate, instead of improve in the coming years.
  
• In my opinion, there is no way in hell that the bank can sell its CRE portfolio at a decent price in order to improve the financial situation of the bank. CRE will be a millstone in years to come.
  
• I also don’t think that the CRE portfolio of the bank can be sold through CMBS (Commercial MBS) securities. It is nice that the bank could successfully issue RMBS (residential mortgage backed securities) in 2012, but I am truly puzzled that people are buying those securities anyway. The outlook for CBMS is far worse, IMHO.

Due to SNS Bank’s vast CRE portfolio and the increasing difficulties to acquire money at a decent price, the bank seems on a road to nowhere.

If you don’t mind, I don’t take that ride!