EV Services Mortgage Markets

EV Services

MortgageMarkets

2020

European Conservatives and Reformists (ECR) Party is Europe’s leading Conservative movement. Since our foundation in 2009, we have become one of Europe’s most important political movements. With more than 40 political parties and active representation in the European Parliament, Council of Europe, Committee of Regions and NATO Parliamentary Assembly.

We are united by our centre-right values, as expressed in the Reykjavik Declaration. The ECR Party is dedicated to individual liberty, national sovereignty, parliamentary democracy, private property, limited government, free trade, family values and the devolution of power.

These values underpin our politics, including our vision for a reformed European Union. Europe stands at a crossroads and the ECR Party’s agenda for reform has never been more relevant than it is today. Join our movement, and help us advance a Europe – and a world – of free peoples, free nations and free markets.

ECR Party is formerly known as ACRE PPEU. Registered in Belgium as a not-for-profit organisation and partially funded by the European Parliament. Sole liability rests with the author and the European Parliament is not responsible for any use that may be made of the information contained therein.ecrparty.eu @ECRparty @ECRparty @ECRparty

ECR Party ecrparty.eu @ECRparty

CONTENTS

INTRODUCTION

MORTGAGE MARKETS

MORTGAGE MARKETS: DIFFERENCES BETWEEN EUROPEAN COUNTRIES

THE MORTGAGE CREDIT DIRECTIVE

THE SPANISH ACT ON REAL ESTATE CREDIT AGREEMENTS

CONCLUSIONS

ANNEX: MORTGAGE MARKET IN DIFFERENT EU COUNTRIES

7

9

17

21

29

39

40

1

2

3

4

5

6

L. EscobarS. SuárezM. LucasN. González

EV Services is a young Spanish company, formed by a multidisciplinary team of economists, lawyers, architects, engineers and IT experts with more than fifteen years’ experience in the relevant industries. Among many other services and based on our experience in developing statistical models for explanation and prediction of market trends, EV Services provides consultancy solutions for many various purposes. Our team is qualified to carry out sophisticated and high-quality reports on any type of property, from intangibles to real estate, including businesses, plant and equipment or financial instruments. We gather market data out of reliable sources, take market trends into account and have in-depth understanding of the relevant industry’s situation, from agriculture and mining to data science, including manufacturing, construction, real estate, financial services (be it banking, insurance or investment) or tourism, retail and leisure.

Leandro Escobar MRICS Registered Valuer, REV, EFA, Panamerican Valuer and IAAO member, is a partner at EV Services. He is a university lecturer in statistics, econometrics, finance and valuation. He is also the Secretary General of ATASA (the Spanish association of valuation firms); on behalf of ATASA, he serves as a permanent representative to the IVSC, TEGoVA, UPAV, IPMSC, IESC and IAAO. A lawyer and economist, he has almost 20 years’ professional experience as a court expert. He also appears as the author or co-author of more than 20 published books and research papers on his fields of expertise.

AUTHORS

EV ServicesMortgage Markets

6 7ECR Party ecrparty.eu @ECRparty

1. Introduction

1 TUPY, M. L. “The European Union: A Critical Assessment”. Economic Development Bulletin No 26. June 2016.

2 TILFORD, S et al. “Has the euro been a failure”. Centre for European Reform. January 2016.

3 Commission of the European Communities. White Paper on the Integration of EU Mortgage Credit Markets. December 2007.

4 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010.

The European Union model, which is marked by overregulation and supra-national empowerment, seems increasingly out of place in today’s world. “The EU claims to have brought about prosperity and stability in Europe, but those claims are increasingly at odds with reality. Europe is becoming worryingly unstable and is falling behind other regions in terms of economic growth”1.

For example, the euro was supposed to have led to increased growth, lower unemployment, and greater competitiveness and prosperity. However, there is “a broad consensus that the euro has been a disappointment: the currency union’s economic performance has been very poor, and rather than bringing EU member-states together and fostering a closer sense of unity and common identity, the euro has divided countries and eroded confidence in the EU2.

Mortgage markets, which represent a significant part of Europe’s economy, have not escaped from the overregulating aim of the European Union. In the Commission’s words, “the integration of EU mortgage credit markets is central to a more efficient functioning of the EU financial system both at the wholesale and the retail level as well as the EU economy as a whole”3.

This report deals with mortgage markets, and how they are one of the many markets regulated by the European Union (EU) where the objectives of regulation have not been achieved.

Indeed, the Mortgage Credit Directive4 is the culmination of a process of more than ten years “of identifying and assessing the impact of barriers to the internal market for credit agreements relating to residential immovable property”.

Section 2 of this report describes mortgage markets and their relevant features, their evolution, as well as the relation of mortgage markets with the global financial crisis that took place in the last part of the 2000s and the early years of the 2010s, which shook Europe strongly.

Section 3, together with Annex 1, enumerates the main attributes of the mortgage markets of the different European countries, where there is still a long way to integration, more than four years after the passing of the Mortgage Credit Directive.

Section 4 deals with the history and provisions of the Mortgage Credit Directive.

Section 5 focuses into the specific case of Spain, where the Mortgage Credit Directive was transposed into internal law in 2019.

Section 6 includes the conclusions of this report.



2. Mortgage markets

2.1. Primary and secondary mortgage markets

5 It is worth it to analyse the etymology of the word “mortgage”. According to OxfordLanguages, it comes from two different Latin words: “mort” (meaning “dead”, through old French) and “gage” (which means pledge). A mortgage would then be a dead pledge. The dead part of the mortgage does not refer to any person; instead, it refers to the idea that the pledge died once the loan was repaid, and also the idea that the property was ‘dead’ (or forfeit) if the loan was not repaid (HUR, J. “History Of The 30 Year Mortgage – From Historic Rates To Present Time”. BeBusinessEd, 2016).

6 ESCOBAR, L.. “Herramientas comparadas de medición y gestión del riesgo inmobiliario”. XXV UPAV Congress. 2010.

7 RAYNES, S. and A. RURLEDGE. “The Analysis of Structured Securities”. Oxford University Press (2003). Page 103.

8 TEGoVA. European Valuation Standards 2016. Page 105.

9 TEGoVA. Op. cit.

Essentially, a mortgage is a debt instrument secured by a collateral. The Cambridge Dictionary defines it in more plain words: “an agreement that allows you to borrow money from a bank or similar organization, especially in order to buy a house, or the amount of money itself”.

The primary mortgage market can be defined as the market tranche where borrowers obtain a mortgage5 credit from a primary lender (banks, mortgage brokers, mortgage bankers, and credit unions)6.

Primary lenders can keep the loans originated by themselves in their balance sheet, or they can sell those loans in the secondary mortgage market, which is the tranche where investors can buy and sell previously-issued mortgage loans through bonds or securities collateralised by the value of mortgage credit7.

Hence, property securitisation can be defined8 as the

process of converting property-related assets into tradable paper securities “by pooling debt or equity interests in real property (such as mortgage loans) into a form that can be sold with the income stream from those interests then assigned to investors. The creator of the asset (typically a lending institution) transfers the interests to a special purpose vehicle (SPV) which then issues securities into the capital markets where they will usually be purchased by financial institutions (such as investment funds, insurance companies, pension funds or credit institutions)”.

Mortgage-backed securitisation has become one of the most important sources of financial instruments in capital markets and a means for lending institutions and others involved in property to fund themselves9.

As the following graph shows, it is the main mechanism which puts together real estate markets and financial markets (specifically, capital markets).

Source: ESCOBAR, L. “Herramientas comparadas de medición y gestión del riesgo inmobiliario”. XXV UPAV Congress. 2010.



Standardisation and the existence of an active primary market are of course important prerequisites for the development of a successful secondary mortgage market: “standardisation of loan applications, credit policy, property valuation and loan underwriting is particularly important to lower

10 LEA, M.J. “The Role of the Primary Mortgage Market in the Development of a Successful Secondary Mortgage Market”. Inter-American Development Bank (2000). Foreword.

11 “The ancient Hindu script, Code of Manu, condemns deceptive and fraudulent mortgage practices. The ancient civilizations of Greece and Rome created a market system for mortgages based on the ancient Talmudic scriptures of Judaism. This Jewish influence continued to impact the mortgage industries of many different societies, such as the British Empire in the English Common Law” (HUR, Op. cit., 2016).

12 WHITEHEAD, C. et al. “The impact of the financial crisis on European housing systems: a review”. Swedish Institute for European Policy Studies. 2014.

13 Essvale Corporation Limited. “Investment Banking Applications. How IT Supports the Business of Investment Banking”. Essvale, 2011.

transaction and processing costs. Moreover, if a regional approach to mortgage intermediation is adopted, primary market standardisation becomes paramount, and additional challenges may include managing currency and risk and integrating monetary policy”10.

2.2. Origin and evolution of the mortgage markets

While mortgages of some sort have existed throughout history, the current mortgage industry looks very different from the past11.

The 2007-2013 global financial crisis revealed that housing markets in the EU are important causes of instability. Authors recognise that housing market

adjustments and government responses have been different from country to country12: “[a]s an example, there was considerable divergence in experience between countries who mainly had high debt to GDP ratios and those that had reasonably consistent price increases”. This shows that there is no effective integration in these industries within the EU.

2.3. The 2007 crisis

The origins of the 2007 financial meltdown need to be looked for at the beginning of the century.

“Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times. In 2001, the US economy experienced a mild, short-lived recession. Although the economy nicely withstood terrorist attacks, the bust of the dot-com bubble and accounting scandals, the fear of recession

really preoccupied everybody’s minds”13.

To keep recession away, the Federal Reserve lowered the Federal funds rate dramatically - from 6.5% to 1.75% in just 20 months (from May 2000 to December 2001).

That reduction created a period of strong GDP growth worldwide.

Source: Bank of Spain. “Report on the Financial and Banking Crisis in Spain, 2008-2014”. BdE, 2017.

And it also created a flood of liquidity, which “found easy prey in restless bankers—and even more restless borrowers who had no income, no job and no assets”14 [the so-called ninjas].

Easier credit gave a lot of people the possibility to get access to the property market; “for them, holding the hands of a willing banker was a new ray of hope”15.

14 Essvale Corporation Limited. Op. cit., 2011.

15 Essvale Corporation Limited. Ídem.

16 Essvale Corporation Limited. Ídem.

Basic Economic theory tells that an increase in demand provokes an increase in price. Hence, property prices went up and therefore a higher amount of credit was needed to afford the new levels of prices, and that credit was granted too. That environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look “like a new rush for gold”16.


By June 2003, interest rates had dropped to 1%, while general inflation was contained, and soon capital

requirements for the biggest US investment banks were significantly relaxed.


At some stage, property prices went so high that they got out of reach for many market participants, hence reducing the demand and… basic Economic theory

tells that, if demand shrinks, prices go down. Because of the high prices, some of the ninja borrowers even began to default at that stage, too.



And then was when panic got in; the high-risk MBSs were revealing themselves as “junk bonds” or “toxic assets” – as if they were poison. Nobody wanted to invest in them anymore and their value was correspondingly put in question. But many banks and investment funds had already invested in those securities; in fact, almost each and every one of the banks of the world had some of those assets in their portfolios. What they were not going

17 ESCOBAR, L. “Regulation of the appraisal activity in Europe for mortgage lending purposes”. Speech to the Azeri Parliament. Baku, 2011.

18 GOPINATH, G. “The Great Lockdown: Worst Economic Downturn Since the Great Depression”. IMF, April 2020.

to do was to disclose at which level they were in. As a consequence, banks, knowing that the rest of the industry operators were as much in as they were, began distrusting each other and not lending to each other. Thus, there was a high increase of the interbanking interest rates, which are the basis for the majority of mortgage loans interest calculations. And that provoked also the biggest credit crunch ever in recorded history17.


2.4. The Great Recession

And that was the beginning of the so-called global financial crisis or Great Recession, the most serious financial crisis since the Great Depression of the 1930s. It sparked a global recession (felt particularly in North American and the Eurozone) and at the time was

considered the reason behind the single worst global recession of the 21st century, though it has been ultimately overshadowed by the Great Lockdown of 202018.

Source: GOPINATH, G. “The Great Lockdown: Worst Economic Downturn Since the Great Depression”. IMF, April 2020.

As already stated, the crisis began in 2007 with a depreciation in the subprime mortgage market in the United States, and it developed into an international banking crisis with the collapse of the investment bank Lehman Brothers in September 200819.

19 See, e.g.: https://www.nytimes.com/2008/09/11/business/11lehman.html?_r=1&hp&oref=slogin

20 More on the euro crisis in the next section.

21 COPELOVITCH, M. et al. “The Political Economy of the Euro Crisis”. Comparative Political Studies 49 (7), 2016.

22 Baldwin, R. et al. “The Eurozone Crisis. A Consensus View of the Causes and a Few Possible Solutions”. CEPR, 2015.

Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn, the Great Recession.


The Asian markets (China, Hong Kong, Japan, India, etc.) were immediately impacted and volatilised after the US sub-prime crisis. The European debt crisis, a crisis in the banking system of the European countries using the euro, followed later20.

In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US following the crisis to “promote the financial stability of the United States”.

The Basel III international regulatory framework for banks was adopted by countries around the world starting 2011.

However, the Directive on Mortgage Credit, which was intended to harmonise mortgage lending practices throughout Europe, did not arrive until 2014, once the crisis had passed through. Once again, a late and ineffective step in the alleged way of integration.

2.5. The European Debt Crisis

One of the main consequences of the Great Recession was the European Debt Crisis21. Some other causes included the real estate market crisis and property bubbles in several countries. Of course, the different causes of this crisis were not the same depending on the country.

To date, there has been substantial economic analysis of the crisis in the Eurozone, which has recently

culminated in the emergence of a widely shared consensus on its causes22.

“The Eurozone crisis is considered in official circles essentially as a sovereign debt crisis. This is partially due to the fact that the crisis started with the sovereign debt problems of Greece at the turn of 2009/10 (and Greece remains the only unresolved issue in 2015). Moreover, European policymakers had



to deal mostly with the problems of member states which had problems refinancing their public debt, losing sight of the root causes of these problems”23.

The Euro crisis was in origin a so-called Balance-of-Payments (BoP) crisis. “The BoP is an accounting identity stating that net cross-border flows of goods and services – the current account – must be matched by net flows of financial claims (including those arising from portfolio shifts and from direct

23 GROS, D. “The Eurozone crisis and foreign debt”, in Baldwin, R. et al. (2015), op. cit.

24 CECCHETTI, S. and K. SCHOENHOLTZ. “Sudden stops: A primer on balance-of-payments crises”. VOX, CEPR Policy Portal, 2018.

25 GROS, D. (2015). Op. cit.

26 CECCHETTI, S. and K. SCHOENHOLTZ (2018). Op. cit.

27 FERNÁNDEZ, C. and P. GARCÍA PEREA. “The Impact of the Euro on Euro Area GDP per capita”. BdE, Documentos de Trabajo N.º 1530 (2015).

investment) – the financial account – . Simply put, if one country is importing more than it is exporting from another country, it must find a way to finance that difference”24.

One simple observation proves the key role of the BoP origin of the crisis: “no country which had in 2008 a current-account surplus and/or a positive net external asset position had to endure lasting financial stress – irrespective of the level of its public debt”25.

Source: GROS, D. “The Eurozone crisis and foreign debt”, in Baldwin, R. et al. “The Eurozone Crisis. A Consensus View of the Causes and a Few Possible Solutions”. CEPR, 2015.

“At the start of the euro in 1999, the periphery of the euro area looked like a particularly attractive place to invest. Inflation had fallen dramatically, currency risk seemed to disappear, and capital per worker was relatively low. The resulting optimism of core-country investors led to a large expansion in the gross and net cross-border supply of credit – including short-term financing – with negligible compensation for default risk (let alone for a possible exit from the euro area). With funds cheap and plentiful, credit flowed into government finance (for example, in Greece and Portugal) and into real estate (in Ireland and Spain). This widened the periphery’s current account shortfall (see chart),

without providing any real basis for future exports that would restore external balance” 26.

Indeed, there is proof that the euro did not bring the expected jump to a permanent higher growth path27: during the first couple of years of the monetary union, aggregate GDP per capita rose slightly above what would have been a scenario without the euro; but since the mid2000s, those gains have completely disappeared. Central European countries did not seem to obtain any gains or losses from the adoption of the euro, whereas some peripheral countries registered positive gains only during the expansionary years, while others quickly lagged behind.

By the end of 2009, numerous Eurozone member states were not able to refinance their government debt without the assistance of third financial institutions.

The European paramount debt crisis reached its

28 NELSON, R.M. “The Eurozone Crisis: Overview and Issues for Congress”. Congressional Research Service, 2012.

29 NELSON, R.M. Op. cit. Bold letters are ours.

30 CRAFTS, N. “The Eurozone: If only it were the 1930s”. VOX. CEPR’s Policy Portal. http://www.voxeu.org: CEPR.

31 Denmark, Norway, Sweden and the UK, all of which left the gold standard and devalued in September 1931.

32 Belgium, France, Italy, Netherlands and Switzerland, all of which stayed on the gold standard until autumn 1936 apart from Belgium which exited in March 1935.

peak between 2010 and 2012. Higher than expected deficit levels eroded investor confidence causing bond spreads to rise to unsustainable levels. Fears quickly spread that the fiscal positions and debt levels of a number of Eurozone countries were unsustainable28.

Source: NELSON, R.M. “The Eurozone Crisis: Overview and Issues for Congress”. Congressional Research Service, 2012.

“European leaders and institutions have pursued a set of unprecedented policy measures to respond to the crisis and stem contagion, particularly to Italy and Spain, the third- and fourth-largest economies in the Eurozone. These policy measures, discussed in greater detail below, have failed to reassure markets for any sustained period of time, however, as the crisis has cycled through periods of relative calm followed by

intense market pressure” 29.

The European Debt Crisis caused more lasting economic damage in Europe than the Great Depression of the 1930s30. The figure below compares the growth path of the Eurozone since 2007 with two groups of countries, namely the sterling bloc31 and the gold bloc32 after 1929.

Source: CRAFTS, N. “The Eurozone: if only it were the 1930s”.



3. Mortgage markets: differences between European countries

3.1. Basic disparities

33 https://ec.europa.eu/eurostat/statistics-explained/index.php/Housing_statistics

34 Cfr Housing Finance Information Network (www.hofinet.org).

The composition of housing markets, mortgage loans and hence mortgage markets varies significantly within European countries.

According to data published by Eurostat33, home-ownership rates, with an average of 70% in 2017, range from 51.4% in Germany to 96.8% in Romania.

There are also huge differences in terms of the existence of an outstanding mortgage for the financing of the relevant home, ranging from more than 80% of the cases in the Netherlands to less than 2% in Romania.

Source: Eurostat

Those differences derive not only from demographical and macroeconomic variances between different countries, but also from the housing finance system itself, specifically the

housing finance policy. There are substantial dissimilarities regarding the relevant legal and regulatory framework, housing finance subsidies and property and mortgage-related taxes34.



As regards the legal and regulatory framework, the main issue is the basis of the legal system itself (civil or common law), as well specific law governing mortgages, both in terms of origination (registration and transfer of titles, enforcement of liens, or legal constraints on mortgage product types and mortgage features) and securitisation (issuance of mortgage-back securities).

In relation to housing finance subsidies, there are also differences regarding both financial institutions (special government lines of credit, government supported liquidity facilities, tax funds for mortgage lending or tax breaks on mortgage backed securities) and households (interest rate subsidies, buy-down of monthly payments, down-payment subsidies, subsidies to savings for mortgage loans or mortgage payments deductibility from income tax).

Finally, property and mortgage-related taxation is also quite different from country to country, including property ownership taxes, property transaction taxes, mortgage transaction taxes, taxes on mortgage interest payments, or capital gains tax on property, as well as potential tax benefits on rental properties. In the Commission’s words:

35 COMMISSION OF THE EUROPEAN COMMUNITIES. Idem.

36 The study can be found at the following link: http://www.finpolconsult.eu/mediapool/16/169624/data/Housing_Finance/Europe/Low_Duebel_Sebag-Montefiori_EMF_Financial_Integration_03.pdf.

37 The aim of the Lisbon Strategy, launched in March 2000 by the EU heads of state and government, was to make Europe “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion” (taken from the Presidency Conclusions of the Lisbon European Council held on 23 and 24 March 2000). As already seen in the previous chapter, that was mostly the opposite of what was actually achieved.

38 COMMISSION OF THE EUROPEAN COMMUNITIES. Op. cit, 2005.

“These differences in mortgage and housing markets reflect Members States’ attitude to regulation, economic history and cultural factors. Differences in outcomes are related to factors such as direct government intervention in housing markets (e.g. by means of fiscal incentives to home-ownership), prudential regulation (e.g. regulatory ceilings to Loan to Value Ratios), the level of competition in mortgage markets, housing rental market conditions (including the availability of social housing) and the perceived risk associated with mortgage lending (in particular, the costs and the time required to realise the collateral’s value in the event of default)” 35.

