Two reasons why the Dutch housing and mortgage market is critically ill.

In this article I will give you two important reasons why the Dutch mortgage and housing market is really critically ill.

Reason One: The banks don’t lend mortgage money… at all. They don’t have it anymore.

Today, an Op-Ed was printed in the Dutch newspaper Trouw (www.trouw.nl). The author Rob Schouten, an independent mortgage-intermediary, complained on the circumstance that ABN AMRO, the third bank in The Netherlands, and almost all other banks, didn’t want to issue mortgage to financially stable customers… at all.

Here are the pertinent snips of the Op-Ed, in this case coming from the weblog of this independent intermediary:

Banks are very reluctant to hand out mortgage-loans

The issuance of mortgages has stalled and banks almost stopped with handing out new mortgage loans. Of course the bad housing market in The Netherlands is an issue, but it is especially the reluctance of banks to hand out mortgages, that kept the issuance at a bare minimum.

I am annoyed by the stories that banks tell about their situation. These stories are not honest and fair.

Due to government measures, banks have less money or even no money at all to issue mortgage loans, as the banks have to deal with new and stricter capital demands. I understand that. 

But why do the banks act in the meantime, towards customers applying for a loan, like everything is hunky-dory while it isn’t? Also to the outside world banks deny that they issue less mortgage loans or even won’t issue mortgage loans at all. ‘Oh no, we currently issue mortgages, just like we did before’ or ‘We like to help entrepreneurs with their financing issues’.

I have noticed for a considerable time now that banks in reality do everything in order to not having to issue mortgage loans. Already more than one year ago, an account manager of ABN Amro visited me with the following, urgent request: ’Dear Rob, please don’t apply for mortgage loans at our bank anymore; we simply don’t have money for it’. The account manager himself also considered it a strange request. 

The same bank rejected a request for a mortgage with a National Mortage Guarantee (NHG), after the first approver already had confirmed the loan. The collateral was OK, the salary and the taxation; everything was fine. The reason for the bank to reject the loan application? The applicant had overdrawn his current account a few times!

The long-term, safe standards for an NHG were suddenly totally ignored. No bank follows the standards for debt-to-income anymore. Customers are rejected. When I enter into a contract with a customer, I hear more and more often the following question: ´How did the customer get his savings´ money?´ A mortgage application with a small correction on the employer´s statement (an error in the postal code) led to a rejection, due to ´fraudulent changes´. A warning code for even the smallest arrears during the last five years at the Bureau of Credit Registration (BKR), leads irrevocably to a rejection. There is no exception possible at all.

Years and years of excess mortgages in The Netherlands led to a situation in which the Dutch customers are broke and the banks are broke too. I do sympathize with Rob Schouten, the mortgage intermediary in this Op-Ed. However, he is still a victim of the erroneous reasoning that everything was fine on the Dutch mortgage market, until the banks decided to tighten the terms for handing out mortgages.

Everything wasn´t fine in 2006! And it was time that this enduring mortgage madness ended. Now we finally seem to arrive in a situation where all Dutch stakeholders (except for the government yet) do agree on the fact that the Mortgage Interest Deduction (MID), in combination with the extremely low interest rates, has hugely disturbed the Dutch housing market. And that also agree that the Dutch mortgage debt of 120% of GDP is a ticking timebomb in The Netherlands.

The only medicine that helps now is debt destruction. As far as this concerns, The Netherlands is finally on its way now, but there is still a very long way to go.

Reason Two: Even if the customer is in arrears ‘forever’ the banks won’t foreclose anymore.

If you would tend to underestimate the seriousness of the current mortgage market situation in The Netherlands, please read then the pertinent snips of the following press release by ratings agency Fitch (www.fitchratings.com):

Fitch: Low Foreclosures Inflate Dutch RMBS Arrears   

Fitch Ratings says that the low level of completed foreclosures in prime Dutch RMBS transactions is adding to the pressure on collateral performance. The comment follows the agency's review of 51 prime Dutch RMBS transactions, which resulted in 173 tranches being affirmed, 2 being upgraded and 22 being downgraded.

Dutch RMBS loans' performance has softened over recent quarters. This is mainly evidenced by an increase in the proportion of loans in arrears, particularly late-stage arrears. While Dutch RMBS transactions have historically reported extremely low arrears, an increasing proportion of transactions are now reporting three month plus arrears in excess of 1%.

"Increased arrears are only partly a result of deterioration in the fundamental credit quality of Dutch residential mortgages," says Ibrahim Kamara, Analyst in Fitch's European RMBS team. "They also reflect a reluctance of servicers to sell properties at auction in current stagnant market conditions. Certain transactions have not reported a single completed foreclosure for quarters at a time."

The Dutch mortgage market is characterised by high loan-to-value ratios. Consequently, the majority of loans in arrears are also in negative equity. Reported loss severities are typically higher on loans that have been foreclosed upon through a court auction process. However, the low level of activity in the residential market means that consensual sales have become more difficult to complete. These factors combine to not only reduce the incentive for servicers to complete foreclosures through forced sales, but also to reduce the volume of consensual sales.

"It is important to note that absolute arrears levels remain relatively low despite the recent increases, particularly when compared to other European jurisdictions," says Gavin Crawford, Associate Director in Fitch's European RMBS team. "However, the increase in late-stage arrears, which Fitch expects to persist in 2012, is causing a build-up in potential foreclosure stock."

Dutch RMBS transactions do not explicitly define what constitutes a loan default. Consequently, provisioning mechanisms are only activated upon realisation of a loss, meaning that no provisions are currently being made for the loans in late-stage arrears.

The normal situation is that when a person or family is too long in arrears, the mortgage is foreclosed upon. But not in The Netherlands. The banks rather kick the can down the road for the people in arrears, while waiting in vain for the housing prices to rise again, than to take a loss on the mortgage. Fitch is right when it says that the auction prices are extremely bad, while on the other hand the chances on a consensual sales are very, very slim indeed.

This makes the banks desperate: theirs is the choice between booking a certain loss after a foreclosure and waiting in vain until the customer in arrears solves his problem or sells the house at a reasonable price. Banks in majority choose the latter, unfortunately.

In my opinion this happens, because the banks don´t want to write off on their Residential Real Estate portfolio. As long as there are no market prices set for houses, the historical prices in their books are alright. But as soon as a house is sold at an auction, there is a market price. This market price does not only deliver a direct loss to the banks, but it also questions the value of the other collateral in their mortgage portfolio, being in arrears.

And one thing is certain in my opinion: when the four largest Dutch banks must seriously write-off on their mortgage portfolios and their housing portfolio, used as collateral, no bank will have positive equity anymore.

And that makes the Dutch housing and mortgage market critically ill!