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Table of Contents
                            HOUSING FINANCE IN THE EURO AREA, MARCH 2009
CONTENTS
TASK FORCE OF THE MONETARY POLICY COMMITTEE OF THE EUROPEAN SYSTEM OF CENTRAL BANKS
ABBREVIATIONS
EXECUTIVE SUMMARY
1 INTRODUCTION
2 HOUSING FINANCE AND HOUSEHOLDS’ FINANCIAL SITUATION
	2.1 INTRODUCTION
	2.2 HOUSEHOLDS’ OVERALL FINANCIAL SITUATION
		Box 1 DISTRIBUTION OF MORTGAGE DEBT ACROSS THE POPULATION: INDICATIONS FROM NATIONAL HOUSEHOLD SURVEYS
	2.3 FACTORS UNDERLYING TRENDS IN MORTGAGE GROWTH
		Box 2 HOUSING LOAN DEVELOPMENTS IN THE NEW NON-EURO AREA MEMBER STATES
3 CHARACTERISTICS OF LOANS FOR HOUSE PURCHASE
	3.1 INTRODUCTION
	3.2 LOAN CHARACTERISTICS
		3.2.1 INTEREST RATE
		3.2.2 MATURITY OF THE LOAN
		3.2.3 LOAN-TO-VALUE RATIO
		3.2.4 REDEMPTION SCHEME
		3.2.5 FLEXIBILITY IN MORTGAGE CONDITIONS
		3.2.6 PURPOSE OF TAKING OUT A HOUSING LOAN
			Box 3 RELEVANCE OF THE RENTED HOUSING MARKET IN SELECTED COUNTRIES
	3.3 TAXATION IN HOUSING MARKETS
	3.4 BANKRUPTCY AND FORECLOSURE PROCEDURES
4 FUNDING OF LOANS FOR HOUSE PURCHASE
	4.1 INTRODUCTION
	4.2 MARKET STRUCTURE ACROSS COUNTRIES
	4.3 FUNDING OF MFIS
	4.4 INSTITUTIONAL CHARACTERISTICS OF COVERED BONDS AND SECURITISATION
		4.4.1 MORTGAGE COVERED BONDS
		4.4.2 SECURITISATION
	4.5 IMPACT OF THE FINANCIAL CRISIS
5 MORTGAGE SPREADS ACROSS COUNTRIES AND OVER TIME
	5.1 INTRODUCTION
	5.2 COST OF FUNDING OF BANKS
	5.3 COST OF HOUSING LOANS
	5.4 HOUSING LENDING RATES IN RELATION TO BANKS’ FUNDING COST OR OPPORTUNITY COST
		5.4.1 SPREAD OF HOUSING LENDING RATES OVER INDEXATION RATES OR THE OPPORTUNITY COST
		5.4.2 SPREAD OF HOUSING LENDING RATES OVER THE MARGINAL COST OF DEPOSIT FUNDING
		5.4.3 SPREAD OF AVERAGE HOUSING LENDING RATES OVER AVERAGE COST OF DEPOSITS
		5.4.4 SPREAD OF HOUSING LENDING RATES OVER COVERED BOND YIELDS
		5.4.5 RELATIONSHIP BETWEEN SPREADS AND POSSIBLE EXPLANATORY FACTORS
			Box 4 BANKING COMPETITION AND THE PRICING OF MORTGAGE LOANS
6 COMPARISON OF INTERNATIONAL MORTGAGE MARKETS
	6.1 INTRODUCTION
	6.2 FINANCIAL SITUATION OF HOUSEHOLDS
	6.3 HOUSING FINANCING
	6.4 LENDING RATES ON HOUSING LOANS
	6.5 INSOLVENCY AND FORECLOSURE PROCEDURES
	6.6 SUMMARY CONSIDERATIONS
7 HOUSING FINANCE AND MONETARY POLICY
	Box 5 EXPERIENCES OF BOOMS AND BUSTS
ANNEXES
	1 DATA, SOURCES AND DEFINITIONS
	2 DATA ON DEBT/LOAN DETERMINANTS
	3 SELECTED BANK QUESTIONNAIRE RESULTS
	4 INCOME TAX DEDUCTIBILITY OF MORTGAGE INTEREST PAYMENTS
REFERENCES
ECB OCCASIONAL PAPER SERIES SINCE 2008
                        
Document Text Contents
Page 1

Task Force of the Monetary Policy Committee
of the European System of Central Banks

HOUSING FINANCE

IN THE EURO AREA

OCCAS IONAl PAPER SER I E S
NO 101 / mARCH 2009

Page 2

In 2009 all ECB
publications

feature a motif
taken from the

€200 banknote.