The Annex to this report includes a glimpse on the main features of mortgage markets in each of the EU28-countries, where some of the most relevant disparities can be observed.

There does not seem to have been a lot of progress since the Study on the Financial Integration of European Mortgage Markets drafted by Mercer Oliver Wyman for the European Mortgage Federation back in 200336, which came to the conclusion that mortgage markets of the EU countries were individual markets with their own characteristics and economic drivers.

3.2. Pursue of integration

The aforementioned disparities amongst European countries has been used for considering the intervention by EU institutions in the EU mortgage credit markets a key aspect to meeting the ‘Lisbon’ objectives aimed at enhancing EU competitiveness37.

“It forms a very important element of the Commission’s policy for the integration of financial services in general and retail financial services in particular. A more efficient and competitive mortgage credit market that could result through greater integration could contribute to the growth of the EU economy. It has the potential to facilitate labour mobility and to enable EU consumers to maximise their ability to tap into their housing assets, where

appropriate, to facilitate future longterm security in the face of an increasing ageing population” 38.

The Commission stated that any action that might be taken to integrate these markets would be aimed at making them more efficient and competitive for the benefit of all. “This could be achieved by ensuring that mortgage credit can be demanded and offered with limited hindrance throughout the EU and that market completeness, product diversity, and price convergence are enhanced”.

As treated in the next chapter, the actions taken to integrate the EU mortgage markets led to the passing, in 2014, of the Mortgage Credit Directive.



4. The Mortgage Credit Directive

4.1. Main features of the Mortgage Credit Directive

39 WILLIAMS, S. “Implementing the Mortgage Credit Directive”. Wolters Kluwer. Retrieved 12 June 2016.

40 EUROPEAN COMMISSION. “Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010”.

41 CASE, K.E.; R.J. SHILLER and A.K. THOMPSON. “What Have They Been Thinking? Homebuyer Behavior in Hot and Cold Markets”. Brookings Papers on Economic Activity. 2012 (Fall): 265–315. doi:10.1353/eca.2012.0014.

42 ANDERSON, Miriam. ARROYO, Esther. “The impact of the mortgage credit directive in Europe: Contrasting views from member states”. December 2017.

43 WILLIAMS, S. “Implementing the Mortgage Credit Directive”. Wolters Kluwer. Retrieved 12 June 2016.

44 EUROPEAN COUNCIL OF REAL ESTATE PROFESSIONS. “A guide to Directive 2014/17/EU on Credit Agreements for Consumers Relating to Residential Immovable Property (the “Mortgage Credit Directive”)”. Brussels, 2014.

45 EUROPEAN COUNCIL OF REAL ESTATE PROFESSIONS. Op. cit.

The Mortgage Credit Directive (MCD) is a piece of European legislation for the regulation of first- and second charge mortgages and consumer buy-to-let (CBTL) lending39.

It was adopted by the European Commission on 4 February 2014 and Member states had to transpose the regulations in their national law by March 2016.

The Directive introduces a European framework of conduct standards for firms selling residential mortgages. It was introduced as implementation of the G20 commitment to establish principles on sound underwriting standards, as well as to improve the conditions for the establishment of an internal market in the area of credit agreements relating to residential immovable property; laying down rules for creditors, credit intermediaries and appointed sales representatives40.

Furthermore, the MCD was designed as a preventive measure to avoid irresponsible lending and borrowing behaviour by market participants, which was one of the main causes of the 2007-2008 crisis41.

As already stated in chapter 2 of this report, the financial and economic crisis that marked the beginning of the century has had a devastating effect on the property and mortgage markets in many Member States of the European Union. Despite this, the European legislator took its time to respond42.

The main goal of the MCD is to create a Union-

wide mortgage credit market, with a high level of consumer protection43.

It establishes common rules to inform customers about the real costs of a mortgage, to enable customers to compare between competitors and to reflect on the mortgage contract before contract closure. It introduces measures which aim to better protect mortgage customers from unfair and misleading practices44.

The MCD applies to credit agreements that are secured by a residential mortgage and to credit agreements that have the purpose to acquire or retain property rights in land or in an existing or projected building45.

However, the Directive is not applicable to:

· Equity release credit agreements where the creditor contributes a lump sum, periodic payments or other forms of credit disbursement in return for a sum deriving from the future sale of a residential immovable property or a right relating to residential immovable property, and will not seek repayment of the credit until the occurrence of one or more specified life events of the consumer, as defined by Member States, unless the consumer breaches his contractual obligations which allows the creditor to terminate the credit agreement.

· Credit agreements where the credit is granted by an employer to his employees as a secondary activity



where such a credit agreement is offered free of interest or at an APRC lower than those prevailing on the market and not offered to the public generally.

· Credit agreements where the credit is granted free of interest and without any other charges except those that recover costs directly related to the securing of the credit;

· Credit agreements in the form of an overdraft

46 EDMONDS, T. “Mortgage Credit Directive”. Briefing paper number 07453. House of Commons Library, 2016.

47 COMMISSION OF THE EUROPEAN COMMUNITIES. “Green paper - Mortgage Credit in the EU (presented by the Commission”. Brussels, 19.7.2005.

48 And detailed in the Annex.

facility and where the credit has to be repaid within one month;

· Credit agreements which are the outcome of a settlement reached in court or before another statutory authority.

· Credit agreements which relate to the deferred payment, free of charge, of an existing debt and which do not fall within the scope of the Directive.

4.2. History of the MCD: from the Green Paper to the Directive

The EU has had a very long-standing ambition to extend the concept of a single market to financial services. This goes back to the Financial Services Action Plan first published in 1999. At its heart was the vision that European citizens would find it as easy to open a bank account in another member state to their own, or get a mortgage with a foreign lender as the building society in their own high street46.

As already stated, in March 2003, the Commission launched a process of identifying and assessing the impact of barriers to the internal market for credit agreements relating to residential immovable property47.

On 18 December 2007, it adopted a White Paper on the Integration of EU Mortgage Credit Markets. The White Paper announced the Commission’s intention to assess the impact of, amongst other things, the policy options for pre contractual information, credit databases, creditworthiness, the annual percentage rate of charge (APRC) and advice on credit agreements.

In view of the problems brought to light in the financial crisis and with a view to ensuring an efficient and competitive internal market which contributes to financial stability, the Commission proposed in March 2009 measures with regard to credit agreements relating to residential immovable property, including a reliable framework on credit intermediation, in the context of delivering responsible and reliable markets for the future and restoring consumer confidence.

In accordance with the Treaty on the Functioning of the European Union (TFEU), the internal market comprises an area without internal frontiers in which the free movement of goods and services and the freedom of establishment are ensured.

The development of a more transparent and efficient credit market within that area is, in the Commission’s words, vital in promoting the development of cross-border activity and creating an internal market for credit agreements relating to residential immovable property.

As seen above on chapter 3 of this report48, there are substantial differences in the laws of the various Member States with regard to the conduct of business in the granting of credit agreements relating to residential immovable property and in the regulation and supervision of credit intermediaries and non-credit institutions providing credit agreements relating to residential immovable property.

“[…] Such differences create obstacles that restrict the level of cross-border activity on the supply and demand sides, thus reducing competition and choice in the market, raising the cost of lending for providers and even preventing them from doing business.

[…] The financial crisis has shown that irresponsible behaviour by market participants can undermine the foundations of the financial system, leading to a lack of confidence among all parties, in particular consumers, and potentially severe social and economic

consequences. Many consumers have lost confidence in the financial sector and borrowers have found their loans increasingly unaffordable, resulting in defaults and forced sales rising. Although some of the greatest problems in the financial crisis occurred outside the Union, consumers within the Union hold significant levels of debt, much of which is concentrated in credits related to residential immovable property” 49.

Therefore, the aim of the MCD was to ensure that the Union’s regulatory framework in this area became robust and consistent with international principles.

That aim would involve making appropriate use of the range of tools available, which may include ratios which determine thresholds across which no credit would be deemed acceptable, such as loan-to-value (LTV), loan-to-income (LTI) and debt-to-income (DTI)50.

On another note, consumer credit had long been regulated in the EU, in particular by the Consumer Credit Directive 87/102/EEC, and more recently by its successor, the Consumer Credit Directive 2008/48 (CCD). Amongst other things, the CCD

49 EUROPEAN COMMISSION. Op cit.

50 In a recent paper, BASTO, GOMES and LIMA found out that “[a] permanent reduction of the LTV limit of impatient households in a small euro area economy leads to: (i) a long-run decline in bank lending to the private sector; (ii) a relatively small long-run contractionary macroeconomic impact; and (iii) a tightening of borrowing and economic activity in the short run which is less pronounced if the authorities phase-in the tightening of the LTV ratio. If the reduction in LTV ratios is observed across the euro area the long-run macroeconomic impact in each of the regions is larger but in the short run the recessionary impact is mitigated by the monetary policy response” [BASTO, R., S. GOMES and D. LIMA. “Exploring the implications of different loan-to-value macroprudential policy designs”, Journal of Policy Modeling, Volume 41, Issue 1, 2019. Pages 66-83.

51 McCANN FITZGERALD. “New Rules for Mortgage Credit and Property Related Loans”. 2016.

contains specific provisions on advertising concerning credit agreements for consumers as well as a list of standard information that must be included in an advert whenever certain conditions are met. However, the CCD only applies to consumer credit and does not cover other forms of credit such as mortgage products and services51.

Prior to the MCD, at EU level, consumer protection in the area of mortgage briefing credit was by way of Commission Recommendation 2001/193 on precontractual information to be given to consumers by lenders offering home loans. That Recommendation endorses a pan-European Voluntary Code of Conduct on Pre-contractual Information for Home Loans. Among other things, it entitles consumers to receive a personalised European Standard Information Sheet prior to the conclusion of the loan contract.

Nevertheless, the exclusion of mortgage credit and high-value credit agreements from the CCD’s scope means that there was a significant gap in EU consumer protection law applicable to property loans. The MCD seeks to remedy this.

4.3. Scope of the MCD

According to Mccann Fitzgerald, the MCD Regulations apply to certain types of credit agreement where the person to whom the credit is provided is a consumer. The definitions of both the terms “credit” and “consumer” are the same as those set out in the CCD regulations. Specifically, “credit” means a deferred payment, loan or other similar financial accommodation. For its part “consumer” means a natural person who is acting for purposes outside his or her trade, business or profession. Contracts concluded partially for non-consumer purposes will still fall within scope, as long as the consumer purpose is predominant. Once an agreement is a consumer credit agreement, the MCD regulations have a very broad scope and apply to any agreement:

• that is secured by a mortgage or by another comparable security on residential immovable property or secured by a right related to residential immovable property – there is no need for the agreement itself to relate to residential immovable property; or

• that has as its purpose to acquire or retain property rights in land or in an existing or projected building – there is no need for the building to be a residential building.

Buy-to-let loans and bridging loans are both in-scope. However, the MCD Regulations do not apply to certain equity release credit



agreements or other equivalent specialised products; home reversions which have comparable functions to reverse mortgages;

52 Specifically, on Annex II, which provides an ESIS Model including the following sections: 1. Lender, 2. Credit intermediary (where applicable), 3. Main features of the loan, 4. Interest rate and other costs, 5. Frequency and number of payments, 6. Amount of each instalment, 7 Illustrative repayment table (where applicable), 8. Additional obligations, 9. Early repayment, 10. Flexible features, 11. Other rights of the borrower, 12. Complaints, 13. Non-compliance with the commitments linked to the loan: consequences for the borrower, 14. Additional information (where applicable), and 15. Supervisor.

53 BAYLISS, J.; J. WARD and A. WILNE. “The implementation of the EU Mortgage Credit Directive”. Globe Business Media Group, 2015.

54 One of the only two corrections included in the “Corrigendum to Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010” refers to the name of the IVSC: the text published in the Official Journal of the European Union on 28 February 2014 stated “International Valuation Standards Committee”, whereas the official name had changed to “International Valuation Standards Council” in 2008, in compliance with the agreements taken in the San Francisco Meetings in Spring 2007, as summarised by Oleysa PEREPECHKO in “History of Development of International Valuation Standards Council” (IVSC, 2019), which can be found at https://www.ivsc.org/files/file/download/id/1833.

55 https://www.ivsc.org/about/members/our-members

56 https://www.ivsc.org/about/boards

lifetime mortgages, which do not involve the provision of credit; and certain niche credit agreements.

4.4. Precontractual information

Creditors must provide standard precontractual information for borrowers through the European Standard Information Sheet (ESIS) which is contained in the MCD regulations52. The purpose is to allow consumers to compare the credits available on the market, assess their implications and make an informed decision on whether or not to conclude a credit agreement.

The MCD regulations set out in what cases the ESIS must be provided to the consumer. In particular, it must be provided when a binding offer is made to the consumer, and the consumer then has a 30-day reflection period during which he or she may accept the offer at any time. During that period, the offer is binding on the creditor.

In many countries, there were already standardised documents in place which disclosed information with regards to the mortgage contract; the ESIS is aimed to extend and clarify those pieces of information.

For instance, included in the ESIS is a right of a seven-day reflection period, and information regarding the potential impact of interest rate changes. Furthermore, the ESIS sets out an Annual Percentage Rate of Charge (APRC) and provides example monthly payments in case the interest rate rises to the highest level of the preceding 20 years53. The ESIS must be issued in good time before the conclusion of the credit agreement, to enable the customer to compare and reflect on the mortgage contract and enable the customer to ask for third party advice.

4.5. Property Valuations

It is important to ensure that the residential immovable property is appropriately valued before the conclusion of the credit agreement and, in particular where the valuation affects the residual obligation of the consumer in the event of default.

Member States should therefore ensure that reliable valuation standards are in place. In order to be considered reliable, valuation standards should take into account internationally recognised valuation standards, in particular those developed by the IVSC, TEGoVA or RICS.

The IVSC (International Valuation Standards Council54) is an independent global standard setter for the valuation profession. Members of the IVSC include valuation professional organisations, valuation service providers, academic institutions, regulators and standards-setting bodies around the world. Currently there are more than 150 IVSC members, operating in 137 countries worldwide55.

The International Valuation Standards (IVS) are drafted by the IVSC’s independent technical boards56 and published following an extensive consultation

process. The current version57 was published in September 2019 and became effective on 31st January 2020. That is the reason why that set of standards is informally known as IVS 2020.

IVS 2020 comprises five general standards and six asset-specific standards.

The general standards set requirements for the conduct of all valuation assignments including establishing the terms of a valuation engagement (IVS 101), the valuation process (IVS 102), bases of value (IVS 104), valuation approaches and methods (IVS 105), and reporting (IVS 103).

The asset standards include requirements related to specific types of asset valuation, including background information on the characteristics of each asset type that influence value and additional asset-specific requirements regarding common valuation approaches and methods used. The assets standards cover: businesses and business interests (IVS 200); intangible assets (IVS 210); plant and equipment (IVS 300); real property interests (IVS 400); development property (IVS 410) and financial instruments (IVS 500).

IVS 2020 has been adopted by the RICS (the Royal Institution of Chartered Surveyors) and included in its Red Book58.

RICS is a professional body promoting and enforcing the highest international standards59 in the valuation, management and development of land, real estate, construction and infrastructure. There are RICS-qualified professionals in nearly 150 countries. RICS accredits 125,000 qualified and trainee professionals worldwide60.

57 https://www.ivsc.org/standards/international-valuation-standards/IVS

58 RICS professional standards and guidance, global. RICS Valuation - Global Standards. Effective from 31 January 2020.

59 RICS: Upholding Professional Standards. rics.org. Retrieved 2019-02-15.

60 The majority of accredited individuals are based in the United Kingdom with large numbers also in mainland Europe, Australia and Hong Kong (“Who we are and what we do”. rics.org. RICS. Retrieved 2 January 2018).

61 www.rics.org/uk

62 ESCOBAR, L. “Estudio comparativo IVS 2013 - EVS 2012”. UPAV, 2014.

63 Market value: “The estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without being under compulsion”. European Valuation Standards. (TEGoVA, 9th Edition - 2020)

64 Market value: the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”. International Valuation Standards. (IVSC - 2020)

The Red Book is issued by RICS as part of its commitment to promote and support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS members undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders61. Since its 2011 issue, it includes the IVS as a constituent part.

TEGoVA (The European Group of Valuers’ Associations) is a Belgian-law association the full members of which are valuation associations from EU countries, while associate members are associations from third countries. Its current membership includes 72 affiliates from 38 countries.

TEGoVA drafts and publishes the so-called European Valuation Standards, the current version of which came into force in 2016 (EVS 2016). In November 2020, the General Assembly ratified the publication of a new version (EVS 2020).

All of those sets of standards should be regularly amended to be adapted to the different real estate and financial markets. There are similarities between the standards, but also some differences62.

That is not the case for EVS 2020, which actually does not differ significantly on a conceptual and practical level from the IVS 2020 (previously published). As an example, the market value definition stated on EVS 202063 does not differ from the market value definition included in IVS 202064, what is more, consequences of its application are practically the same.

In fact, the requirements for the conduct of all valuation assignments stated in both sets of standards are very similar, which includes, amongst other



things, same guidance about the minimum content on valuation reports and same guidance on valuation approaches and methods.

The main technical discrepancy stated between the standards is that the EVS include the definition of the mortgage lending value (MLV) as a basis of value, with the following definition:

“The value of immovable property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property”.

Nevertheless, that definition is not even peaceful between the different countries of the European Union. The definition of MLV varies between countries and even within them due to differing practices of financial institutions. Valuers using

65 European Valuation Standards (TEGoVA, 9th Edition - 2020).

66 26th whereas of the MCD.

67 FERRETTI, Federico. “EU Competition Law, the Consumer Interest and Data Protection: The Exchange of Consumer Information in the Retail Financial Sector”. Springer, 2014.

68 FERRETTI, F. “The Never-Ending European Credit Data Mess”. BEUC, 2017.

69 McCANN FITZGERALD. “New Rules for Mortgage Credit and Property Related Loans”. 2016.

MLV must state which definition and/or legislation they are using.

The rest of the contents of EVS cannot be truly considered as standards, but rather a compilation of aspects of EU law over financial and real estate markets65.

According to the Commission, internationally recognised valuation standards contain high level principles which require creditors, amongst others, to adopt and adhere to adequate internal risk management and securities management processes, which include sound appraisal processes, to adopt appraisal standards and methods that lead to realistic and substantiated property appraisals in order to ensure that all appraisal reports are prepared with appropriate professional skill and diligence and that appraisers meet certain qualification requirements and to maintain adequate appraisal documentation for securities that is comprehensive and plausible66.

4.6. Credit databases

According to the MCD, to prevent any distortion of competition among creditors, it should be ensured that all creditors, including credit institutions or non-credit institutions providing credit agreements relating to residential immovable property, have access to all public and private credit databases concerning consumers under non-discriminatory conditions.

Each Member State shall in the case of cross-border credit ensure access for creditors from other Member

States to databases used in that Member State for assessing the credit-worthiness of consumers. The conditions for access shall be non-discriminatory67.

However, functions in the economy and activities of credit bureaus still differ significantly within the EU Member States, depending largely on national cultures and traditions, institutional arrangements, and the local economic and regulatory environment68.

4.7. Creditworthiness

A creditor must carry out a thorough assessment of a consumer’s creditworthiness before concluding a credit agreement for the purpose of verifying the likelihood that the consumer will meet their obligations under the credit agreement. The consumer must provide much of the relevant information

and the credit must specify clearly and simply the information that the consumer needs to provide and the applicable time frames69.

Member States should issue additional guidance on criteria and methods to assess a clients’

creditworthiness and they are encouraged to implement the Financial Stability Board’s Principles for Sound Residential Mortgage Underwriting Practices in this regard. It is deemed to be essential that the customers’ ability to refinance the credit agreement is assessed and verified before the conclusion of the credit agreement. The assessment should take into

70 Specifically, in Annex I.

71 EUROPEAN COUNCIL OF REAL ESTATE PROFESSIONS. Op. cit.

consideration all relevant factors that could impact a customers’ ability to repay the loan. Reasonable allowance should be made for future events that could negatively impact this ability. Furthermore, the possibility of an increase in residential immovable property value should not be taken as a sufficient condition for granting the credit.

4.8. APRC

The Directive includes a formula that should be used to present the customer the Annual Percentage Rate of Charge70. The APRC should allow customers to oversee the overall costs of the mortgage contract and to better compare between different offers71.

APRC means the total cost of the credit to the consumer, expressed as an annual percentage of the total amount of credit, where applicable, including the costs and equates, on an annual basis, to the present value of all future or existing commitments (drawdowns, repayments and charges) agreed by the creditor and the consumer.

