The Netherlands: State-guaranteed securitisation
In June 2012, the European Commission published a report1 on the Netherlands’ housing market which highlighted the impact of negative wealth effects impeding the recovery, unduly high household leverage and increased banking sector vulnerability.
“The funding gap for Dutch banks, the difference between customer deposits and loan books, is large and banks have to access capital markets to bridge this shortfall,” says Philippe Lamaud, director for financial institutions at Fitch Ratings. “But in 2008, 2009 and then again in 2011, the wholesale funding markets for banks was disrupted, if not closed down. This is a weak point for Dutch banks.”
With the frailty of its troubled banks in mind, a distressed housing market and mortgage rates that remain elevated years after the financial crisis, and significantly above the European average, the Dutch government has put housing market reform near the top of its priorities, and enacted a variety of legislative changes to address the issues.
A national mortgage institute, NHI (Nationale Hypotheek Instelling) has been proposed to purchase mortgage bonds (all of which have an NHG2 guarantee) from the banks, repackage them, and sell them as bullet-style mortgage bonds called Nationale Hypotheek Obligaties (NHO), to investors, particularly pension funds.
The framework of proposals, announced by Kees van Dijkhuizen’s committee in early March, gauged good interest from all sides, both banks and the pension funds, would be forthcoming. The committee was tasked with exploring the involvement of pension funds in residential mortgage loans. Van Dikhuizen’s two main conditions were that the pension funds should not be forced and that the government should not increase its market exposure.
The plan was met with interest from banks, and an enthusiastic response from the pension fund industry.
Those first proposals were taken further by a working group that included representatives from PGGM, the main banks and the Dutch central bank (DNB). This was chaired by Tjerk Kroes, senior APG director. A proposal for a National Investment Institute (NII) to be set up to encourage institutional investing in the local economy and an agreement that the NHI-issued mortgage bonds were to have government guarantees were announced in the autumn Budget speech.
“We believe that the initiative will have enough momentum to become a reality now that the government has secured strong assurances from the largest pension funds that they will invest in these state-backed bonds,” says Edward Krijgsman, pension consultant at Mercer. “We have reservations, however, many of which cannot be resolved until more details are published.
“One issue will be how to price these bonds,” adds Krijgsman. “Although, they will have a state guarantee, they cannot be directly compared to a Dutch government bond. Should they be treated like a bond issued by the Dutch Municipal Bank [BNG], for example? These typically carry yields of around 20 basis points higher than an equivalent government bond.”
TKP Investments agrees that the bonds could be interesting, but how pricing will be key. “These bonds, with their state guarantee, should be perceived as low risk, certainly the credit risk is minimal. If they are thus perceived as cheap it is likely that there will be demand for them,” says Tjomme Dijkma, senior portfolio manager at TKP Investments. “Of course, ideally we would like enough issuance of large enough individual bonds to create a decent yield curve, and that would certainly help pricing.”
PGGM, who manage one of the Netherland’s largest pension funds, were fairly unconvinced initially with NHI proposals. However, the pledge of government guarantees did ease fears, and kindled enthusiasm.
“The market will determine the fair price. Important factors will be credit risk, regulatory capital treatment and liquidity”, according to Bob Raedecker, chief investment manager for public markets at PGGM. “Since it is still a work in progress, it is too early to tell what a fair liquidity premium might be. A unique feature of these bonds, in contrast to RMBS, however, is that they are bullet bonds, with no repayment, or pre-payment risk. With a Dutch state guarantee, investors could enjoy a risk-free bond with a liquidity premium.”
Of course, the banks have examined developments. Rabobank’s Ruben van Leeuwen, the bank’s ABS specialist, says that things have gone quiet, although an official update is expected at the end of this quarter.
Van Leeuwen adds: “The new structure [of the NHI] could be beneficial to the banking sector, but we have to consider potential asset encumbrance, and the funding requirements of the huge number of loans not covered by the NHG.”
Fitch’s Lamaud thinks it is hard to see how the proposals will aid the banks: “While putting in place additional funding sources is a good thing, particularly for the small to medium banks, would this represent a major change for the banks’ overall funding structure? And although the bonds could well be quite an interesting asset class, we do not see how they will become a big market.”
The finalised structure of the NHI is still unknown, although Rabobank’s Leeuwen has some ideas. “If we compare existing Dutch proposals to other systems in the world, we have much in common with the Canadian mortgage system, as its Canada Mortgage and Housing Corporation has reasonable similarities to the proposed NHI, which could be a way for the Dutch system to proceed.
“As things stand, we see the main risk due to the structure of RMBS. If an originator fails, and cannot buy back its RMBS from the institute, then there will be a liquidity mismatch – between the bullet bond sold on by the NHI and the underlying residential mortgages.”
The Rotterdam-based consultancy Cardano is keen to stay involved in discussions on the proposals for pension funds to help financing the Dutch mortgage market. Nevertheless, Rob Janssen, consultant at Cardano, remains cautious and argues that with changing regulations like Basel III, there is a danger that investment decisions could be driven by regulation. “We have at all times to ask ourselves the question ‘Is the risk/return profile on this investment good?’ Very often, if governments are too involved, then markets get distorted, and subsequent investment decisions can appear quite irrational.”
Mark Burbach, CIO of Blue Sky Group, takes up the point about government entities. “Mortgage bonds are specialised, and possibly best left to dedicated managers who monitor the loans, and provide a continuous dialogue to investors about any material changes. We are not sure that a government entity is really best placed to do this.”
Overall, however, it seems that investors are comfortable with the plans thus far. Philip Jan Looijen, managing director for integrated client solutions at ING Investment Management, comments: “In theory we see the bonds as an appropriate means to diversify fixed-income portfolios, with a somewhat higher yield. We look forward to the details with interest.”
Blue Sky’s Burbach also has an open mind: “With the many unknowns, it is hard to be definitely enthusiastic about them. Currently, there are good spreads in the [Dutch] mortgage markets and for us this means the possibility of some interesting investments which, if they existed today, could indeed include the new bonds”.
1. The Housing Market in the Netherlands, Windy Vadevyvere and Andreas Zenthofer, Economic Papers 457/June 2012, European Commission.
2. Nationale Hypotheek Garantie – a mortgage guarantee established in 1993 to stimulate home ownership, targeting first time buyers. The upfront insurance premium is often added to the mortgage loan itself.