OCCAS IONAL PAPER SER IES
NO 101 / MARCH 2009

Task Force of the Monetary Policy Committee

of the European System of Central Banks

HOUSING FINANCE

IN THE EURO AREA

This paper can be downloaded without charge from

http://www.ecb.europa.eu or from the Social Science Research Network

electronic library at http://ssrn.com/abstract_id=1325202.

Page 48

47
ECB

Occasional Paper No 101

March 2009

4 FUNDING OF LOANS

FOR HOUSE PURCHASE
(b) A critical feature of some forms of true-sale

securitisation is that it allows the originator

to remove risks off the balance sheet and thus

to obtain capital relief. By contrast, covered

bonds are used fi rst and foremost to raise

funding in a cost-effi cient manner. In the

event of banks retaining the loss-absorbing

tranche (often labelled the equity tranche) of

the securities resulting from the securitisation,

there cannot be any regulatory capital relief,

at least not in some jurisdictions. In these

cases, the distinction between the two classes

of instruments is less clear.

(c) Unlike RMBSs, covered bonds are “dual-

recourse” securities. In other words, covered

bond investors have a claim, in the fi rst

instance, against the issuer, as well as a

preferential claim on the cover pool, if the

issuer/originator defaults; RMBS investors,

by contrast, have no claim vis-à-vis the

originator.

(d) The collateral pool backing covered bonds is

usually dynamic, implying that underlying

assets can be replaced if they mature or no

longer meet eligibility criteria. The cover

pool for RMBSs, by contrast, is generally

static. While covered bonds predominantly

have a fi xed rate bullet structure, RMBSs

generally have fl oating rates.

(e) Finally, tranching of the collateral pool is

a common feature of RMBSs, but not of

covered bonds. This enables issuers to tailor

individual tranches to specifi c investor needs

and to lower the cost of capital through

higher-rated securities.

4.4.1 MORTGAGE COVERED BONDS 47

Between 2003 and 2007, the value of mortgage

covered bonds outstanding in the euro area

rose by almost 80%. The development of this

market segment was supported by the fact that

investors benefi t from relatively high returns

at comparatively low risk. While mortgage

covered bonds have long been a well-established

funding instrument for MFIs in Germany in

particular, mortgage lenders in other euro area

countries have only recently adopted this source

of funding more extensively. In the absence of

an integrated and homogeneous market, there

are substantial cross-country heterogeneities

which call for a look into the key explanatory

elements that underpin these differences.

In essence, developments were largely driven by

changes in the legal and regulatory landscape, as

well as by housing market dynamics. As shown

in Chart 15, issuance of mortgage covered bond

was heavily concentrated on Germany and Spain,

while France also accounted for a substantial

share of the euro area market.48 The Spanish

share in the euro area total more than doubled

between 2003 and 2007, from 18% to 39%. The

fl ip side of this was a sharp decline in the German

share, from 72% to 34%. However, this decline

should by no means be interpreted as a sharp

deterioration of the German market. Rather, it was

due largely to a surge in Spanish issues. Indeed,

since 2003, the value of mortgage covered bonds

outstanding has fallen by 16% in Germany, while

it has almost quadrupled in Spain. Spanish credit

institutions were able to draw on the signifi cant

increase in their asset pool to meet the rising

mortgage loan demand, which was attributable,

in turn, to strong housing market dynamics.

By way of comparison, average mortgage loan

growth in Spain was close to 20% between 2003

and 2007, while it averaged merely 1.6% in

Germany. Moreover, another factor behind the

weak developments in Germany was the strong

growth of domestic investor deposits. Although

the Pfandbrief Act of 2005 has effectively

eliminated the principle of specialist banks

by enabling issuers thereof to engage in

other activities,49 this has failed to stimulate

the market in light of lacklustre mortgage

developments.