The basic equation is as follows:

where:

X is the APRC

M is the number of the last drawdown

K is the number of a drawdown, thus 1 ≤ k ≤ m

Ck is the amount of drawdown k

tk is the interval, expressed in years and fractions of a year, between the date of the first drawdown and the date of each

subsequent drawdown, thus t 1 = 0

m′ is the number of the last repayment or payment of charges

l is the number of a repayment or payment of charges

Dl is the amount of a repayment or payment of charges

sl is the interval, expressed in years and fractions of a year, between the date of the first drawdown and the date of each

repayment or payment of charges.

Amongst other requirements, the calculation of the APRC shall be based on the assumption that the credit agreement is to remain valid for the period

agreed and that the creditor and the consumer will fulfil their obligations under the terms and by the dates specified in the credit agreement.

4.9. Advice on credit agreements

A key aspect of ensuring consumer confidence is the requirement to ensure a high degree of

fairness, honesty and professionalism in the industry, appropriate management of conflicts of interest



including those arising from remuneration and to require advice to be given in the best interests of the consumer72.

The consumer should receive information by means of the ESIS without undue delay after the consumer has delivered the necessary information on his needs, financial situation and preferences and in good time before the consumer is bound by any credit agreement or offer, in order to enable him to compare and reflect on the characteristics of credit products and obtain third party advice if necessary73.

72 EUROPEAN COMMISSION. “Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010. Para. (31)”.

73 Idem. Para. (44)”.

74 Ibidem. Para. (63)”.

Providing advice in the form of a personalised recommendation is a distinct activity which may but need not be combined with other aspects of granting or inter-mediating credit. Therefore, in order to be in a position to understand the nature of the services provided to them, consumers should be made aware of whether advisory services are being or can be provided and when they are not and of what constitutes advisory services. Given the importance which consumers attach to the use of the terms ‘advice’ and ‘advisors’, it is appropriate that Member States should be allowed to prohibit the use of those terms, or similar terms, when advisory services are being provided to consumers74.

5. The Spanish Act on real estate credit agreements

5.1. The long and winding road to transposition

75 National transposition measures communicated by the Member States concerning the MCD can be consulted at the following link:https://eur-lex.europa.eu/legal-content/EN/NIM/?uri=CELEX:32014L0017

76 Opinion of advocate General Tanchev delivered on 28 March 2019, concerning Case C-569/17, European Commission v Kingdom of Spain.

77 Idem.

Article 42(1) of the MCD provides that “Member States shall adopt and publish, by 21 March 2016, the laws, regulations and administrative provisions necessary to comply with this Directive. They shall forthwith communicate to the Commission the text of those measures”.

While the rest of Member States fulfilled the relevant compliance obligations75, the Spanish government did not do anything to comply with that requirement on time.

“Not having received by the transposition deadline of 21 March 2016 any notification from the Kingdom of Spain of the measures transposing Directive 2014/17 into Spanish law,

the Commission sent the Kingdom of Spain a letter of formal notice dated 26 May 2016, inviting it to do so”76.

The Spanish government responded, more than two months later, that it had not been able to transpose the Directive “on account of unusual circumstances relating to the interim nature of the Government, but that preparatory work on the draft bill transposing that directive had begun”77.

Indeed, the general election of December 2015 had led to a highly fragmented Parliament, marking the transition from a two-party system in national terms to a multi-party one.



Breakdown of representatives per party in the Congreso de los Diputados according to the 2015 General Election (source: Ministry of Interior Affairs).

After months of inconclusive negotiations and a failed investiture, no party was able to garner enough votes

to secure a majority, leading to a fresh election in 2016, which took place on 26th June.

Breakdown of representatives per party in the Congreso de los Diputados according to the 2016 General Election (source: elpais.es).

The results being also inconclusive, Pedro Sánchez′s ouster of the Socialist Party (PSOE)′s leadership on 1st October and an interim committee ordering abstention to PSOE representatives (15 of which voted against anyway) was needed for the People’s Party (PP) Mariano Rajoy’s reappointment as the prime minister.

In any event, the political situation per se, difficult as it might have been, does not explain why the Spanish government did not pass any pieces of legislation and/or regulations for two years, where they had a big enough majority to do so, putting the country at risk of being strongly fined.

Once the new government was already formed, by reasoned opinion dated 17 November 2016, the Commission stated that the Kingdom of Spain had still not adopted measures transposing the MCD, nor notified it of those measures. The Commission invited it to adopt the necessary measures within a period of two months from receipt of that reasoned opinion78.

That, in practical terms, meant that Spain had a new deadline for transposing the Directive: 17th January 2017. Once again, it took the Spanish government more than two months to answer; as stated on the Opinion of Advocate General Tanchev:

“[...] In its response to that reasoned opinion by letter dated 19 January 2017, the Kingdom of Spain informed the Commission of the progress made with the preliminary draft law transposing Directive 2014/17.

[...] Taking the view that the Kingdom of Spain had still not transposed Directive 2014/17 or given notification of any transposition measures, the Commission

78 Ibidem.

decided on 27 April 2017 to bring infringement proceedings before the Court”.

On 27 September 2017, the Commission initiated infringement proceedings against the Kingdom of Spain under Article 258 TFEU for failing to adopt the necessary measures to transpose, by 21 March 2016, the MCD or, in any event, failing to notify the Commission of those measures.

Far from what might be expected, this is not an isolated case where Spain has to face infringement proceedings, nor is it the only country that is pursued by the Commission. In fact, at the end of 2019, there were as many as 1,564 infringement cases open against the whole set of 28 EU countries existing at that date (almost the same as compared with the 1,571 in 2018). In any event, Spanish governments are so far second to none in terms of transposition infringements, since they provoked 85 of those cases (7% of the total number of cases). So much for European integration.

Source: EUROPEAN COMMISSION. “Monitoring the Application of European Union Law. 2019 Annual Report”. 2020.

For the specific case, the Commission asked the Court to impose, in accordance with Article 260(3) TFEU, a daily penalty payment of €105,991.60 on the Kingdom of Spain, starting on the date of delivery of the Court’s judgment establishing the infringement, for failing to fulfil its obligation to notify measures transposing Directive 2014/17.

That case was providing the Court with the opportunity to give a ruling, for the first time, on the interpretation and application of Article 260(3) TFEU.

However, after more than one and a half years of proceedings (which included a change in government in Spain following the first successful motion of no confidence under the 1978 Constitution), the relevant



Opinion of the Advocate General was published on 28th March 2019, i.e. 12 days after the publication of the Spanish Act on real estate credit agreements in the Boletín Oficial del Estado (Official State Gazette)79.

The Conclusion of the Advocate General’s Opinion was proposing the Court to:

“(1) declare that, by failing to adopt before 21 March 2016 the laws, regulations and administrative provisions necessary to comply with Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 or, in any event, by failing to notify the Commission of those provisions, the Kingdom of Spain has failed to fulfil its obligation under Article 42(1) of that directive;

79 Ley 5/2019, de 15 de marzo, reguladora de los contratos de crédito inmobiliario, published on BOE number 65, on 16 March 2019. Pages 26329 to 26399.

80 BANCO DE ESPAÑA. �The Law regulating real estate credit agreements”. Economic Bulletin 1/2019. Quarterly report on the Spanish economy. 2019.

81 Idem.

82 As stated on art. 14 of the Act, which includes provisions on transparency in the marketing of real estate loans.

83 Provision included in the Act by the 2007 amendment. Translation by Asociación Hipotecaria Española (http://www.ahe.es/bocms/images/bfilecontent/2009/05/13/6721.pdf?version=2).

(2) order the Kingdom of Spain, in accordance with Article 260(3) TFEU, to pay a daily penalty payment of EUR 105 991.60, with effect from the date of delivery of the judgment in the present case until the date that it notifies the Commission of the provisions necessary to comply with Directive 2014/17;

(3) order the Kingdom of Spain to pay the costs of the proceedings [...]”.

However, since the Act had been already passed and published, the day after it came into force (i.e. 17th June 2019), the Commission informed the Court of Justice of its own withdrawal of the case, in accordance with art. 148 of the Proceeding Regulations. Hence, the Court closed the case on 10th July 2019 with no measures against the Kingdom of Spain.

5.2. Most relevant aspects of the Act

The aforementioned Spanish Act on real estate credit agreements (the Act), which applies to new mortgage agreements and, in certain specific instances, to outstanding agreements, apart from transposing the MCD, also contains some other provisions not specifically envisaged in the Directive80.

The Act introduced of course the European Standardised Information Sheet, for the pre contractual phase of the credit granting process.

In this sense, the notary publics’ role of providing independent advice on the content of the agreement and of ensuring that the borrower has been provided with all the necessary information in due time, was also reinforced. In turn, in compliance the law, land registrars shall refuse to register agreement clauses which do not comply with legal provisions or which have been declared void by the Supreme Court81.

Moreover, the agency, notary and registration fees must now be paid by the lender, the borrower bearing only the appraisal fees and the cost of any copies requested of notarised documents82.

The reason behind the obligation of the borrower having to pay for the appraisal report is the portability established in article 3 bis I) of Act 2/1981, of 25th March 1981, on the regulation of the mortgage market:

“The credit institutions, even those with their own valuation services, must accept any valuation of a property provided by the client, provided that it is certified by a valuer approved in accordance with this Law and it has not legally expired, and without prejudice to that fact, the lender can carry out the checks that it deems relevant; under no circumstances can the cost thereof be passed on to the client which provides the certificate”83.

Also, a number of provisions were reinforced concerning the conduct and internal organisation of lending institutions84.

84 BANCO DE ESPAÑA (2019). Op. cit.

There are also some new provisions on maximum fees for early repayment and change of rate type:

Source: BANCO DE ESPAÑA (2019). Op. cit.

As shown by the Bank of Spain in the following graph, the higher fees in the case of fixed rate loans are justified by the financial loss lenders may incur in the event of early repayment:

“This loss arises when market interest rate falls below the mortgage rate, since the interest that the lender would have received during the residual life of the loan will be greater than the market return available on similar assets when the repaid funds are reinvested”.


This loss basically depends on the residual maturity of the mortgage, the (positive) differential between the mortgage rate and the market interest rate and, albeit to a lesser extent, the level of market returns.

The Act also regulates acceleration, namely the right of the lender to terminate the agreement in the event that the borrower has failed to pay a certain number of loan instalments, as a prior step to initiating



foreclosure proceedings. As shown by the Bank of Spain, the new regulations of the Act “will generally lengthen the time taken to recover past-due amounts in the case of non-performing loans”85.

85 Idem.

86Idem.

87 BANCO DE ESPAÑA (2019). Op. cit.

Lastly, the Act introduces incentives for the subrogation (change of institution) and novation (change in the terms and conditions of the mortgage with the same institution) of loans where a variable rate mortgage is converted into a fixed rate one.

5.3. Main goals aimed and first couple of actual outcomes

The approval and coming into force of the new Act was supposed to:

• Increase the level of information available.• Reduce legal uncertainty and litigiousness.• Reduce transaction costs.• Increase both domestic and cross-border

competition. However, even if the time elapsed since the transposition has not been long, and most of it has

passed through very special circumstances (the Covid-19 pandemic and the relevant economic crisis due to a general lockdown all over the world), general remarks can be stated mostly against the expected outcomes of the Act:

· The Spanish mortgage market used to be highly efficient in terms of time devoted to the transfer of property. This can be checked in the following table, which shows the typical number of days for the transfer of title in the biggest countries of the former EU28:

Source: own elaboration based on data from hofinet.org.

Spanish average transaction times were consistently low as compared to all of the peers. Nevertheless, the coming into force of the new Act includes at least ten more days to the process (which is the minimum time for the lender to provide the borrower with pre contractual information86).

· Similarly, the Bank of Spain points out that the delay in the recovery of past-due debt for lenders might result in a certain tightening of lending conditions,

especially those for debtors with a higher risk profile. In addition, the increase in the mortgage costs borne by lenders and, in particular, the maximum limits on early repayment fees in the case of fixed rate agreements may lead to a certain increase in the rates charged on new loans, especially in the case of those applied to the latter type of agreement87.

The following table shows a clear trend towards fixed rates vs variable rates during the last decade in Spain:

Source: ASOCIACIÓN HIPOTECARIA ESPAÑOLA. Boletín estadístico informativo. Q2 2020.

88Idem.

The greater ease with which variable rate loans can be converted into fixed rate ones based on the new Act might reinforce the shift in the stock of debt towards fixed rate agreements, reducing the high current

weight of variable rate mortgages88. That trend can also be observed graphically on the following time line chart, which gives monthly detail for the last three years:

Source: ASOCIACIÓN HIPOTECARIA ESPAÑOLA. Boletín estadístico informativo. Q2 2020.

According to the Bank of Spain, “[t]his would lead to a transfer of interest rate risk from debtors to creditors, who are in principle in a better position to manage such risk. However, the extent of this effect will depend on debtors’ risk/cost preferences, i.e. the extent to which, in order to secure a fixed rate of interest over the life of the loan, they are prepared to incur a higher expected cost, reflecting an interest-rate risk premium and a premium associated with the possibility of early repayment”.

· There is clear evidence that the spread between the reference rate (1y-Euribor) has been increasing for the last couple of years (especially since the MCD was passed), as is shown in the following graph (where the red line represents Euribor and the blue line represents the average rate in mortgage loans of more than three years maturity granted by Spanish credit institutions).



Source: own elaboration based on data published by the Bank of Spain.

89 There are currently three main merger transactions going on, in different stages of development: Caixa-Bankia, BBVA-Sabadell and Unicaja-Liberbank. The set of those three transactions would add up to some 70% of the whole mortgage market in Spain. See e.g. https://www.economiadigital.es/finanzas-y-macro/asi-quedara-el-mapa-bancario-espanol-tras-la-fusion-bbva-sabadell-3-bancos-dominaran-el-mercado_20106943_102.html.

This is a clear hint that credit institutions need to require more return as a balance with the higher level of risk they assume.

Hence, rather than reducing costs for customers, EU integration attempts in the field of mortgage markets seem to be producing the opposite effect.

And, for the moment being, Spain is not among the

countries with the highest levels of interest rates in most segments, but it could become one if trends remain the same.

The following chart represents box-and-whiskers graphs for the distribution of mortgage rates in the different countries of the euro area, split according to the initial rate fixation period (up to one year, one to ten years, and over ten years).


Finally, and in the words of the Bank of Spain, “there are still notable cross-country differences between the law applicable in this area”. Yet another goal, the main alleged goal, far from being achieved: rather

than having attracted more competition from other Member States, the current situation is leading to a greater level of concentration in the mortgage origination industry89.



6. Conclusions• This report focuses on mortgage markets, which

are highly important to the economy in general, because they put together real estate markets and financial markets, specifically capital markets, as well as from a social and sustainability point of view.

• Mortgage markets are split into origination (or primary market) and securitisation (or secondary market), where inherent risks are scattered into the broader financial markets.

• The set of crises spreading from 2007 to 2013 had a very important cause in the abuse of the mortgage-backed securitization system in the United States, which in turn affected many of the economies of the world, with a special emphasis in the EU countries.

• There are very significant differences regarding mortgage markets between EU countries, deriving not only from demographical and macroeconomic variances, but also from the housing finance system itself, specifically the housing finance policy.

• Disparities have been used for considering the intervention by EU institutions in the EU mortgage credit markets a key aspect to meeting the Lisbon objectives aimed at enhancing EU competitiveness.

• A process of more than ten years culminated with the adoption of the Mortgage Credit Directive in February 2014.

• The key points where the MCD looks for integration are precontractual information, property valuations, credit databases, creditworthiness, APRC and advice on credit agreements.

• The main goals of the MCD are to increase the level of information available, to reduce legal uncertainty and litigiousness, to reduce transaction costs, and to Increase both domestic and cross-border competition.

• The implementation of the MCD does not seem to have achieved any of those goals yet, but rather the opposite.

• The Spanish mortgage market seems to be a paradigm of lack of achievement of those goals: after a long and winding road to transpose the Directive, the coming into force of the Act on real estate credit has led so far to greater costs for both lenders and borrowers, longer periods of transaction management and lesser competition.



ANNEX Austria

The Austrian banking industry can be divided into several sectors. The biggest ones are the joint stock and private banks, the Raiffeisen sector and the saving banks. The joint stock banks, including the central institutions of the cooperative groups and savings banks, have Austrian as well as foreign shareholders.

In Austria, housing finance is mainly raised from banks and Bausparkassen, with the Bausparkassen being the leading residential mortgage lenders in the Austrian market, whereby the savings bank group (including their Bausparkassen branch) have the largest market share of the Austrian mortgage market. The mortgage market expanded since 2001 till 2007 quite rapidly. The mortgage debt to GDP ratio increased from 13.7 percent in 2001 to 23.9 percent in 2007.

Austria has a contractual savings system, the Bauspar system which is characterised by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised credit institutions, the Bausparkassen. The government grants an interest premium between 3 to 6 percent of the amount saved (up to a set maximum). The actual size of the

premium is readapted every year according to the interest rates on the Austrian capital markets (2009: 4 percent, 2010: 3.5 percent).

Most mortgage lending is still financed through deposits. Outstanding Covered Bonds represented only 6.4 percent of the outstanding mortgage debt and the securitisation of mortgages played an even smaller role.

Standard Mortgages

Fixed-rate Mortgage

The most common and secure type of mortgage in Austria is the fixed-rate mortgage. The interest rate is contractually predetermined for the entire term of the loan agreement, usually 15, 20, or 30 years. With more maturity the proportion of principal payments will increase but the monthly repayment will remain the same throughout the whole contract period. Although this type of mortgage provides for high financial predictability, the home owner will not be able to capitalize on positive market developments and lower central bank interest rates. However, the current recession in Europe and the low interest rate

environment have rendered fixed-rate mortgage products a secure option for risk-averse home owners.

Adjustable-rate Mortgage

The adjustable-rate mortgage (ARM) usually offers a lower initial rate of interest than fixed-rate loans. Contrary to the fixed-rate mortgage the interest rate follows a base interest rate, typically adjusted every three months. Essentially, the base interest rate is determined by the Euribor (Euro Interbank Offered Rate), which indicates the interest rates European banks offer each other for short-term loans. The long-term exposure to the market makes this mortgage a rather risky alternative.

Building Savings Contract

The mortgage loan may be connected to a building savings contract. The due payments are transferred to the savings account, which is used later to wipe off the mortgage. Due to government subsidisation for building savings contracts the advantage of this debt structure lies in the lower interest rates. However, due to additional transactions necessary to facilitate this mortgage option, additional fees might apply.

Mortgage combination

Many new homeowners choose a combination of these types of mortgage loan contracts. By adjusting mortgages to the individual needs of clients banks

ensure that young families may buy their own house even though their initial income would not be sufficient to repay the debt. To register a mortgage every debtor has to pay 1.2% of the property’s value in registration fee.

CURRENT MORTGAGE MARKET IN AUSTRIA

Residential mortgage lending growth to households was largely stable in 2018. Growth figures remained largely stable at the beginning of the year, standing at 4.6% in April 2019 compared to the previous year. Although credit standards for residential mortgage lending tightened slightly in the first quarter of 2019, lending rates for new mortgage loans continued to decline until recently, at 1.72% in April 2019, 12 basis points lower than a year before. The share of variable rate loans (1-year fixed interest rate) on new lending averaged 42.8% over the last 12 months to April 2019, decreasing from 50.0% one year before. The foreign currency share of housing loans stood at 11.0% in April 2019, down 1.4 percentage points from a year ago.

REFERENCES:

https://www.housing-finance-network.org/index.php?id=279

http://www.wealthmakerfinancialservices.com.au/home-loans/home-loans-resources/austrian-mortgage-market



ANNEX Belgium

The Belgian banking community is characterised by a variety of players who are active in different market segments. BNP Paribas Fortis, KBC Bank, Belfius Bank and ING Belgium are the four leading banks (with a combined balance sheet on a non-consolidated basis of 66% of the sector total at the end of 2018) and offer an extensive range of services in the field of retail banking, private banking, corporate finance and payment services. In addition, a number of smaller institutions exist which are often active in a limited number of market segments.

Like the Belgian economy, the banking sector is characterised by a high degree of international openness. Of the 87 banks established in Belgium at the end of September 2018, 84% were branches or subsidiaries of foreign institutions, and only 16% had Belgian majority ownership. At the end of 2018, 13 credit institutions under Belgian law had 87 entities in 25 other countries.

The Belgian mortgage market is dominated by the four leading banks aforementioned, which accounted for almost two-thirds of the entire banking sector in 2018. Intense competition has led to low fees and charges, and more mortgage options.

In 2017, the market share of new fixed interest rate loans and loans with initial fixed rate for more than ten years represented about 88.6% of loans newly provided. The share taken up by new loans granted with an initial fixed rate for 1 year, increased to approximately 1.4% of the credits provided (coming from 0.9%). The number of credits with an initial period of variable interest rate between 3 and 5 years also showed an increase (ca 10% of the credits provided).

In Belgium, the most common mortgage credit product is a loan with a term of 20-25 years, a fixed interest rate throughout the full loan term and a fixed number of monthly instalments.

CURRENT MORTGAGE MARKET IN BELGIUM

In 2018, the number of new mortgage credit contracts was about 253,000 for a total amount of almost EUR 34 bn (refinancing transactions not included). The number of mortgage credits went up by more than 4%, whereas their amount went up by almost 9% to reach again an all-time high.

The number of loans for the purpose of purchasing

went up by 7%. The number of construction loans also went up by more than 3%. The number of loans granted for renovation (-4.4%), however, decreased, but less substantially than in 2017 (-21%).

Belgium’s mortgage market is expected to remain resilient in the coming years, despite higher LTVs and longer loan maturities beyond the typical 20-year term,

REFERENCES:

https://www.ebf.eu/belgium/

https://www.globalpropertyguide.com/Europe/Belgium/Price-History

http://www.ecbc.eu/uploads/attachements/8/65/Belgium.pdf



ANNEX Bulgaria

Bulgaria has undergone a significant transformation over the past three decades. It has transformed from a highly centralised, planned economy to an open, market-based, upper-middle-income economy securely anchored in the EU.

The banking system in Bulgaria comprised 25 banks at the end of 2018. As was expected, deposit accumulation in the banking system increased in 2018 and reached BGN 77.66 bn at the end of December, which represents 71.8% of Bulgarian GDP. This growth in deposits was the result of the improvement of the macroeconomic environment, the preference of corporations and households to deposit their funds in banks and the strengthening of consumers’ confidence.

Households still represent the main contributor, since they hold 66.4% of deposits. Therefore, given their importance deposits are the main funding tool used in Bulgaria. Mortgage bonds, as a subcategory of corporate bonds, are traded at the Bulgarian Stock Exchange-Sofia. However, Bulgaria has no active covered bond market as yet.

The interest rates of mortgages for properties in Bulgaria vary from 6 to 7%. The maximum term of

any mortgage is 25 years. The minimum loan amount is EUR 50,000 with no maximum. The maximum LTV ratio for a purchase is 75%.

CURRENT MORTGAGE MARKET IN BULGARIA

Bulgaria’s mortgage market has seen great variations since 2000. In 2018 the national mortgage market grew at a very similar pace as the previous year, by 12.52%, a very remarkable growth rate which shows the potential for further expansion of the market. If we look at the amount of gross mortgage lending, we see that this has also grown, albeit at a slower pace, by 5.48% y-o-y.

Total outstanding housing loans increased 6.4% to BGN 9.33 bn (EUR 4.77 bn) in October 2017 from the same period previous year. Gross residential mortgage loans to individuals reached the number of 8,771,553 in 2016, rose to 9,460,270 in 2017 and slightly dropped to 9,928,714 in 2018(Q1). Non-performing loans in Bulgaria stood at 8.1% in December 2017 but dropped to 7.8% in March 2018.

Regarding the interest rates on these mortgages, the representative interest rate for 2018 stood at 4.64%,

a figure above the EU average, but well below the maximum levels reached in 2009. Mortgages can be taken in the form of repayment (including interest and capital) or interest only loans.

REFERENCES:

http://www.ecbc.eu/uploads/attachements/72/65/Bulgaria.pdf



ANNEX Croatia

The banking system of Croatia is characterised by relatively high concentration: competition between the major banks is making it difficult for other banks to compete. Another feature of the Croatian banking system is a prominent share of foreign capital (mainly from Austria and Italy).

The Croatian National Bank (CNB) serves as the independent regulator for five housing savings banks and 28 commercial banks in Croatia. Founded in 1990, the CNB aims to maintain price stability and ensure the soundness of the country’s financial system. In 2013, it joined the European System of Central Banks and started performing its role under the Statute of the ESCB and the ECB, following Croatia’s entry into the European Union.

The Croatian banking sector remains one of the domestic economy’s strongest sectors, primarily as a result of relatively disciplined borrowers and efficient regulation. More than 90% of all banking assets in the country are foreign-owned, with the top five banks in Croatia accounting for over 70% of the sector’s total assets.

In Croatia, housing finance is mainly raised from banks but also from Bausparkassen. Banks dominate

the housing finance market with a share of almost 95 percent, but the Bausparkassen (which entered the market in 1997) were able to increase their market share very rapidly and held already 5 percent of the market in 2008. The housing finance market has seen a massive boom in Croatia since the year 2000. The mortgage debt to GDP ratio increased from 4.7 percent in 2000 to 15.3 percent in 2008.

Croatia has a contractual savings system, the Bauspar system which is characterised by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised credit institutions, the Bausparkassen. The government grants an interest premium equal to 15 percent of the amount saved (up to a set maximum).

Fearing financial instability, the Croatian National Bank limited lending growth to 12 percent per annum in 2008 and issued new guidelines to banks on managing household and currency-induced credit risk, including a 75 percent loan-to-value ratio limit.

Banks and Bausparkassen fund their mortgage market activities almost exclusively with deposits. Some funding through parent bank loans also occurs.

CURRENT MORTGAGE MARKET IN CROATIA

Mortgage lending continued to grow from 2017, after many years of decline. Outstanding mortgage loans in 2018 amounted HRK 54,040 mn, which represents an increase of 2.3%. Despite a further decrease in the relative importance of commercial banks in relation to Croatian financial sector assets, they still play a dominant role in housing finance in general.

In 2018, no changes in the sources for housing financing occurred. Croatian commercial banks and certainly housing saving banks were primarily and dominantly funded through deposits. The funding structure of credit institutions in the Republic of Croatia at the end of 2017 (last available data) was as follows: deposits 93.5%, loans 5% and other sources 1.5%. The reasons for this funding structure are their continuous and permanent dominance in the financial sector in relation to traditional household savings and external financing activities.

In 2018, the asking prices for apartments rose in 85% of Croatian counties. In general, it is expected that prices will continue to appreciate slightly over the medium term in Zagreb and in coastal areas based on continuing favourable macroeconomic conditions continuing to prevail i.e. continuing GDP growth and continuing low interest rates.

In February 2019, the average interest rate for housing loans indexed to foreign currency stood at 3.29%, down from 3.55% in February 2018 and 3.91% in February 2017, according to the Croatian National Bank (CNB), the country’s central bank.

Only about 11% of all new housing loans in February 2019 are floating rate (or with interest rate fixation

(IRF) of up to 1 year), an unusually small proportion. In fact, more than 72% of all new housing loans have an IRF of more than 5 years. This suggests that the Croatian property markets will be exceptionally resilient in the event of interest rate hikes.

After six years of massive contraction, Croatia’s outstanding housing loans expanded again by about 2.3% in 2018. Since 2012 outstanding housing loans have been declining, even after the economy recovered from recession in 2015, contracting by 0.6% in 2012, 1.9% in 2013, 2% in 2014, 1.9% in 2015, and 11.1% in 2016, according to the CNB. In 2017, housing loans grew by a meagre 0.6%.

This decline came despite the fact that Croatia’s mortgage market has developed significantly during the past decade. The old large state-owned banks have been privatised, and commercial banks have been restructured. Austrian, Italian and German banks have entered the market. There was a significant increase in building societies’ share of loans, from 1% in 2003 to 5% recently.

REFERENCES:

https://corporatefinanceinstitute.com/resources/careers/companies/top-banks-in-croatia/


https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/financial-services/deloitte-nl-fsi-property-index-2019.pdf

https://www.globalpropertyguide.com/Europe/Croatia/Price-History



ANNEX Cyprus

The banking sector in Cyprus comprises domestic banks and international banks with Cyprus-based subsidiaries or branches. Beyond the traditional deposit and lending services, banks in Cyprus operate under the universal banking model as they offer a diverse range of products and services. Deposits from customers have traditionally been the main source of funding for banks and that element remains stable for the local banking sector.

There are 34 authorised credit institutions in Cyprus, consisting of seven local authorised credit institutions, three subsidiaries of foreign banks from EU Member States, two subsidiaries of foreign banks from non-EU countries, five branches of banks from EU Member States, 15 branches of banks from non-EU Member States and two representative offices.

Within the framework of the European Banking Union, since November 2014, the Bank of Cyprus, Hellenic Bank and RCB Bank, were among the European credit institutions that came under the direct supervision of the ECB, as part of the Single Supervisory Mechanism (SSM) provisions, whereas the subsidiaries of Greek banks are supervised by the SSM as their parent banks are systemic in their home country.

Bank funding in Cyprus is dependent primarily on customer deposits. Funding conditions are comfortable as reflected in the gross-loans (not including provisions), to deposits ratio at 70.5% at the end of 2018. Cyprus banks have access to ECB funding. The securitisation legislation which has been enacted in July 2018 provides an additional tool for banks to obtain funding.

In 2012-2013 Cyprus underwent a financial crisis, largely resulted from Cypriot banks business model of attracting offshore money, large exposure to Greek government bonds, amid of big domestic real estate bubble.

To resolve the scandal, a new directive on mortgage credit was adopted on January 28, 2014 by the Economic and Financial Affairs Council. The new rules address some of the amazing problems in the Cyprus market, such as insufficient pre-contractual information, irresponsible lending and borrowing, and misleading advertising and marketing. The directive establishes regulatory and supervisory principles for credit intermediaries, and provisions to regulate and supervise non-credit institutions.

By 2016, Cyprus benefited from the economic adjustment programme, during which it managed to emerge from recession, stabilise its financial sector, and consolidate its public finances while still remaining many challenges.

Variable-rate mortgages now account for about 98% of all housing loans in Cyprus. The ECB left its key rate unchanged at an all-time low of 0.00% in July 2019, after cutting it by 5 basis points in March 2016. In previous years, banks in Cyprus have been slow to respond to ECB interest rate cuts, because there is little inter-bank lending, so banks rely on customer deposits for funding. Many banks pay high rates to attract deposits.

CURRENT MORTGAGE MARKET IN CYPRUS

From 29.1% of GDP in 2005, the mortgage market grew sharply to about 91.32% of GDP in 2012. But it has contracted sharply since, and was at 46.6% of GDP in 2018.

The mortgage market remained relatively large in relation to GDP after years of restructuring and deleveraging. Total loans for house purchase at the end of 2018 amounted for EUR 9.7 bn or 46.6% of GDP. Loans for house purchase to domestic residents were EUR 8.7 bn or 41.8% of GDP. This is a drop of 22% from the prior year and a cumulative drop of about 58% from the 2011 peak of EUR 12.5 bn for domestic residents. The steep decline in 2018 reflects primarily the resolution of the Cyprus

Cooperative Bank in the same year. New mortgage loans in 2018 amounted to EUR 965 mn of which EUR 96 mn were renegotiated amounts. This compares with new mortgage loans in 2017 of EUR 857 mn of which EUR 136 mn were renegotiated amounts.

Despite the low interest rates, new housing loans to households fell by 3.9% y-o-y to €481.1 million in the first half of 2019, according to the Central Bank of Cyprus. About 92% were pure new loans while the remaining 8% were renegotiated loans, with advances to local residents accounting for around 90% of housing loans.

Banking system solvency is also improving. NPLs were about 30.6% of total gross loans in Q1 2019 – one of the lowest levels since 2013. The reduction in NPLs can be attributed to increased repayments, restructurings, write-offs, and settlement of debt through swaps with real properties intended to be sold for faster cash collection, according to the central bank. The housing market recovery is also helping improve Cypriot banks’ asset quality. Despite the significant improvement, it remains among the highest in the EU.

REFERENCES:

https://www.ebf.eu/cyprus/

https://www.globalpropertyguide.com/Europe/Cyprus/Price-History



ANNEX Czech Republic

The banking sector of the Czech Republic is characterised by relatively high concentration and a prominent share of foreign capital.

In the Czech Republic, housing finance is mainly raised from banks and Bausparkassen, with the Česká spořitelna (savings bank, including their Bausparkassen branch) taking the largest share. Bausparkassen have a share of 33 percent in the market. Starting from a very low 3.7 percent mortgage debt to GDP in 2001, the mortgage market has been growing with an enormous pace in the Czech Republic. The mortgage debt to GDP ratio increased from 3.7 percent in 2001 to 15.3 percent in 2007.

The Czech Republic has adopted comprehensive consumer finance regulations, which provide the consumer with sufficient, though in some respects excessive, protection. Czech consumer financing legislation is inspired by European regulation of consumer finance, which has displayed an increasing tendency to protect the consumer in recent years, in particular by strengthening the consumer’s position in consumer credit regulation.

Moreover, the new consumer loan law (effective on December 1, 2016) in response to the EU directive

2014/17/EU has new rules related to mortgages that include:

· Early repayment penalties are now limited for new mortgages starting December 1, 2016 or for existing mortgages with fixation renewed after December 1, 2016.

· Banks should now inform their clients of their renewal offers on fixed length mortgages 3 months before the fixation ends.

· Banks are also obliged to show the total cost of mortgage or APR (annual percentage rate) to clients.

The main source of funding for banks remained client deposits, which dominate the liability side of the banking sector. Another possible source is covered bonds which are regulated in the Bond Act. There are banks on the market that use this tool regularly, others less often or as yet not at all.

The CNB had continuously lowered its key interest rate since 2009. From above 3% before the crisis, the CNB slashed its 2-week repo rate many times to reach a record low of 0.05% in December 2012, which remained unchanged till July 2017.

The Czech Republic has a contractual savings system, the Bauspar system which is characterised by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised institutions, the Bausparkassen. The government grants an interest premium of 15 percent of the amount saved (up to a set maximum).

CURRENT MORTGAGE MARKET IN CZECH REPUBLIC

The mortgage market in the Czech Republic was in good shape since 2018. Although sales decreased by 5%, outstanding volumes continued to grow – in the previous year by 9.3%. The small decrease in sales was driven by the following:

• continued low levels of supply on the real estate market;

• rapidly growing prices of real estate that make housing less affordable;

• gradually growing interest rates; despite the fact that they remained under 3% p.a. for the majority of the year;

• new regulation of housing finance from the Czech National Bank focused on income indicators.

Starting August 2017, the central bank has shifted gear and decided to raise the key rates several times, in an

effort to curb inflationary pressures and protect the domestic currency. In November 2018, the CNB raised its 2-week repo rate to 1.75%, the seventh consecutive rate hike in just 15 months. It is the highest level since April 2009.

In 2018, the size of the residential mortgage market was around 23.8% of GDP, up from 20.9% in 2014, 15.2% in 2008, and 4.2% in 2002.

In December 2018, the total outstanding housing loan amounts rose by 8.5% to almost CZK 1.25 trillion from a year earlier, according to the Czech National Bank (CNB). The average interest rate for new mortgage loans increased to 2.58% in Q3 2018, from 2.17% a year earlier, according to the Czech National Bank (CNB).

Loans with interest rate fixation (IRF) of between 1 and 5 years dominate the mortgage market, capturing about 52% share in Q3 2018, followed by loans with IRF of between 5 to 10 years (25% market share). Mortgage loans in the Czech Republic are typically granted with 20 year maturities, the maximum LTV ratio being 85%.

REFERENCES:


https://www.globalpropertyguide.com/Europe/Czech-Republic/Price-History



ANNEX Denmark

Danish banking sector is characterised by large size in terms of total assets, high degree of concentration while having a significant number of small banks, and prevailing share of domestic banks over foreign-controlled banks which are represented in Denmark by a few large international groups.

Denmark is one of the most competitive economies in the EU, as well as the entire world at the moment. A huge supporter of free trade, favoured by vast natural resources and highly developed infrastructure, it is naturally considered a favourite destination for foreign investment.

The mortgage industry of Denmark provides borrowers with flexible and transparent loans on conditions close to the funding conditions of capital market players. Simultaneously, the covered mortgage bonds transfer market risk from the issuing mortgage bank to bond investors. Lastly, strict property appraisal rules, credit risk management by the mortgage banks, and tight regulations including the so-called balance principle, have also historically shielded mortgage bonds from default risk. High industry concentration and automatic stabilizers also play a role in maintaining stability.

The balance principle in the Danish Mortgage-credit Loans and Mortgage-credit Bonds Act regulates the financial risk of the mortgage credit institution resulting from differences in payments between loans and funding, fluctuations in interest rates and exchange rates and the use of financial instruments.

In Denmark, the mortgage banks are the only financial institutions allowed to grant loans against mortgage on real property by issuing covered mortgage bonds (Danish: Realkreditobligationer). The scope of activities allowed to mortgage banks is limited to the origination and servicing of mortgage loans, their funding, exclusively through the issuance of mortgage bonds, and activities deemed accessory.

As of 2007, there are eight mortgage banks active in the Danish mortgage market, some affiliated with commercial banks. The mortgage banks hold a share of around 90 percent in terms of home loans balances. The housing finance market has seen a moderate growth since the year 2000. The mortgage debt to GDP ratio increased from 71.2 percent in 2000 (an already comparatively high level) to 92.8 percent in 2007.

Mortgage loans issued by mortgage banks are solely funded through the issuance of covered bonds. Mortgage banks continuously supply extra collateral on a loan by loan basis if the value of cover assets (properties) deteriorates.

In Denmark, the usual maximal loan-to-value ratio (LTV) amounts to 80 percent. In 2007, the most popular type of loan was the loan with a fixed interest rate (54 percent), followed by capped variable interest loans and interest reset loans (each 23 percent). All interest on debt is tax deductible up to a certain limit.

Denmark is not open to foreign buyers. Despite Denmark’s association with liberalism, it is not easy to acquire property here. Non-residents may not purchase real property here unless the person:

· Has previously resided in Denmark for at least five years;

· Is an EU national working in Denmark; or,

· If a non-EU national, has a valid residence or business permit.

CURRENT MORTGAGE MARKET IN DENMARK

Despite the central bank’s assurance, others remain worried. No less than 45% of Danish mortgages have long interest-only periods in 2018, up from only 10% in 2004. Adjustable-rate mortgages were about 64% of all mortgages in 2018. Danes are paying down mortgages at a rate of only 2% a year on average and their monthly payments rise sharply when the interest-only periods end (typically ten years into the loan).

Mortgage interest rates remain negative. The short-term mortgage rate averaged -0.51% in 2018, slightly up from -0.55% in 2017 but still down from -0.29% in 2016, -0.16% in 2015, 0.19% in 2014, 0.23% in 2013, and 0.47% in 2012, according to the ADMB. On the other hand, the long-term mortgage rate dropped to 2.12% in 2018, from 2.26% in 2017, 2.57% in 2016, 2.77% in 2015, 3.08% in 2014, 3.48% in 2013, and 3.67% in 2012.

Danmarks NationalBank’s interest rate on certificates of deposit remained unchanged at -0.65%, after an increase of 10 basis points in January 2016. The lending rate, discount rate and the current account rate have been unchanged at 0.05%, 0%, and 0%,

respectively.

In 2018, total mortgage outstanding rose by 2.1% y-o-y to DKK2.76 trillion (EUR369.3 billion), according to the ADMB. Denmark’s economy grew by an estimated 1.2%, a slowdown from GDP growth rates of 2.3% in 2017, 2% in 2016, and 1.6% in both 2014 and 2015, amidst economic slowdown in Europe, the country’s biggest export market. The economy is expected to expand by 1.6% this year and by another 1.3% in 2020, according to the European Commission.

By year end 2018, outstanding mortgage loans from mortgage banks amounted to DKK 2,740 bn, of which app. DKK 1,600 bn were for owner occupied housing. On top of this, housing loans for households from commercial retail banks amounted to DKK 283 bn. In total, mortgage credit growth was recorded at 1.7% in 2018. In light of recent years’ house price increases, mortgage credit growth remained modest.

Mortgage loans with variable interest rates have been gradually falling in recent years. In 2018, variable-rate mortgages accounted for 64% of total loans – down from 65.6% in 2017, 66.7% in 2016, 68.2% in 2015, 72.1% in 2014, 72.6% in 2013 and 73.2% in 2012. Fixed-rate loans accounted for the remaining 36% of total mortgage loans.

During the first 14 weeks of 2019, the short-term mortgage rate was at an average of -0.48% while the long-term mortgage rate dropped to 1.93%.

Denmark’s €500 billion mortgage bond market, the world’s biggest, might be heading for a “potential crisis” if interest rates substantially increase, some rating companies worry. The share of bonds with maturities of less than five years has increased to about 63% in 2018 from 47.5% in 2008, according to the ADMB. The mismatch means that some bonds must be rolled over each year.

REFERENCES:

https://en.wikipedia.org/wiki/Mortgage_industry_of_Denmark


https://www.globalpropertyguide.com/Europe/Denmark/Price-History



ANNEX Estonia

The Estonian banking sector is dominated by foreign capital holding 90% of banking sector assets. The market is chiefly divided between Swedbank, SEB Bank and Luminor Bank. LHV Bank, the largest bank based in local capital, holds around 6% of banking sector assets.

Estonian banking and financial system has been developing rapidly since 1991 when Estonia declared its independence from the Soviet Union. Estonian banking sector is relatively small, highly concentrated, with high share of foreign capital. Large banks in Estonia operate as universal banks, covering a wide range of market segments, while smaller banks concentrate on a specific range of services.