Prepared by R.Weber.47

Several caveats should be borne in mind. On the basis of 48

available data, it is not possible to distinguish between residential

and commercial mortgage covered bonds. Country shares and

amounts outstanding could be biased by the fact that international

entities may issue covered bonds through subsidiaries in foreign

countries, in order to take advantage of cross-border intra-group

funding opportunities. Indeed, data are available by country of

issuance, not by nationality of the issuer.

A special license is nevertheless still required.49

Page 49

48
ECB

Occasional Paper No 101

March 2009

The surge in Spanish issues also dwarfed

substantial bond issuance in other euro area

countries. This held particularly true of France,

where housing market dynamics had been

strong and mortgage covered bonds outstanding

roughly tripled, although the country’s share in

the euro area total only increased by 6 percentage

points to 16%.

Regarding the importance of legal and regulatory

frameworks, it is necessary to distinguish

between international and country-specifi c

developments. At the international level,

Article 22(4) of the Council Directive 85/611/

EEC of 20 December 1985 on the coordination

of laws, regulations and administrative provisions

relating to undertakings for collective investment

in transferable securities (UCITS) spells out that

such entities can invest up to 25% (rather than

the usual 5%) of their assets in covered bonds of

a single issuer, if the latter meets the criteria set

out in Article 22(4). Moreover, if certain

requirements are fulfi lled, covered bonds benefi t

from lower credit risk weightings under the EU

Capital Requirements Directive (CRD) 50 that

was adopted in 2006.

As for the country-specifi c frameworks, they

can be based either on special laws or on

general legislation. Following the trend towards

frameworks based on special laws, covered bond

issuance has gained impetus. However, special

legislative frameworks are still fairly recent

in many countries, while only two countries

(Belgium and Cyprus) have not yet adopted any

special covered bond legislation (see Table 4).

The Dutch case is of special interest; before

adoption, in 2008, of the framework based on

special laws, issuance was based on contractual

arrangements under civil law.

However, legislation alone is not enough to

promote covered bond issuance. Austria, for

instance, has a long-established legal framework

that goes back as far as 1899, but issuance

remains subdued. In Luxembourg and Malta, the

presence of a strong deposit base has held back

the development of the mortgage covered bond

market; moreover, the limitations of the Maltese

capital market further discourage bond issuance.

In Slovenia, issuance has been obstructed by

the small size of the portfolio of eligible cover

assets, as well as by other impediments of a

more structural nature.

Each national legal and regulatory framework,

in particular as regards the level of investor

protection, has a major impact on the credit

ratings of the bonds issued under that

jurisdiction. The relative attractiveness of the

national legislation therefore also has a strong

bearing on investor demand. Moreover, as

more and more countries enter the market by

adopting a legislative framework, the potential

investor base is broadened and thereby

provides further impetus to the development of

the market.

Directive 2006/49/EC of the European Parliament and of the 50

Council of 14 June 2006 on the capital adequacy of investment

fi rms and credit institutions (recast).

Chart 15 Mortgage covered bonds outstanding,
broken down by country of issuance

(EUR millions)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2007

Spain

Germany

France

Netherlands

Ireland

Portugal

Finland

Austria

Luxembourg

2003 2004 2005 2006

Sources: NCBs and ECBC.

Page 96

95
ECB

Occasional Paper No 101

March 2009

EUROPEAN

CENTRAL BANK

OCCASIONAL

PAPER SERIES

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95 “Financial stability challenges in candidate countries managing the transition to deeper and

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96 “The monetary presentation of the euro area balance of payments” by L. Bê Duc, F. Mayerlen

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97 “Globalisation and the competitiveness of the euro area” by F. di Mauro and K. Forster,

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99 “The ECB and IMF indicators for the macro-prudential analysis of the banking sector: a

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100 “Survey data on household fi nance and consumption: research summary and policy use”

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Page 97

by the Eurosystem
Household Finance and
Consumption Network

Survey Data on

HouSeHolD

Finance anD

conSumption

reSearcH Summary

anD policy uSe

occaS ional paper Ser i e S
no 100 / January 2009

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