Estonia’s original house price boom was supported by a massive expansion of the mortgage market which grew by an average of 62% yearly from 2002 to 2006. After 2007, the mortgage market collapsed.

In 2014, housing loans outstanding rose by 2.8% from a year earlier, and total value of outstanding housing loans has risen by 4.4% in 2015, by 5.4% in 2016, and by another 6.8% in 2017, based on figures from the Bank of Estonia. In December 2018, the value

of housing loans outstanding rose strongly by 7% to about €7.63 billion from the same period previous year.

The Central Bank of Estonia declared changes in the requirements for mortgage borrowers in 2015. Nuances of new mortgage rules in Estonia, valid since 2015:

· The loan amount should not exceed 85% of the real estate value in Estonia. Only KredEx bank is allowed to give up to 90%.

· Monthly payments – no more than 50% of the net income of the borrower.

· Mortgage loans available for up to 30 years.

· Terms apply to individuals who take mortgages for purchase, construction or renovation of real estate in Estonia.

· For some solvent borrowers exceptions to the rules are allowed. The proportion of such investors should be 15% of all mortgage loans issued in a particular bank during the month.

CURRENT MORTGAGE MARKET IN ESTONIA

In a well-balanced macroeconomic environment, with a developing housing market, the Estonian mortgage market has also performed positively. In 2018 the mortgage market grew, with an increase of 7% of the volume of total outstanding residential loans which at the end of the year amounted to EUR 7,603. This amount of housing loans represented 30.8% of GDP in 2018. Likewise, gross residential lending grew by 9.05%.

In December 2018, the average interest rate on outstanding housing loans was 1.88%, up from 1.77% a year earlier and 1.69% two years ago, according to the European Central Bank (ECB). The size of the mortgage market in 2018 was equivalent to 30.8% of GDP.

The lending policy of banks for housing loans did not change particularly in 2018. The most important source of funds for the Estonian banking sector

continues to be deposits. As deposits have grown strongly in recent years, they have been sufficient to finance the demand for credit. Nevertheless, the country started analysing other options available for funding mortgage markets, such as covered bonds and is actually working closely with Latvia and Lithuania with a view to introducing a Pan-Baltic covered bond framework, according to which the three markets combined, will achieve a critical mass. In this sense, Estonia is the most advanced of the three since as of 13 February the legislation on covered bonds has been adopted by the Parliament.

REFERENCES:

https://www.ebf.eu/estonia/

https://www.globalpropertyguide.com/Europe/Estonia/Price-History

https://ee24.com/estonia/news/estonia-change-mortgages-rules-2015/



ANNEX Finland

Finnish banks and financial markets avoided severe consequences of global financial crisis 2008-2009. Finnish banking landscape is rather diversified and consists of both systemic universal banks operating throughout the country and internationally, and specialised regional savings and cooperative banks. The majority of foreign-controlled banks operating in Finland are originated from Sweden.

The Finnish mortgage market is relatively small, and the competition between Finnish banks is quite high. The Finnish banking market is dominated by four major banks, which together, hold 81% of the market shares. Nordea Bank, OP Financial Group and Municipality Finance are deemed domestically significant institutions (O-SII) and are directly supervised by the ECB. Smaller domestic retail groups, like Savings Banks group, POP Bank group and other small domestic banks, are under the supervision of the Finnish Supervisory Authority.

Although deposits from households are the largest single source of funding for domestic banks, the sector’s funding can be said to be heavily dependent on market funding as well. Market-based funding accounted for 57% of the total funding after Nordea’s

headquarters change. However, the dispersion is high between credit institutions: some fund their operations almost entirely with deposits, while others, especially mortgage credit institutions, only issue covered bonds. Almost 40% of Finnish mortgage loans are funded by covered bonds. The ratio of loans to deposits increased and was 163% at the turn of the year, because all the performance ratios have been affected by the transfer.

The typical payback period for a mortgage in Finland is 20 to 25 years, depending on the size of the loan. The average interest rate for mortgages in Finland is one of the lowest in the world, dropping below 1% in the past years.

The housing market has high interest rate sensitivity. In 1994, about 70% of new mortgages were variable rate. Since 2001, more than 90% of new mortgages have been variable rate, taking advantage of historic low interest rates from 2003 to 2006.

Although deposits from households are the largest single source of funding for domestic banks, the sector’s funding can be said to be heavily dependent on market funding as well. Almost

40% of the Finnish mortgage loans are funded by covered bonds.

The Finnish tax system still privileges owner-occupation. Despite reforms during the 1980s, a flat 29% tax deduction on mortgage interest remains in place, while imputed rental income and capital gains on permanent homes are untaxed.

CURRENT MORTGAGE MARKET IN FINLAND

Finland’s mortgage market has enjoyed strong growth during the past two decades, with outstanding mortgage loans rising from 16.2% of GDP in 1995 to 43.8% of GDP in 2015. But the size of the mortgage market declined slightly to 42.9% of GDP in 2017, to 42.1% in 2018, and to 41.9% in 2019.

Housing loan growth averaged 2.2% annually from 2013 to 2019, a sharp slowdown from annual expansions averaging 6.8% in 2008-12 and 14.4% in 2001-7. In February 2020, the total amount of housing loans outstanding stood at €100.54 billion, up by 2.7% from a year earlier, according to the Bank of Finland.

New housing loans were taken out for 2.2% more than the previous year. At the end of 2018, the total housing loan portfolio stood at EUR 97.8 bn (41.9% of GDP) after growing by 1.7% during the year. Repayments on housing loans were made for a total of EUR 16.8 bn in 2018. Amortisations grew by 5.1% y-o-y. Housing loans have been amortised at a faster rate than in previous years, because low interest rates have enabled a larger proportion of principal in the instalments of constant payment loans - which made up about 40% of Finnish households’ housing loans, according to the Bank of Finland. The total amount of covered bond stock stood at EUR 37.3 bn at the end of 2018. New issuances were made at a total value of EUR 5.65 bn, slightly more than in previous years.

REFERENCES:

https://www.globalpropertyguide.com/Europe/Finland/Price-History

https://www.ebf.eu/finland/



ANNEX France

The banking sector is one of France’s six main economic assets, according to the OECD. As of January 2019, the French banking industry numbered 340 banks. The major French banks are BNP Paribas, Credit Agricole and Societe Generale, among the largest banks in the world.

The central bank of France is the Banque de France, headquartered in Paris. Its missions, defined by its statuses, are to drive the French monetary strategy, ensure financial stability, and provide services to households, small and medium businesses enterprises.

In France, housing finance is mainly raised from deposit banks and specialised mortgage banks like the Crédit Foncier. Mutual and co-operative banks as well as commercial banks held a share of 53.6 percent and 34.6 percent respectively in terms of home loans balances at the end of 2006, with the mutual bank Crédit Agricole being the market leader. The housing finance market has seen a considerable boom in France since the year 2000. The mortgage debt to GDP ratio increased from 21.2 percent in 2000 to 34.9 percent in 2007.

The French mortgage market is the third largest in the European Union after the United Kingdom and Germany. While the mortgage market in the UK and Spain suffered significantly during the financial crisis, the French mortgage market has remained strong, with limited defaulting. Due to a strict upfront financial analysis for each dossier, French banks have succeeded for the most part in lending what borrowers are able to repay. This has created a great deal of stability for the French real estate market.

The country has a contractual savings system, the épargne logement system which is characterised by low interest rates on loans and a government interest premium paid on savings. In principal, it can be offered by all deposit banks.

Deposits are for the banks the main source of funding for their mortgage market activities. The specialised mortgage banks refinance exclusively and banks partially by issuing Obligations Foncières (Covered Bonds). As only specialised credit institutions are allowed to issue Covered Bonds in France (Sociétés de Crédit Foncier and the Caisse de Refinancement Hypothécaire), the banks do not issue the bonds directly but by turning to subsidiaries adhering

the specialised banking principles required by law. Almost 10 percent of the outstanding residential lending can be attributed to them. The securitisation of mortgages plays only a minor though possibly growing role in France.

The usual maximal loan-to-value ratio amounts to 80 percent and the loans are either fixed-interest loans (for the most part) or variable rate mortgage loans (annual adjustment on the basis of an index). There are two long-term savings plans on which the government pays an interest bonus that offer (after a certain minimum lifetime of the plan) for customers the chance to take out a mortgage loan at a reduced rate. In 2007, the Constitutional Council, the highest court in France, struck down the mortgage interest deduction (which was enacted in the same year) as unconstitutionally.

CURRENT MORTGAGE MARKET IN FRANCE

Approximately 80% of properties in France are purchased with mortgage financing.

The French lending model is both dynamic and sound. The level of non-performing loans is very low (2.8% at the end of December 2018) as is the cost of risk (€7.9 billion in 2018, down 6.4% year-on-year).

2018 was another good year for the distribution of housing loans, thanks mainly to interest rates that remained low throughout the year (1.48% fixed). These low interest rates could be explained by low market rates as well as by fierce competition between banks. As house loans were mainly distributed by general banks, deposit-financed lending was still the norm in 2018.

The amount of global outstanding deposits of residents (households and companies) reached EUR 2,148.6 bn in March 2019 (+4.6 % in 2018) while sight deposits accounted for EUR 967 bn in March 2019 (+7.3% in 2018).

Throughout 2019, the interest rates on French mortgages have continued to remain at historically low levels and this has helped to keep the French housing market in a healthy state. In September 2019, the average interest rate on new mortgages in France fell to just 1.27% (down from 1.31% in August). This is lowest level that interest rates have reached in

the last 50 years. As a result, the market for French mortgages has continued to remain buoyant, with the Banque de France reporting strong demand for borrowing. The annual growth rate of home loans to individuals in France stood at + 6.67% in September 2019. The total volume of new home loans issued during September 2019 in France stood at €21.7 billion euros. This was an increase on the 12 month average (€19.0 billion euros).

The Banque de France has indicated that interest rates will remain stable during the remainder of 2019 and into 2020. The EURIBOR (European Central Bank base rate) is still negative at -0.38%; and it is unlikely to rise before the end of 2019. They forecast some slight increases to around 1.55% by the end of 2020, due to pressure from increased rates from the US Federal bank and the drop off in Quantitative Easing by the ECB. They comment that “In view of this, lending rates are likely to rise over the coming quarters, although only moderately, as banks will not pass on the increase in market rates entirely because of strong competition among credit institutions” (Source: www.banque-france.fr).

Therefore, it is unlikely that French mortgage interest rates will increase before the midpoint of 2020, which is great news for borrowers. Furthermore, there are signs that French banks are willing to relax their mortgage lending criteria for non-residents by now taking into account Pension income and allowing greater consideration of rental income from other properties to support mortgage applications. Certain French banks are still offering a variable repayment mortgage at 1.24% and a fixed rate mortgage from 2.15%.

REFERENCES:

https://www.ebf.eu/france/

https://www.francehomefinance.com/blog/more/french_mortgage_market_update


https://www.longtermrentalsinfrance.com/south-france-property/mortgage-interest-rates-in-france-2020.html



ANNEX Germany

The history of banking in Germany dates back to the 15th century. The oldest bank still operating in Germany is Berenberg Bank, founded in 1590. Nowadays Germany has three-pillar banking system consisting of private banks, cooperative banks and public savings banks, distinguished by the legal form and ownership structure.

The private commercial banks represent the largest segment by assets, accounting for 40% of total assets in the banking system. The private banks play a key role for the German export economy, they are involved in 88% of German exports and maintain almost three quarters of the German banking industry’s foreign network.

The public banking sector comprises savings banks (Sparkassen), Landesbanken, and DekaBank, which acts as the central asset manager of the Savings Banks Finance Group, representing 26% of total banks’ assets. There are currently 385 savings banks. They are normally organised as public-law corporations with local governments as their guarantors/owners. Their business is limited to the area controlled by their local government owners. Other than this regional focus, their business does not differ in any way from that of the private commercial banks. As a result of the so-called regional principle, savings banks do not compete with one another.

Landesbanken were originally designed to act as central banks for the savings banks. In recent years,

however, they have been increasingly involved in wholesale funding, investment banking, and international business activities, thus directly competing with commercial banks. The six Landesbanken at present are owned by the federal states and the regional associations of the savings banks.

The cooperative sector consists of 875 cooperative banks (Volks- und Raiffeisenbanken) and one central cooperative bank (DZ Bank AG). It accounts for 50% of institutions by number and 18% of total bank assets. The cooperative banks are owned by their members, who are usually their depositors and borrowers as well. By virtue of their legal form, cooperative banks have a mandate to support their members, who represent about half of their customers. However, cooperative banks also provide banking services to the general public. Like the savings banks, cooperative banks have a regional focus and are subject to the regional principle.

The German mortgage market has a distinguished position within the European Union. Due to its focus on risk safety and restricted lending practices, fixed interest rates with long-term duration, loan value instead of market value, and low loan-to-value (LTV) ratio provide a secure basis for lenders and mortgagers alike. To date, financial products for private households provide little ground for financial speculation and contribute to keep the house prices in Germany rather stable. Nonetheless, these precautions

also prevent lower-income households from entering homeownership. This is one reason for the rather low homeownership rate compared by international standards. Thus, the German mortgage and housing market provide an enduring and stable framework for a tenant society.

In Germany, the usual maximal loan-to-value (LTV) ratio amounts to 80 percent. Yet, mortgages exceeding an LTV ratio of more than 60 percent (the legal limit for a first lien) are offered by most banks only at the price of an interest increase. This is due to the fact that mortgages with an LTV of less than 60 percent can be refinanced at better conditions by the bank. However, Bausparkassen can hypothecate up to an LTV of 80 percent at favourable conditions and their loans are usually placed as second lien mortgages so that it can be conveniently combined with a first lien mortgage. Hence, housing finance in Germany is typically made up of three elements: 1. equity that the customer has at its disposal (20-30 percent); 2. a mortgage provided by a (mortgage) bank (50-60 percent); and 3. a loan provided by a Bausparkasse (20-30 percent). The average LTV ratio is around 70 percent and 60 percent of the loans are fixed-interest loans (i.e. fixed for more than 5 years).

Germany has a contractual savings system, called the Bauspar system which is characterised by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised credit institutions, the Bausparkassen. All terms of the contract, including interest rates on savings and the loan, are specified at the conclusion of the contract. The government grants an interest premium equal to 8.8 percent of the amount saved on a contractual savings account (up to a set maximum).

The German government supports homeownership by paying Bauspar customers on Bauspar deposits a government premium of maximal 45.06 Euro (married customers 90.11 Euro) per annum. Furthermore, the state-owned bank KfW offers subsidised mortgages.

In Germany, the main funding instruments on the banking side are for housing loans savings deposits and mortgage bonds (Pfandbriefe). Germany has one of the largest covered bond markets in Europe, representing a significant share of the total market. The sub-sector of this market for mortgage bonds is also strong in Germany and in the total EU market.

CURRENT MORTGAGE MARKET IN GERMANY

The growth of construction and monetary turnover associated with transaction activities on the residential property market has been accompanied by increasing residential mortgage lending for several years. In 2018, gross residential lending rose again and amounted to EUR 227.8 bn (+6.3% y-o-y). The volume of residential loans outstanding summed up to EUR 1,446 bn, which corresponded to an increase of +4.9% in 2017.

The mortgage market was equivalent to 41.1% of the country’s GDP in 2018 - an unusually low level for a developed economy, a huge plunge from 82% of GDP in 1998. As of Q1 2019, outstanding housing loans amounted to €1,404.9 billion, up by 5% from a year earlier, according to the Deutsche Bundesbank.

Germans’ conservative borrowing is often attributed to the hyperinflation experienced in the 1920s, says Deutsche Bank real estate economist Jochen Moebert. However, the changes in tax incentives are likely to be a better explanation of the general decline in the mortgage loans to GDP ratio.

Germany homebuyers mostly borrow loans at a fixed rate. In 2018, the share of loans with interest rate fixation (IRF) of 5 years or more was 79.5% of total loans, slightly lower than the previous year’s 79.8% but far higher than the 64.4% share in 2009.

In contrast, loans with IRF of up to one year have never exceeded 20% of new loans approved. Such declined to 11.8% of total loans approved in 2018, from 18.7% in 2004. This interest rate profile gives considerable stability to the German housing market, which tends not to suffer from the sudden lurches in rates, or in the value of houses.

REFERENCES:

https://www.ebf.eu/germany/

https://www.researchgate.net/publication/289981538_Mortgage_market_character_and_trends_Germany


https://www.globalpropertyguide.com/Europe/Germany/Price-History



ANNEX Greece

Greek banking system consists of four domestic systemic banks, several regional cooperative banks and foreign-controlled banks.

Despite renewed economic growth, unemployment remains high and many house-owners cannot repay their mortgage debt. Greek banks hold about €88.6 billion in bad loans – almost half of total loans and equivalent to about half of the country’s annual economic output. More specifically, a recent report released by the European Parliament showed that Greek banks have the highest non-performing loans (NPL) ratio across the eurozone, at 44.8%, followed by Cyprus (34.1%) and Portugal (12.4%). Of these, around 41% are delinquent mortgages.

The official conclusion of the three-year ESM financial assistance programme on 20 August 2018, the disbursement of EUR 61.9 bn followed by the ESM over three years in support of macroeconomic adjustment and bank recapitalisation in Greece along with a number of agreed legislative reforms in the banking sector including, inter alia, an NPL resolution strategy involving insolvency legislation, an out-of-court workout scheme and an electronic auctions platform represent a step towards the

restoration of confidence in the Greek banking system contributing towards the improvement in bank credit conditions.

The “Katselis Law” or Household Insolvency Law, enacted in 2010, provides protection for primary residences, especially to families with incomes below the poverty line. The law freezes foreclosures on houses with outstanding mortgage debt worth up to €200,000, where a family’s annual income is lower than €35,000. However, these homeowners must pay at least 10% of their net monthly income towards their mortgage. The law expired at the end of February 2019.

A gradual overall stabilisation of the residential property market and an increase in values locally is expected in the short term. Provided that taxation on property capital value will eventually become more rational, as well as restoration of liquidity flows from the banking system, further strengthening of household disposable income and improvement of the growth prospects of the Greek economy, housing market is expected to start gradually recovering at a solid base, starting from prime properties.

CURRENT MORTGAGE MARKET IN GREECE

The improving of the economic environment and expectations, the recovery of the economy to positive, albeit low, growth rates in 2017, and the completion of the fourth and final review create expectations of gradual stabilisation of the property market. This is confirmed by recent developments in property values. However, factors such as the high unemployment rate, the imposition of capital restrictions, the lack of liquidity, the reduction of real disposable income (-0.2% on average in 2017) and the constantly changing tax framework are impediments in the real estate market recovery. Pressures on market values and rents for residential and commercial properties continued through 2017, albeit weaker than in the past few years.

After nine years of falling house prices, the Greek housing market is now growing strongly again amidst improving economic conditions and market expansionary measures.

The new loans market has virtually collapsed. New housing loans fell slightly by 0.7% y-o-y during the first eleven months of 2019, to €472.4 million. Contrast this tiny figure with €6.6 billion loans in 2010 and €15.4 billion loans in 2006. Outstanding housing loans were down by almost 34% in 2019 from the peak in 2010.

The average interest rate for new housing loans with initial rate fixation (IRF) of up to one year stood at 2.84% in November 2019, far lower than the interest rate of 5.35% in November 2008.

For outstanding housing loans:

· Average mortgage rates for loans with IRF of between 1 and 5 years stood at 4.38% in November 2019, down from 4.58% in November 2018 and still

lower than the interest rate of 5.36% in November 2008.

· Average mortgage rates for loans with IRF of over 5 years declined to 2.06% in November 2019, slightly down from 2.13% in November 2018 and 5.08% in November 2008.

The Greek housing market is vulnerable to interest rate movements as the majority of housing loans have an IRF of up to one year only. Since the second half of 2009, 70% or more of new housing loans have had interest rates adjustable at least annually.

By maturity (euro-denominated housing loans from domestic credit institutions) the present situation is:

· Up to 1 year: €684 million in November 2019, according to Bank of Greece.

· 1-5 years: €618 million, down 9.1% from a year earlier.

· Over 5 years: €46.1 billion, down 7.4% from a year ago.

Since the global financial crisis, cash-basis property transactions have accounted for about 80% of all transactions with only 20% relying on bank loans, according to the Bank of Greece.

The percentage of non-performing housing loans increased to 33.7% by early-2019, up from 10% in 2010, according to the Bank of Greece.

REFERENCES:

http://www.ecbc.eu/uploads/attachements/66/65/Greece.pdf

https://www.globalpropertyguide.com/Europe/Greece/Price-History



ANNEX Hungary

Hungarian banking sector is dominated by foreign-controlled banks from the neighbouring countries, operating as universal banks. Along with these banks, there are regional savings and mortgage banks and building societies.

In Hungary, housing finance is raised from banks, mortgage banks and Bausparkassen. In 2007, banks had a market share of 57 percent, mortgage banks of 38 percent and Bausparkassen of 5 percent. From 2001 to 2007, the Hungarian mortgage market was rapidly expanding. The mortgage debt to GDP ratio increased from 2.1 percent in 2001 to 12.4 percent in 2007.

The largest portion of mortgage loans is still deposit-funded in Hungary, but covered bonds are also a commonly used source of mortgage funding. A legal act was introduced for Mortgage Banks and Mortgage Bonds in 1997 contributed significantly to the establishment of the covered bond market and provided support to establish a mortgage bond market from the year 2000 onwards.

The typical loan-to-value (LTV) ratio is 70 percent for resale property and 80 percent for new-build

property. Most mortgage loans taken out are loans with a fixed interest rate. In 2007, 47 percent of all residential mortgage loans were denominated in foreign currency especially in Swiss Franc. In the course of the financial crisis, Swiss franc housing loans have been withdrawn at the end of 2008 and the value of foreign denominated housing loans, as measured in their original currency, continues to drop. In June 2010 the government even decided to ban banks from offering foreign currency-based residential mortgage loans. In September 2011, the Hungarian Parliament approved the option for early repayment of household foreign currency mortgage loans at a preferential exchange rate (discount of about 25% compared to market rates) - the corresponding losses being incurred by the banks. Especially three Austrian banks are affected by this decision.

There is no good source for house prices in Hungary. However, periods of strong house price increases (1999-2000 and 2003 to 2004, with annual growth rates from 20 to 30 percent) have been followed by periods of stagnating or even falling house prices. Since 2004, prices have been falling according to the Hungarian Central Bank.

Hungary has a contractual savings system, the Bauspar system which is characterised by low interest rates on loans and a government interest premium paid on savings. It is offered by specialised credit institutions, the Bausparkassen. The government grants an interest premium on the amount saved (up to a set maximum).

The credit institutions fund their lending activities through the usage of deposits and the issuance of Covered Bonds. Outstanding Covered Bonds equaled to 47.9 percent of all outstanding residential lending in 2007. Funding mortgage loans through Covered Bonds is legally constrained by an LTV ratio limit of 70 percent.

CURRENT MORTGAGE MARKET IN HUNGARY

Hungary’s residential mortgage market ground to a halt in 2009 as a result of the decline in the value of the Forint against the Euro. A large portion of mortgages were backed by foreign currency loans, burdening homeowners with swelling repayments, and prompting buyers to exit the market.

Foreign currency mortgages were banned in August 2010, and a number of measures were introduced to manage the foreign currency loan crisis:

· An early repayment scheme.

· Exchange rate fixing.

· Foreclosure quota.

· Home protection interest subsidy.

· Establishment of the National Asset Management Company.

The introduction of an early repayment scheme in September 2011 unilaterally changed the terms of all foreign currency loan contracts and allowed debtors to make a one-off repayment of their loans at a discounted exchange rate. Banks had to cover the difference between the discounted exchange rate and the current exchange rate. Those unable to afford early repayment of foreign currency loans have been able to get help since 2012 by paying the instalments at a fixed exchange rate.

As of December 2015, only 0.2% of the stock of housing loans was in foreign currency, down from

52% in December 2014. Legislation adopted in November 2014 required financial institutions to convert all outstanding foreign currency-denominated loans into HUF claims.

The National Asset Management Inc purchased properties of debtors unable to pay mortgages, allowing debtors to continued use of these properties as tenants. Around 19,628 collateralised properties were purchased from January 2013 to December 2015. From January 1, 2015 creditors have been allowed to sell any non-performing residential real estate, without restriction - a sign of the end of the crisis.

Currently, around 93% of current loans are “problem free”, from 86% to 89% in 2016. About 2.5% were “under special watch” while only 0.4% of the total current loans were “below average”. The remaining 4% were categorised as “sub-prime” (consisting of doubtful and bad loans). Mortgage market remains steady, despite surging home loans.

In 2018, the total value of new housing loans amounted to HUF 850 billion (2.55 billion), up by 31% from the prior year, according to MNB’s Housing Market Report – May 2019.

Loans borrowed for the purchase of used homes, which constituted almost three-fourths of new housing loans, were up 37% y-o-y in 2018. Loans for the purchase or construction of new homes, which accounted for 17% of new loans, rose by 27% y-o-y in 2018. As a result, the total value of housing loans outstanding increased 10.3% to HUF 3.22 trillion (EUR 9.69 billion) in 2018 from a year earlier, according to KSH’s Residential Mortgages in 2018 report.

Despite this, the size of the mortgage market remained at 7.9% of GDP in 2018, almost unchanged from a year earlier, according to KSH.

REFERENCES:


http://www.ecbc.eu/uploads/attachements/27/65/Hungary.pdf

https://www.globalpropertyguide.com/Europe/Hungary/Price-History



ANNEX Ireland

Irish banking sector was affected by post-2008 banking crisis, resulting in the government’s bank bailout, in particular nationalisation and recapitalisation of the troubled banks. Now Irish banking sector is dominated by ‘Big Four’ domestic banks.

The Irish banking system operates on a basis similar to the UK banking system. Currently, there are 64 banks in Ireland. The Central Bank of Ireland (CBI) is responsible for traditional central banking functions, such as financial regulation. In 2010, a new CBI structure was created, replacing the three previously related entities: the Central Bank, the Financial Services Authority of Ireland, and the Financial Regulator. All banks operating in Ireland must be licensed by the CBI. Banks in Ireland consist of retail banks that provide general banking services, including comprehensive current account services and mortgage facilities and banks that operate in the IFSC (International Financial Services Centre).

On January 27, 2015, the central bank introduced new regulations to limit mortgage lending. A central bank review in December 2019 found the measures have

kept house prices from rising significantly, so they will stay unchanged in 2020.

These measures include the following:

Loan to Value (LTV) limits for principal dwelling houses (PDH):

· 90% LTV limit on PDH mortgages of first time buyers.

· 80% LTV limit on PDH mortgages of second and subsequent buyers.

· Banks and other lenders have the freedom to lend a certain amount above these limits: up to 5% of the value of mortgages to first time buyers and up to 20% to second and subsequent buyers.

LTV for Buy to Let mortgages (BLTs):

· 70% LTV limit on BTL mortgages.

· Banks can lend above these limits, but only up to 10% of the value of all non PDH mortgages on an annual basis.

Loan to Income (LTI) for PDH mortgages:

· A limit of 3.5 times loan to gross income on PDH mortgage loans

· Banks can lend above the said limit: up to 20% of the value of new mortgages to first time buyers can be above the LTI cap; and up to 10% of the value of new mortgages to second and subsequent buyers can be above the LTI cap.

According to the central bank, these measures are now a permanent feature of Ireland’s mortgage market. They raise bank and borrower resilience and ensure that the financial system can better withstand future economic shocks.

The European Central Bank (ECB)’s refinancing rate remained at zero in November 2019, unchanged since March 2016.

CURRENT MORTGAGE MARKET IN IRELAND

Banking & Payments Federation Ireland (BPFI) mortgage data show that there were 40,203 mortgage drawdowns valued at EUR 8.7 bn in 2018 compared with 34,798 drawdowns valued at EUR 7.3 bn in 2017 – representing a 15.5% increase in volume terms and a 19.4% increase in value terms. Mortgage approval activity also increased, albeit at a slower rate than drawdowns; in volume terms by 6% in 2018, bringing the total number of approvals to 45,656 and in value terms activity increased by around 9% with the total value of approvals exceeding EUR 10.1 bn in 2018. First-time buyers (FTBs) accounted for nearly half of all mortgage drawdowns by value in 2018, a trend that is similar to the one experienced over the past few years.

Due to the central bank’s measures Ireland’s mortgage market is shrinking. Residential mortgage lending fell to just 23.5% of GDP in 2018, from 25.1% in 2017, 27% in 2016, 29.2%

in 2015, 40.1% in 2014 and 46.2% in 2013. It is now way below the peak of 64.5% of GDP in 2009.

Loans outstanding for house purchase fell by 1.7% y-o-y to €76.02 billion in October 2019, according to the Central Bank of Ireland. New housing loans with floating rate and up to one-year fixation fell by 21% y-o-y €282 million in October 2019. In contrast, new housing loans with over one-year fixation rose modestly by 3.6% to €770 million over the same period.

Mortgage interest rates in Ireland remain very low, fueling strong housing demand. In October 2019:

· The average interest rate for housing loans with maturity of up to 1 year was 3.1%, down from 3.63% in the same period previous year.

· The average interest rate for housing loans with maturity of between 1 and 5 years was 3.24%, down from 3.33% a year ago.

· The average interest rate for housing loans with maturity of over 5 years was 2.52%, unchanged from a year earlier.

Banks in Ireland rely mainly on retail funding sources (household and corporate deposits) for mortgage lending. Irish private sector deposits (mainly from households and non-financial corporations) represented 32% of credit.

REFERENCES:

https://corporatefinanceinstitute.com/resources/careers/companies/banks-in-ireland/

https://www.ebf.eu/ireland/

https://www.globalpropertyguide.com/Europe/Ireland/Price-History



ANNEX Italy

The banking sector is among the primary strong points of the Italian economy. Ten years on, much has changed: credit risk is decreasing, capitalisation is rising, restructuring and consolidation are going on, and profitability is recovering.

The health of Italian banks is also reflected in the fundamental role they continue to play in favour of households and firms. Lending to the private sector has been expanding since the end of 2016. Latest figures, as of April 2019, show that total loans to households and non-financial firms continue to grow, increasing by around 0.9% on an annual basis.

A business model of Italian banking is focused on loans intermediation and other retail services and very limited exposure to market risk. This traditional banking approach has helped the Italian banks in supporting domestic activities.

In Italy, housing finance is mainly raised from banks, with the Unicredit bank taking the largest market share. The housing finance market has been growing with a fast pace in Italy. The mortgage debt to GDP ratio increased from 9.8 percent in 2000 to 19.8 percent in 2007.

The loan-to-value ratio (LTV) is capped by prudential regulations at 80%. Yet, the average LTV lies with 50 to 60 percent clearly below this level. This is due to the conservative lending standards of Italian banks and high average down payments. About 90 percent of mortgage loans are floating rates, or fixed for only one year; less than 10 percent of mortgage loans are fixed for ten years or more. A tax rebate of 19 percent for mortgage interest on the income tax is granted up to a certain limit.

Deposits are for the banks the main source of funding for their mortgage market activities though, in 2007, securitised mortgages were with a share of 16 percent on the total residential mortgage debt outstanding of importance. Though a law on Covered Bonds was passed in 2005, no Covered Bond deals have occurred until 2008.

CURRENT MORTGAGE MARKET IN ITALY

Italy’s mortgage market is still small, with outstanding mortgages equivalent to less than 22% of GDP in 2019, less than half of EU 28’s average of about 47% of GDP.

This is largely attributable to the length and cost of the loan recovery process, which makes Italian banks very cautious.

From the time a borrower defaults, legal proceedings usually take from five to seven years. Italian house buyers are also reluctant to use mortgage facilities, despite tax benefits, according to the Royal Institution of Chartered Surveyors (RICS). The take-up of mortgages expanded sharply when interest rates on new house purchases fell to historical lows of 2.7% in 2010, but since then the demand for new loans for house purchases has slowed sharply, despite generally very low interest rates.

That mortgage market’s small size means interest rate reductions tend to have a relatively small effect on the Italian housing market, even though about 50% of housing loans were variable rate.

With reference to the residential mortgage market, outstanding residential loans have continued to grow progressively since 2015. The outstanding amount reached more than EUR 379 bn in 2018 (EUR 375.4 bn in 2017). However, and after the excellent growth registered in previous years, new loans for residential housing purchase (EUR 67.8 billion at the end of the year) recorded a decrease in 2018.

In February 2020, outstanding housing loans rose slightly by 1% to €384.24 billion from a year earlier, up from an annual average growth of just 0.5% in 2012-2019 but sharply down from 12% annual growth in 2004-2011, according to the ECB.

Even before the financial crisis, the Italian economy was growing sluggishly, with average GDP growth of 1.2% from 2001 to 2007.

It has been a miserable decade since then. Italy’s economy contracted by 1.1% in 2008 and by another 5.5% in 2009. The country went back to 1.7% growth in 2010 and 0.6% in 2011, but contracted by 2.8% in 2012 and 1.7% in 2013, according to the International Monetary Fund (IMF). Italy’s economy then grew by 0.1% in 2014, 0.9% in 2015, and 1.1% in 2016. Italy’s economy grew by a miniscule 0.3% in 2019, down from expansions of 0.8% in 2018 and 1.7% in 2017, amidst trade tensions and weaker investment outlook.

The COVID-19 pandemic is expected to drag Italy’s already ailing economy into deep recession this year, after the government imposed travel restrictions, and closed businesses except food and medicine for weeks. Oxford Economics projects the eurozone’s third largest economy to contract by 3% this year but other forecasts are more pessimistic, suggesting that the economy could shrink by as much as 7%.

REFERENCES:

https://www.ebf.eu/italy/


https://www.globalpropertyguide.com/Europe/Italy/Price-History



ANNEX Latvia

Latvia banking and financial system has been developing rapidly since 1991 when Latvia declared its independence from the Soviet Union. Latvian banking sector is relatively small, highly concentrated, with high share of foreign capital. Most of the foreign-controlled banks are originated from Scandinavian countries (Denmark, Finland, Norway and Sweden); most of the domestic banks are privately owned.

The majority of Latvian banks operate as universal banks; however, there are also specialised banks, focused solely on wealth management or corporate banking. More than half banks in Latvia provide their products and services to non-residents (offshore banking). The Latvian banking sector is stable, resilient and well capitalised. It is committed to embedding a culture of compliance while developing products and services that support the economy being shaped by environmental, social as well as governance challenges.

It was not until 2008 that mortgage market growth ground to a halt; since then, the country’s share of total mortgage debt to GDP has shrunk from 36.6% in 2010 to 16.2% of GDP in 2017. Even today, the value

of outstanding housing loans continues to decline as most foreign homebuyers typically prefer to pay in cash. In September 2018, the total value of housing loans outstanding fell by 6.4% to about €4.09 billion from the same period previous year, according to the Bank of Latvia.

The decline has continued despite the introduction of the state-guaranteed Mortgage Loan Programme in 2015, under which the Latvian Development Finance Institution (ALTUM) provides guarantees for mortgage loans granted by commercial banks to families with children. From the program’s inception in January 2015 to June 2018, state guarantees already total €61 million, benefitting about 8,708 families. About 67% of the guarantees have been granted in Riga and Pieriga, 14% in Vidzeme, 9% in Kurzeme, 7% in Zemgale, and 3% in Latgale. Since March 2018, the Mortgage Loan Programme has been expanded to cater to young professionals, in addition to families with children.

CURRENT MORTGAGE MARKET IN LATVIA

Credit institutions in Latvia obtain funding mostly from depositors and parent banks. The importance

of domestic deposits as a source of funding has been growing, and the share of domestic deposits was 56.9% (compared to 43.0% the year before) of banks’ total liabilities by the end of 2018, while the share of liabilities to foreign parent MFIs was 10.8% (9.7% in 2017). In 2018, there were no mortgage covered bonds issued by Latvian MFIs.

Housing loans with a maturity of over 5 years account for 97.3% of all loans in September 2018. Loans with maturity of up to 1 year and those with maturity of 1-5 years represented 1.6% and 1.1%, respectively.

The outstanding amount of banking sector residential and commercial mortgage loans decreased in 2018 by 11.9%. However, the decrease is explained mainly by one-off factors related to structural changes in the Latvian banking sector (for instance, the withdrawal of the credit institution’s license). The outstanding amount of residential mortgage loans showed a decrease of 6.0% for the same reasons. Excluding structural one-offs, the residential loan stock increased slightly in 2018 (0.5%) as issuance of new residential mortgage loans peaked (7.1% in 2018), facilitated by a rise in household income, low interest rates and the state support programme for house purchase (in 2018,

about half of new residential mortgages were granted within the program). Meanwhile, the repayment of the long-term residential mortgages granted in the pre-crisis boom period is still weighing on the loan portfolio dynamics. Total residential mortgage loans comprised 13.9% of GDP in 2018 and household indebtedness overall remained low (16.6% of GDP in 2018). Effective interest rates on EUR-denominated residential mortgage loans remained broadly unchanged (2.82% in 2017 and 2018).

The quality of the banking sector loan portfolio continued to improve – residential mortgage loans over 90 days past due made up 2.1% of the respective portfolio, while resident corporate loan portfolio over 90 days past due stood at 2.5% at the end of 2018.

REFERENCES:

https://www.ebf.eu/latvia/

https://www.globalpropertyguide.com/Europe/Latvia/Price-History

https://hypo.org/app/uploads/sites/3/2019/09/HYPOSTAT-2019_web.pdf



ANNEX Lithuania

The Lithuanian banking sector is dominated by the subsidiaries of large Scandinavian banks. The two largest banks – SEB, Swedbank – are owned by their parent banks in Sweden. The other three banks, AB Šiaulių bankas, UAB Medicinos bankas, and AB “Citadele“ bankas, are considerably smaller and are owned by groups of local and foreign investors.

Lithuanian banking sector is relatively small, highly concentrated, with high share of foreign capital and is dominated by Scandinavian banks. The Lithuanian government has no ownership stake in the banking sector.

In 2018 as in previous years, deposits remained primary funding source of mortgage lending. Despite majority banks offering close to zero rates for EUR term deposits, the deposits volume in the market continued to grow. The competitive landscape is dominated by SEB, Swedbank, and Luminor (merged DNB and Nordea banks). The above three banks together comprise 97% of the mortgage market, since all of them have strong parent banks and they are in good position to provide relatively cheap mortgage funding in Lithuania based on local deposits and parent funding. Current

economic landscape, especially total size of the market and prevailing rates, precludes banks from using innovative mortgage funding instruments like securitisation or covered bonds.

About 80% of all dwelling purchases are now made with the aid of mortgages, and typically 95% of all property value is granted in loans. The mortgage market reached 17.54% of GDP in 2018, almost back to the 22.4% of GDP it occupied before the 2009 crisis, and up from a mere 0.4% of GDP in 2000.

More than 99% of all loans have initial rate fixation of over 5 years. All new loans are in euros. Lithuania joined the Euro on January 1, 2015, the bloc’s 19th member. The Litas, which had been pegged to the Euro for a decade, went out of circulation.

CURRENT MORTGAGE MARKET IN LITHUANIA

The average interest rate for new housing loans with initial rate fixation (IRF) of up to 1 year stood at 2.28% in December 2018, up from 1.96% a year earlier and 1.8% two years ago, according to the Bank of Lithuania. The average rate for new housing loans with IRF of more than 1 year was 5.03%,

up from 4.57% in December 2017 and just 2.78% in December 2016. The average interest rate for outstanding housing loans was 1.7% in December 2018, slightly up from 1.61% a year earlier and 1.65% two years ago.

Mortgage market growth in 2018 slowed down compared to 2017 following housing construction trends. According to the statistics of Bank of Lithuania, the outstanding mortgage loan amount at the end of 2018 was EUR 7,758 mn, while in 2017 it was EUR 7,173 mn, this constitutes an 8.16% growth, compare with the 2017/2016 growth of 8.94%. New loans issuance in 2018 grew by 9.1% from EUR 1,338 mn to EUR 1,459 mn, with the growth rate gradually decreasing from 9.8% in 2017/2016. The

Bank of Lithuania statistics indicate that the average mortgage interest rate increased from 2.01% in 2017 to 2.22% in 2018. The slower growth rate indicates certain lack of consumer confidence and the bank’s moves to counteract the heating up of the housing market.

REFERENCES:

https://www.ebf.eu/lithuania/


https://www.globalpropertyguide.com/Europe/Lithuania/Price-History



ANNEX Malta

Over the past two decades, the banking sector in Malta has grown from four retail banks serving the local population to 24 licensed banks as at the end of 2018, only three of which are Maltese majority-owned. The ownership of the other banks originates from various EU and non-EU jurisdictions, including Austria, Australia, Belgium, Greece, Kuwait, Turkey and the United Kingdom. As such, 65.7% of the banking sector’s total assets of around € 44.4 billion are foreign-owned.

The sector is very diverse in terms of inter-linkages with the domestic economy, and can be split into three groups, according to the extent of linkage with the Maltese economy: core domestic banks; non-core domestic banks and internationally-oriented banks.

Malta is establishing itself as an international banking centre and hub for finance in the Mediterranean region. Malta’s banking sector has transformed from one having several retail banks serving the local population to a diversified landscape with domestic and foreign-controlled banks, providing a variety of solutions from traditional retail banking products to sophisticate customised private banking, wealth management and corporate banking products.

Mortgage loans are mainly provided by the core domestic banks, predominantly Bank of Valletta plc and HSBC Bank Malta plc, which account for almost 75% of the domestic retail market (core banks’ total assets). This category of banks relies mainly on resident deposits for their funding, with such deposits increasing by 6.6% to EUR 19.5 bn in 2018. With a loan-to-deposit ratio as low as around 61%, deposits provide ample liquidity to the banks, without recourse to securitisation or covered bonds being called for.

On 29 March 2019, the Central Bank of Malta published Directive No 16 on the Regulation on Borrower-Based

Measures. The objective of these binding measures is to strengthen the resilience of lenders and borrowers against the potential build-up of vulnerabilities stemming from the real estate market. The Directive came into force on 1 July 2019. The Measures were introduced in collaboration with the Malta Financial Services Authority (MFSA) following a recommendation by the Joint Financial Stability Board (JFSB). The measures set limits on the loan-to-value at origination (LTV-O), debt-service-to-income at origination (DSTI-O) and maturity.

The macro prudential measure differentiates between two categories of borrowers – Category I and Category II Borrowers. The first category comprises first-time buyers (FTBs) and non-FTBs purchasing their primary residence, not having outstanding residential real-estate (RRE) loans upon the signing of the deed. It includes borrowers who already own or have owned a primary residence and at the origination of the mortgage loan the pre-exisitng primary residence has either been sold or a promise of sale agreement (“konvenju”) has been entered into; or there are pending proceedings before the Civil Court (Family Section) which hinder the sale of the primary residence. The second category of borrowers includes any other loan to purchase an RRE excluding Category I Borrowers. Loans to Category I Borrowers with a collateral market value below EUR175,000 (excluding haircuts) are exempted from the loan-to-value-at-origination (LTV-O) and debt-service-at-origination (DSTI-O) limits specified in the Directive. Loans falling below this threshold are still subject to prudent lending policies in terms of the MFSA Notice on the Management of Credit Risk by Credit Institutions authorised under the Banking Act 1994 (BN/01/2002). The maturity limits apply for all new RRE loans. Lenders may implement tighter credit standards than those established in CBM Directive No.16. For Category I Borrowers (for loans with a collateral market value exceeding EUR175,000), the following caps shall apply:

· 90% LTV-O with a ‘speed limit’ of 10% on the volume of loans;

· 40% Stressed DSTI-O with a shock to interest rates of 150 bps;

· 40 years maturity cap or the official retirement age – whichever occurs first.

For Category II borrowers, the following limits shall apply:

· Gradual LTV-O phase-in:

· 1st year: 85% LTV-O cap with a ‘speed limit’ of 20% on the volume of loans;

· 2nd year: 75% LTV-O cap with a ‘speed limit’ of 20% on the volume of loans;

· 40% Stressed DSTI-O with a shock to interest rates of 150 bps;

· 25 years maturity cap or the official retirement age – whichever occurs first.

The vast majority of mortgage loans granted in Malta are amortising variable rate loans. Drawing from the banks’ regulatory reporting in 2018, 62.1% of the loans for house purchase were granted at variable rates or at a fixed rate for up to one year; compared with 74.3% in 2017. Almost all of the remaining mortgage lending was granted with an initial interest rate fixation period of between one and five years. These are typically loans granted with a fixed interest rate period of between two to three years, at a rate which is somewhat lower than that for variable rate loans. When the fixed interest rate period expires, these loans become variable rate loans in line with the normal practice in Malta. The share of such loans increased in 2018, amounting to 37.7% of total loans granted, compared with 25.4% granted in 2017. Meanwhile, only 0.2% of the total mortgages have a fixed interest rate for over five years.

CURRENT MORTGAGE MARKET IN MALTA

Since 2014, house price growth gathered momentum, averaging at around 5.8% in 2018. Various factors can be attributable for this increase including the low interest rate environment which contributed to drum up housing demand as borrowers could finance the acquisition of property at a relatively cheaper rate. Demand was further incentivised via budgetary measures first announced in

November 2013 aimed at first-time buyers and, more recently, also for second-time buyers. Inward migration also drove up demand, together with a flourishing tourism industry which has seen a greater share of tourists staying in rented private accommodation.

Demand pressures led supply to respond, with the number of permits for the construction of dwellings increasing by more than 30% annually in four years, to reach 12,885 in 2018. This represented the highest number of dwelling permits issued in one year, compared to the previous high of 11,343 units reported in 2007.

Resident credit by the core domestic banks was predominantly driven by mortgage lending, which picked up further in 2018, growing by 8.8%, 0.6 percentage points higher than in the previous year. Despite this increase, growth was still significantly lower than the double-digit growth rates recorded pre-2008, and it was still proportionate to nominal GDP growth. The share of resident mortgages to total resident lending rose to account for almost half of the banks’ lending portfolio compared to around 32% a decade before. Meanwhile, lending to resident construction and real estate rose by 7.0% during 2018, following a number of years of anemic or negative growth as supply was correcting for previous imbalances in the market.

Mortgage loan rates have hovered near 3% since December 2008. In March 2019, the average lending rate on new mortgages was 2.55%, a slight decline from 2.76% in the same period previous year. In February 2019, Malta´s outstanding loans for house purchases increased by 9.49% y-o-y to €5.03 billion.

REFERENCES:

https://www.ebf.eu/malta/


https://www.globalpropertyguide.com/Europe/Malta/Price-History

https://www.esrb.europa.eu/pub/pdf/other/esrb.notification20190517_other_mt~4b2d102bce.en.pdf

https://www.centralbankmalta.org

https://www.centralbankmalta.org/borrower-based-measures



ANNEX Luxembourg

Luxembourg’s international banking centre has a long-standing expertise in financial services, ranging from international private banking and wealth management, retail banking, corporate finance to fund services and depositary banking. Luxembourg is leveraging its unique strengths and attributes to position itself as a leader in emerging fields such as innovative financial technologies (‘Fintech’) and sustainable finance. The banking sector is the main economic engine. Luxembourg features the highest banking internationalisation rate in Europe (94.8%) with more than one third of the banks coming from outside the European Union. These banks are operating an expanded business model on a cross-border basis, using an EU passport for providing financial services across Europe, particularly in private and corporate banking as well as in asset servicing.

Mortgages in Luxembourg are principally funded through deposits. The usual maximum LTV ratio amounts to 80%. The most common mortgage contract is at a fixed rate. The standard maturity for mortgage loans is 25 to 30 years, while some banks grant credits for up to 35 years.

CURRENT MORTGAGE MARKET IN LUXEMBOURG

Luxembourg´s mortgage debt as a percentage of GDP has sharply increased from 22.5% of GDP in 1999 to 50.9% of GDP in 2018. The mortgage market in Luxembourg in 2018 followed a sustained growth path similar to the previous years and reached new all-time high both in outstanding and new lending figures. This evolution rests on sound underlying fundamentals and on the ongoing easing of lending criteria of Luxembourg banks, in line with the same trend observed across the Euro area. The ongoing expansion of the mortgage market, rests also on the fact that interest rates, despite the slight increase over the last couple of years, is around 1.75% in 2018, remaining one of the lowest in Europe.

In 2018, the Luxembourg market for mortgage loans has seen the number of fixed-rate loans further increase with respect to the variable-rate loans, thus now reaching nearly 60% of the new issuance. The dynamism of real estate market is driven by both demand and supply factors. Excessive demand has contributed to this steep price development, which is exacerbated by migration-induced demographic

pressures, the relatively strong purchasing power of resident households as well as bottlenecks on the supply side. A significant role is also played by socio-demographic factors such as the reduction of the size of households and the average size of dwellings. High house prices in Luxembourg City have also fostered urban sprawl to less densely inhabited areas in the country. Moreover, the tax system in the Grand Duchy favours owner-occupied housing as it still allows for mortgage interest deductibility.

REFERENCES:

https://www.ebf.eu/luxembourg/


https://www.globalpropertyguide.com/Europe/Luxembourg/Price-History



ANNEX The Netherlands

The Dutch banking market is relatively competitive. Large Dutch banks are internationally active in order to serve the open and export-oriented Dutch economy. The five largest Dutch banks account for about 85% of the balance sheet total. However, with the European banking union being phased in, the relevant market gradually becomes a truly European market. The ownership structure of the three major banks is diverse. The largest bank is publicly listed, the second largest is a cooperative institution and the third largest is partly state-owned. The capitalisation of Dutch banks is good. Cost reduction and digitalisation drive profitability. However, new lenders have entered the Dutch market for mortgages and roughly 50% of new mortgage loans are issued by non-banks.

In the Netherlands, housing finance is mainly raised from banks and specialist residential mortgage providers like Bouwfonds, with the cooperative bank Rabobank taking the largest market share with a share of 30 percent in 2008. Mortgage Brokers have an important intermediation role as about 60 percent of all mortgage transactions were processed through mortgage brokers in 2005. Between 2000

and 2007 the housing finance market has been growing considerably. The mortgage debt to GDP ratio increased from 68.2 percent in 2000 to almost 100 percent in 2008. This very high level traces back partly to the Dutch fiscal regime (see next passage).

Mortgage market continues to decline. During the past seven years, there was a sharp contraction - to 68.4% of GDP in 2018, from over 103% of GDP in 2009, according to De Nederlandsche Bank (DNB). Dutch residential mortgage debt had previously had the fastest annual increase (41%) among OECD countries from 2007 to 2011. The rise of mortgage debt was rooted in aggressive government promotion of homeownership since the 1980s. The Dutch fiscal regime allows full tax deductibility of most mortgage interest payments if:

· The house purchased is the main residence.

· The mortgage loan has a period of a maximum of 30 years.

· The profit made on the sale of the previous houses is used to reduce the size of the mortgage on the next one.

Since 1995, 90% of new mortgages have been not repayable till loan maturity, while 30% do not have to be repaid at all (“interest-only”). Generous mortgage tax relief, allowing homeowners to deduct the full cost of their mortgages from tax, has distorted the housing market, and saddled Dutch banks with higher risks by boosting loan books.

CURRENT MORTGAGE MARKET IN THE NETHERLANDS

The high presence of non-bank lenders in the market continued to be visible in 2018, even though banks booked a stable market share during the year. On the basis of the Land Registry data, the market share of banks averaged some 60% in 2018. On a relative basis, insurers continued to originate lower volumes and decreased their average market share to some 16%. Third-party originators, mainly acting on behalf of domestic pension funds, but increasingly also for foreign parties, were responsible for approximately 26% of all new mortgage originations. From the funding side, whole-loan transfers or forward flow mandates continued to dominate, especially on the non-bank side. Banks increasingly opted for the issuance of covered bonds instead of securitisations (RMBS), not only because of more favourable funding conditions in the latter market, but also to have to opportunity to raise long-term funding.

The residential mortgage market faced a strong year in 2018. Even though transaction volumes on the housing market hardly grew, total new mortgage originations still amounted to EUR 106 bn, according to the Land Registry. This was an increase of 5% compared to 2017 and the origination volume was the highest since the financial crisis. The main driver behind the increase were mortgage refinancing, as a bigger group of mortgage borrowers took a new mortgage in order to benefit from lower mortgage rates.

In April 2019, total outstanding housing loans were almost unchanged from 2018 at €527.09 billion, according to DNB. But new housing loans drawn amounted to €8.71 billion in April 2019, down by 3.1%.

The average interest rate for new housing loans was 2.36% in April 2019, down from 2.39% the previous year and 2.42% two years earlier. Most Dutch housing loans are fixed rate mortgages (FRM) of 5 years or more. However very low interest rates have prompted some shift to floating rates.

For new housing loans:

Floating rate and interest rate fixation (IRF) up to 1 year: 1.87% in April 2019, down from 1.92% a year earlier.

IRF 1-5 years: 2.09% in April 2019, down from 2.16% in the previous year.

IRF 5-10 years: 2.33% in April 2019, slightly down from 2.36% in the previous year.

IRF 10 years or more: 2.82% in April 2019, down from 2.88% in a year earlier.

For outstanding housing loans, the average interest rate was 3.05% in April 2019, down from 3.24% a year earlier.

Original maturity of less than or equal to 1 year: 2.12% in April 2019, down from 2.23% in the previous year.

Original maturity of 1-5 years: 2.33% in April 2019, down from 2.42% in the previous year.

Original maturity of more than 5 years: 3.06% in April 2019, down from 3.25% in a year earlier.

REFERENCES:

https://www.ebf.eu/the-netherlands/

https://www.globalpropertyguide.com/Europe/Netherlands/Price-History




ANNEX Poland

The Polish banking system is characterised by high stability and resilience. The Polish Financial Supervision Authority (Komisja Nadzoru Finansowego – KNF) is responsible for state supervision of the national financial market. The institution responsible both for operating the deposit guarantee scheme and resolution processes is the Bank Guarantee Fund (Bankowy Fundusz Gwarancyjny – BFG). The authority responsible for macro-prudential supervision is the Financial Stability Committee (Komitet Stabilności Finansowej – KSF), comprising the Polish National Central Bank (NBP), the Ministry of Finance, the KNF and the BFG.

Polish banking sector is dominated by foreign-controlled banks, with the presence of domestic commercial banks; there are also two domestic cooperative banking groups operating in Poland.

The main funding instruments for mortgage loans in Poland are deposits and covered bonds, with deposits being the main funding source, even for long-term mortgage loans. The outstanding volume of Polish covered bonds amounted to est. PLN 21.5

bn, and new issues in 2018 amounted to PLN 5.35 bn. According to the law, only specialised mortgage banks are eligible to issue covered bonds in Poland.

CURRENT MORTGAGE MARKET IN POLAND

In 2018, nearly 212,600 new housing loans were granted in Poland – the best results of new volume since 2011. At the end of 2018, the total number of active housing loans reached 2,246,296 units and the total balance of debt amounted to over PLN 415 bn.

The Polish mortgage market has grown explosively - from only 1.3% of GDP in 2000, to 20.4% of GDP in 2019.

In February 2020, Poland’s total outstanding housing loans rose by 8% to PLN 469.44 billion (EUR 103.45 billion) from the same period previous year, according to the NBP. Zloty-denominated housing loans outstanding rose strongly by 12.4% y-o-y to PLN 345.91 billion (EUR 76.22 billion). Foreign currency-denominated housing loans fell by 2.7% y-o-y to PLN 123.54 billion (EUR 27.22 billion). Foreign currency-

denominated housing loans (including Swiss franc loans) peaked at more than 69% of all loans in 2008. This caused a crisis when the currency collapsed. During the 2008-09 crisis the Polish zloty fell dramatically, and mortgages - mainly denominated in foreign currencies - became unrepayable.

REFERENCES:

https://www.ebf.eu/poland/


https://www.globalpropertyguide.com/Europe/Poland/Price-History



ANNEX Portugal

In the aftermath of the financial crisis and of the economic crisis that followed, the Portuguese financial system has undergone a very intense transformational process that resulted in significant achievements on all fronts: solvency, liquidity, asset quality and, more recently, profitability, as well as business model adjustments and governance improvements. The Portuguese banking sector is now more resilient and prepared to face potential adverse shocks. Portuguese banking sector is dominated by domestic banks with a number of foreign-controlled banks operating in Portugal.

According to the IMF, bank capital ratios have been boosted by the 2017-18 capital augmentations, profitability has improved, and non-performing loans have markedly decreased, but banks continue to face challenges. Although it remains below Euro area standards, asset quality has steadily improved, with the non-performing loan (NPL) ratio declining to 9.4% at end-2018, with a provisioning ratio above 50%. The banking system has reported positive profits since the beginning of 2017, but these remain low relative to pre-crisis levels and below the cost of equity. The mission recommends that supervisors ensure that banks continue to follow through on their

NPL reduction targets and strengthen their corporate governance, internal controls, and risk management, and encourage banks to step up efforts to improve operational efficiency and profitability.

Portugal has one of the highest owner-occupation rates in Europe, partly caused by generous government mortgage subsidies having helped push up owner occupation from 52% of all housing in 1981, to 74% in 2013 and finally to about 75% in 2019.

On the banks perspective, retail and wholesale funding are the main sources of funding of the national banking system, with deposits becoming the main source (LTD ratio of 89% as of December 2018). On the customer perspective, commercial banks are the most common providers of mortgage.

The most common mortgage products are written with variable interest rate indexed to Euribor rate. Mortgage loans granted in 2017 had an average maturity of 33.3 years (+6 months per contract compared to 2016), 13 months higher comparing to the contracts portfolio. The maximum term contracted in 2017 was 53 years, higher than the verified during the previous four years.

Since July/1/2018, new residential credit agreements should observe the following LTV limits: 90% for credit for own and permanent residence; 80% for other purposes than the latter; 100% for purchasing immovable property held by the credit institutions themselves and for property financial leasing agreements.

CURRENT MORTGAGE MARKET IN PORTUGAL

From an annual perspective, total assets of the banking system, in 2018, increased by 0.9% over 2017, total loans decreased 0.6% (+0.5% for households), client deposits increased 3.3%, and central bank financing declined 14.8% (to EUR 20.36 bn; EUR 50.72 bn in 2011).

In 2018 concerning domestic activity for the five major banks operating in Portugal, the financial margin (the difference between the amount that banks lend and the price at which they are financed) increased more than EUR 170 mn, topping more than EUR 2.9 bn. Although interest rates are still historically low, banks are benefiting from lower financing costs. The improvement in this indicator was a reduction in the cost of funding, namely the reduction in the cost of debt issued and the trend towards a decrease in the remuneration of deposits, notwithstanding the reduction in the yield generated by the credit and securities portfolios. According to recent data from Banco de Portugal, the average rate of deposits to individuals was 0.1% in December 2018, 0.04 pps below that observed in December 2017. In addition to the lower cost that banks have with deposits, some banks are also reaping the benefits of increased credit amounts.

After continuously declining from 2012 to 2015, interest rates on housing loans have been almost

unchanged in the past four years. In November 2019, the average interest rate on housing loans stood at 1.05%, slightly down from 1.11% a year earlier. Despite very low interest rates, outstanding housing loans declined by 0.1% in November 2019 from a year earlier, to €94.41 billion or 44.8% of GDP.

The Portuguese mortgage market is extremely sensitive to interest rate changes, since about 65% of new mortgage loans issued in 2019 have variable interest rates or initial rate fixation of less than one year, according to the European Mortgage Federation (EMF).

By maturity (as of November 2019):

Up to 1 year: 2.51%, down from 2.92% a year earlier.

Over 1 and up to 5 years: 2.51%, down from 2.68% a year earlier.

Over 5 years: 1.05%, slightly down from 1.11% a year ago.

The exceptionally low mortgage rates were partly due to the recent rate cuts of the European Central Bank (ECB), from 1.5% in October 2011 to 0.05% in September 2014 and to 0.00% in March 2016.

REFERENCES:

https://www.globalpropertyguide.com/Europe/Portugal/Price-History

https://www.ebf.eu/portugal/




ANNEX Romania

The banking sector of Romania is highly concentrated and is dominated by foreign-controlled banks. Banks in Romania operate as universal banks.

In Romania, generally credit institutions are the main mortgage lenders, with marginal input from non-bank financial institutions. The top 10 banks grant the majority of mortgage loans in Romania.

Deposits are the primary source for mortgage funding. During past years, residents’ deposits increased faster than non-government loans such that the loan-todeposits ratio declined from the maximum 1.3 reached in December 2008 to 0.76 in December 2018. In 2018 residents’ deposits increased significantly, by 8.8% y-o-y, the largest rate post-2008, mainly due to the expansion of households’ deposits, in particular of foreign currency denominated deposits. Banks’ external financing followed a declining trend, the banks’ share of foreign liabilities (out of which funding from parent bank represents around 60%) in total liabilities reached 8.6% in December 2018 down from 10% compared to the same period in the previous year. In 2018, new steps were taken to

open the covered bond market in Romania, with the first covered bond issued in Q1 2019 by Alpha Bank Romania.

In Romania, the loan / deposit ratio stands at approximately 79%. Thus, credit institutions mainly use funds attracted from clients in order to grant loans. Credit institutions have gradually reduced their dependence on parent banks by increasing their deposits volumes.

The mortgage market’s strong growth has been buoyed by the government’s “Prima Casa” (First Home) programme, launched in May 2009, which supports first home purchasers who have not previously had a mortgage.

The government guarantees 80% of the value of the loan, up to a maximum credit amount of 60,000 euros, and there is no age limit for the beneficiaries. The credit period is 10-30 years. Accepted earnings are the standard accepted by banks: earnings from salaries, pensions, copyrights, life annuities, dividends, and earnings from independent activities, but not rental income.

CURRENT MORTGAGE MARKET IN ROMANIA

Romania’s mortgage market remains small by international standards, at just 7.82% of GDP in 2019. From 2008 to 2018 housing loans outstanding have grown by almost 17% annually.

It might have been expected that mortgage growth would have been stalled by the passage, in early 2016, of the “Legea darii in plata” law, allowing a borrower to close his mortgage debt by handing back his property to the bank, with no other obligations. However mortgage growth has not stalled. Housing loans increased by 10.4% y-o-y in November 2019 to RON 80.39 billion, according to the National Bank of Romania.

In 2019, the Prima Casa programme received a budget of about RON 2 billion. It was implemented through fifteen banks: BRD-GSG, BCR, Banca Transilvania, CEC Bank, ING Bank, Raiffeisen Bank, OTP Bank, Banca Romaneasca, Unicredit Bank, Garanti Bank, First Bank, Marfin Bank, Credit Agricole, Leumi Bank, Intesa Sanpaolo Bank.

According to the new provisions, starting on 1 January 2019, the maximum level of indebtedness is 40% of net income for domestic currency-denominated loans and 20% for foreign currency-denominated loans. The rising interest rates increased the offer of housing loans with fixed interest rates for up to 10 years, such that by the end of the year the weight of these loans in total new housing loans granted reached 32% compared to 25% in December 2017. Although, the nonperforming ratio of housing loans declined further to 2.8% in September 2018 from 3.5% in September 2017, the estimated probability of default on a one-year horizon is expected to rise from 0.35% to 0.7%.

REFERENCES:

https://www.ebf.eu/romania/

https://www.globalpropertyguide.com/Europe/Romania/Price-History




ANNEX Slovakia

The Slovakian banking sector consists of universal banks, focused on retail and corporate banking. Some of them are specialised banking institutions. Since privatisation ended in 2001, most of the banks in Slovakia are controlled by foreign entities, mainly banking groups from Austria, Italy and Belgium. The Slovakian banking sector is concentrated within the hands of three major players (Slovenska sporitelna, VUB Banka and Tatra banka) who control more than 50% of the banking assets. Despite this concentration, the market share of small and medium-sized banks has slightly increased in recent years. Entities which can issue mortgage loans are mortgage banks, Bausparkassen and State funds.

Mortgage loans have maturity of at least 4 years and maximum of 30 years. Most mortgage loans taken out are loans with a variable rate or with short-term fixed rates. The average Loan-to-Value (LTV) ratio for new loans in Slovakia is the fourth highest in the Euro area and one third of new loans to households have an LTV ratio of 80% indicating a relatively elevated share of risky borrowers. This factor combined with excessive household indebtedness and the risk of falling property prices led the National Bank of Slovakia (NBS) to introduce two measures which were phased in starting on 1 July 2018:

A reduction in the share of new loans that that can have an LTV ratio between 80% and 90% and eventually prohibit the provision of loans with an LTV greater than 90%;

A reduction in the share of loans that can be provided to borrowers with Debt-to-Income (DTI) ratio of 8 or greater (highly leveraged borrowers).

The share of new loans that may have an LTV ratio of more than 80% will be gradually reduced from 40% to 20%, and the share of new loans that may have a DTI ratio of more than 8 will be gradually reduced from 20% to 10%.

Deposits are for banks one main source and for the Bausparkassen the only source of funding for their mortgage market activities. Short-term deposits and current checking accounts continue to offer a stable, low-cost source of funding for the banks and Bausparkassen. Banks also fund the lending activities through the issuance of Covered Bonds. Covered bonds are an attractive funding tool for Slovak banks, because they are typically cheaper for banks than senior unsecured bonds on average in Europe. This is because they are asset-backed and are perceived as lower risk by investors. In August 2017, the Slovakian

government passed a resolution adopting a new covered bond law, which came into force in January 2018 and has contributed to increase liquidity in the market and has made covered bonds an even more attractive funding tool for banks.

CURRENT MORTGAGE MARKET IN SLOVAKIA

The average interest rate on new housing loans stood at 1.49% in March 2019, having fallen continuously from 1.65% in March 2018, 1.88% in March 2017, 2.11% in March 2016, and 2.87% in March 2015.

In March 2019:

Average floating rate loan interest rate (or loans with interest rate fixation (IRF) of up to 1 year): 1.57%, down from 1.76% a year ago.

IRF over 1 to 5 years: 1.49%, down from 1.65% a year ago.

IRF over 5 to 10 years: 1.43%, down from 1.63% in the previous year.

IRF of over 10 years: 1.55%, down from 1.69% a year earlier.

The low interest rate environment is due to the European Central Bank cutting its key rate to a historic low of 0.00% in March 2016, where it has remained since. Unsurprisingly in April 2019, the total outstanding amount of housing loans to households rose by almost 11% to €29 billion from the same period previous year.

The size of the mortgage market grew rapidly to about 31.3% of GDP in 2018, from 29.9% of GDP in 2017, 16.1% of GDP in 2010, and just 6.3% of GDP in 2004.

REFERENCES:

https://www.ebf.eu/slovakia/


https://www.globalpropertyguide.com/Europe/Slovak-Republic/Price-History



ANNEX Slovenia

In the beginning of the decade the three largest banks in Slovenia were state owned: NLB Group, the largest bank in the Adriatic region, NKBM and A Banka. In 2013 the financial system in Slovenia found itself in deep trouble, caused to a large degree by bad loans. The system was overhauled with the help of massive state aid. A crucial part of the restructuring plan approved by the European Commission was the commitment of Slovenia to sell its state-owned banks.

Banking sector of Slovenia is highly concentrated and is dominated by domestic state-owned banks which control more than 40% of the market, while France´s Societe Generale, Italy´s Unicredit, and a number of Austrian banks are also present in the market. Slovenian banks are continuing to gradually reduce their foreign deposits. On the other hand, the banks continued to increase their liabilities from household deposits and deposits by non-financial corporation.

The mortgage industry in Slovenia is part of the universal banking services. Before the economic crisis in 2008, banks were funded by international financial markets as they were needed to fuel high lending activity, however, the situation changed afterwards.

Currently lending activity is predominantly financed by means of rising deposits from the non-banking sector and the LTV ratio for the non-banking sector stabilised at 77%. Liabilities to the Euro system account only for a small proportion of funding as a favourable liquidity position means that the banks do not need these resources. Wholesale funding accounted for 6.4% of all funding in 2018, less than a fifth of its pre-crisis figure.

However, the maturity mismatch between investments and funding continues to increase as a result of the lengthening maturities of loans and the simultaneous growth in sight deposits from the non-banking sector, which is introducing a certain level of potential instability into the banking system’s funding structure. Finally, although legislation allows banks to issue mortgage backed securities, no securitisation of residential mortgages has yet taken place.

In 2018 Bank of Slovenia amended its non-binding macro prudential recommendation for household lending (issued in 2016) that included a maximum recommended level of LTV ratio and of DSTI ratio for housing loans. The maximum LTV ratio recommended is 80%, while the maximum DSTI ratio varies from

50% to 67% depending on the monthly income. According to the latest assessment of compliance with the macro prudential recommendations for the residential real estate market, the average LTV and DSTI have not changed significantly over time and remain within the bounds of the Bank of Slovenia recommendation. The rate of owner occupation is high, while the proportion of real estate owners with a mortgage is among the lowest in the Euro area.

CURRENT MORTGAGE MARKET IN SLOVENIA

Slovenia’s mortgage market has expanded from 7.6% of GDP in 2007 to about 13.6% of GDP in 2018. It has been held back by structural problems - the underdeveloped land registration system, weak foreclosure procedures, and other problems of the legal environment.

The total outstanding housing loans rose by 4.4% in 2018, after growing by an annual average of 22% from 2008 to 2010, and 3.1% from 2011 to 2017.

Demand for residential real estate slowed down as a result of diminishing affordability and shortage of marketable real estate. Growth in the stock of housing loans to households remained stable in 2018 at 4.5% and growth in demand for housing loans slowed down too due to affordability issues. Interest rates on housing loans remained relatively low, although a slight increase in average fixed interest rates was experienced. More than half of new housing loans were approved with a fixed interest rate in 2018. The average maturity of housing loans in 2018 was 18.7 years, down from just over 19 years in 2017.

In December 2019, total lending for house purchases increased by 5.6% to €6.59 billion from the previous year, based on the figures from the Bank of Slovenia.

Loans for house purchases denominated in domestic currency rose by 6.8% to €6.25 billion during the year to December 2019.

Loans for house purchases denominated in foreign currency plunged by 12.5% y-o-y to €337 million in December 2019.

Average housing loan interest rates in Slovenia in December 2019:

Floating and IRF of up to 1 year: 1.81%, down from 1.89% in December 2018.

IRF over 1 and up to 5 years: 3.15%, down from 3.22% in December 2018.

IRF over 5 years and up to 10 years: 2.5%, down from 2.74% in December 2018.

IRF over 10 years: 2.7%, down from 2.95% in December 2018.

REFERENCES:

https://www.ebf.eu/slovenia/

https://www.investslovenia.org/news-and-media/e-newsletter/the-new-shape-of-slovenian-banking

https://www.intellinews.com/outlook-2020-slovenia-174063/


https://www.globalpropertyguide.com/Europe/Slovenia/Price-History



ANNEX Spain

Spanish banking system was deeply affected by the financial crisis: in June 2012 Spain requested 100 bln EUR to recapitalize Spanish banks. Series of mergers and acquisitions took place in 2009-2014 resulting in significant decrease in the number of banks operating in Spain and enlargement of the remaining banks.

The Banco de España is Spain’s central bank and the supervisor of its banking sector. It has contributed to establishing a range of measures since 2007 to increase the resilience of the sector in response to the international financial crisis. This included increasing provisioning and transparency, promoting mergers between saving banks, and setting up the Sareb, the asset management company to which non-performing real estate assets of banks have been transferred.

The evolution of the mortgage credit during 2018 confirms the positive trend started four years earlier. The expansion of mortgage credit throughout these years could be explained by the combination of two key circumstances: the maintenance of accommodating monetary policy and the improvements in the labour market. In this sense,

new lending activity secured by a home increased from almost EUR 39.0 bn in 2017 to more than EUR 43.0 bn in 2018, thus leading to an improvement on a yearly basis of 10.8%.

In Spain, mortgage lending is always provided by financial institutions. Banks, savings banks, credit cooperatives, and financial credit establishments are the institutions allowed by law to grant mortgage loans and issue securities. It is worth mentioning that saving banks were specially affected by the recent crisis due to the high exposure to the real estate sector. Several saving banks disappeared through liquidation or acquisition, and most of the remaining transformed into banks after Law 26/2013 of 27 December was passed. Since then, only small and regional saving banks operate in the market. The most common way to fund mortgage lending is deposits, covered bonds and RMBS/CMBS.

On average terms, the LTV ratio on new residential mortgage loans stands at 66% (according to Bank of Spain statistics). However, the most common LTV for first time buyers is 80%. The average mortgage term is now 24 years, according to Bank of Spain and INE (Instituto Nacional de Estadística). The most common

mortgage loan product in Spain is the variable rate mortgage loan reviewable every 6 or 12 months with a French amortisation system. In variable rate mortgage loans, the interest rate is linked to an official reference index (being the most common the Euribor 12m). Since 2015 as a result of the security they offer, initial-fixed interest rate mortgage loans, with a fixation period of over 10 years, have gaining momentum, representing in December 2018 around 34% of gross lending.

CURRENT MORTGAGE MARKET IN SPAIN

Since 2013 mortgage securities’ issuances remain at a relatively subdued level compared to previous years, as a result of the ongoing excess of liquidity and the insufficient level of new lending activity. The total amount of Covered Bonds’ stock showed a decrease of 2.2%, amounting to EUR 211.7 bn at the end of 2018, while mortgage back securities drop by 11.0% y-o-y, up to EUR 100.2 bn.

As in 2017, in 2018 around 90% of the total volume of new mortgage loans was granted by banks. Other financial institutions, like credit cooperatives and financial credit establishments, represented the remaining 10%.

In 2018 the average maturity for new mortgage loans in Spain stood near to 24 years (according to Bank of Spain statistics and INE). Although the real amortisation period is usually lower, around 15 years on average.

Following post-crisis European Central Bank (ECB) key rate reductions, average mortgage rates in Spain dropped to 1.29% in December 2016, and have held steady since. In November 2019, the average mortgage rate in Spain was 1.22%, almost unchanged from a year earlier, according to the European Central Bank (ECB).

In November 2019:

The interest rate for housing loans with initial rate fixation (IRF) of up to 1 year stood at 1.85%, up from

1.76% in November 2018 but still down from 2.29% two years ago.

The interest rate for housing loans with IRF between 1 and 5 years was 4.25%, up from 4.13% in the previous year but down from 4.7% two years earlier.

The interest rate for loans with IRF of over 5 years was 1.21%, almost unchanged from a year earlier.

Spain’s housing market has traditionally been extremely vulnerable to interest rate changes, given that before 2004 more than 80% of new mortgages had initial rate fixations (IRF) of less than 1 year, a proportion which rose to 90% from 2005 to 2006.

However, there has been a continuous decline in the share of adjustable rate mortgages in recent years. In October 2019, fixed rate mortgages represented 45.3% of all new loans contracted, up from 39.8% share in a year earlier, and from just about 3% a decade ago, according to INE.

Despite ultra-low interest rates, the Spanish mortgage market continues to shrink. It contracted to about 41.1% of GDP in 2019, down from 42.8% of GDP in 2018, 44.9% in 2017, 48.1% in 2016, 51.3% in 2015 and 61.5% in 2011.

New home mortgages increased by a minuscule 0.1% y-o-y to 289,289 during the first ten months of 2019 – far below the annual average of 1.13 million new home mortgages granted from 2003 to 2008.

REFERENCES:

https://www.globalpropertyguide.com/Europe/Spain/Price-History


https://www.ebf.eu/spain/

https://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/



ANNEX Sweden

The four main categories of banks on the Swedish market are Swedish commercial banks, foreign banks, savings banks and co-operative banks.

Swedish banking sector is dominated by “Big Four” domestic banks, operating as universal banks. There are also a number of foreign-controlled banks, regional savings banks and co-operative banks. The “Big Four” Swedish banks have prominent presence in other Scandinavian Countries and Baltic States.

Several measures have been taken in recent years for the purpose of counteracting high indebtedness. In 2010 the Swedish Financial Supervisory Authority introduced a mortgage cap, whereby home loans may not exceed 85% of the value of the home. The Financial Supervisory Authority has also introduced a risk weight floor for Swedish mortgages in order to tie up more capital in relation to banks’ mortgage lending. The risk weight floor for mortgages is currently 25%. Another measure to tackle high indebtedness is the introduction of amortisation requirements. In June 2016 the Financial Supervisory Authority’s regulation on amortisation requirements entered into force and from March 2018 stricter amortisation requirements entered into force.

Variable interest is the most common interest rate on mortgages.

There are no specific limitations as regards issuing mortgages. In practice 99% of all mortgage lending in Sweden is issued by banks and credit market institutions. New non-bank actors are entering the market, but have yet a limited stock of mortgage loans. Covered bonds are the most common form of funding used in the Swedish market for funding of mortgages.

CURRENT MORTGAGE MARKET IN SWEDEN

Residential mortgage lending grew by 5.8% in 2018 compared to 7.1% in 2017. The growth rate of residential loans has now been declining for three years in a row. The mortgage lending has cooled-off the last years, but from comparably high figures. During a comparably long period the mortgage lending growth has been higher than the GDP growth and has increased households’ debt levels. Several factors, which have been unchanged for many years, explain the increasing residential lending. The Swedish population is growing in record numbers due to high immigration and relatively high birth rates.

The internal migration in Sweden towards larger cities has driven the housing markets in expanding areas. This in combination with a long period of comparably low residential housing construction has created a severe lack of housing and housing imbalances. Another factor is the dysfunctional rental markets in the growth regions due to a general rent control, which results in many years of queuing to get a rental apartment with a first-hand contract. If someone moves to a city in a growth region in Sweden, normally has to buy an apartment or rent a second-hand apartment at a cost usually far higher than rents on the regulated first-hand market. An additional factor is historically low mortgage interest rates. Also, the high construction figures the last years of above all tenant-owned apartments have added to financing needs by mortgage loans.

Mortgage interest rates have been relatively stable the last four years. The variable (3-month) mortgage interest rate has varied between 1.4 and 1.6% during 2018, which is about the same level as from 2015 to 2017. The initial fixed mortgage interest rates, 1-5 years, have varied between 1.6 and 1.7% in 2018, which is also the same level as previous years. Initial fixed mortgage interest

rates over 5 years were low also in 2018 and reached levels below 2% at the end of 2018.

The average LTV for new mortgage loans was 65% in 2018, slightly higher than in 2017. The credit loss ratio on mortgage loans has been close to zero for several years in Sweden, including 2018. An explanation for the low credit losses are high credit standards in Sweden, but also that the housing prices have been almost continuously increasing the last 25 years.

During 2018 the Swedish stock of covered bonds increased by 3.6% (in SEK) to EUR 218 bn. This could be compared to outstanding residential mortgages of EUR 409 bn. The Swedish mortgage institutions issued new covered bonds amounting to EUR 54 bn in 2018.

REFERENCES:

https://www.ebf.eu/sweden/#:~:text=The%20four%20main%20categories%20of,and%20two%20co%2Doperative%20banks.




ANNEX United Kingdom90

90 The United Kingdom is formally no longer an EU member since 31st January 2020.

The United Kingdom banking sector is dominated by a few very large banks, including the Lloyds Group, Barclays, the Royal Bank of Scotland (RBS), and HSBC. In terms of market shares for all categories of business, the market is clearly oligopolistic.

The United Kingdom is a leading trading power and important financial centre attracting investors from all over the world by its stable environment and financial and corporate legislation. Among more than 350 credit institutions operating in the United Kingdom, there are about 140 branches of foreign credit institutions from 40 different countries. Most of the British Crown dependencies and overseas territories are also financial centres specializing in offshore finance and banking.

In 2018, the top five lenders accounted for more than 64% of outstanding mortgage loans (Lloyds Banking Group, 20.4%; Nationwide BS, 13%; Santander UK, 11.2%; Royal Bank of Scotland, 9.8%; and Barclays, 9.7%), according to UK Finance.

Although banks and building societies have always been closely regulated in the UK, the former Financial Services Authority (now the FCA) implemented a regulatory scheme specifically for mortgages as

a result of the Financial Services Act of 2000. The professional conduct of mortgage providers is regulated by the FCA. The entities which can issue mortgage loans are Monetary and Financial Institutions (MFIs), which includes banks and building societies, and other specialist lenders (non-bank, non-building society UK credit grantors, specialist mortgage lenders, retailers, central and local government, public corporations, insurance companies and pension funds).

The most common type of mortgage in United Kingdom is the initial fixed rate mortgage with an average maturity of 25 years. The typical LTV ratio on residential mortgage loans is 72%.

CURRENT MORTGAGE MARKET IN UNITED KINGDOM

Government policy on housing in recent years has been largely aimed at stimulating first-time buyer activity, most notably through help to buy schemes and stamp duty exemptions. At the same time, more stringent regulation and increased taxation on buy to let mortgages have acted to significantly dampen demand for new investment in the rental sector. Home movers have been largely left alone in

this mix – neither directly targeted with assistance or with additional surcharges and regulation. As such, we continue to see different trends in purchase activity: first-time buyer numbers increased again, with 357,000 new first-time buyer loans in 2018, up 2% from the 348,000 in 2017. However, the rate of growth was significantly down - from 5% in 2017 and 11% in 2016. This is likely to be linked to affordability; irrespective of assistance programmes, since 2014 FCA rules require lenders to verify that mortgage applicants can afford to repay the mortgage from available income after deducting other household bills and living costs, both at the initial pay rate and under a higher, stressed interest rate. For much of the intervening period wages have failed to keep pace with house price inflation, and as a result affordability has become ever more stretched.

February 2018 saw the closure of the Bank of England’s Term Funding Scheme, which enabled lenders to access cheap finance, subject to this being passed on in loans to the real economy (consumers and businesses).

Although mortgage lending spreads have continued to narrow and the extra compensation for lending for five years, rather than two has decreased, borrower demand has been relatively muted and the mortgage market remains very competitive, with historically low lending margins. As a result, there has been little pressure on banks’ mortgage funding costs as they have largely been able to fund new mortgages with retail deposits. The introduction of ring-fencing of major UK banks which separates retail banking services from other activities may have supported this, as some ring-fenced entities have more domestic deposits than loans. There has been some volatility in wholesale funding market rates, but this has not fed through into mortgage pricing. These fluctuations have arisen from sterling weakness, as the UK continues to negotiate with the EU about its relationship in a post-Brexit environment and securitisation market uncertainty about the introduction of the new EU securitisation regulation that introduces simple, transparent, standardised securitisations.

The Bank of England (BoE) raised its key rate by 25 basis points in August 2018 to 0.75%, the highest level since February 2009.

Despite this, mortgage rates continue to fall. In October 2019, average interest rates for types of mortgages with 75% loan to value (LTV) were:

2-year fixed rate mortgages (FRMs): 1.55%, down from 1.8% a year ago.

3-year FRMs: 1.63%, down from 1.85% a year ago.

5-year FRMs: 1.74%, down from 2.06% a year earlier.

10-year FRMs: 2.64%, slightly down from 2.72% a year earlier.

Standard variable rate mortgages: 4.29%, down from 4.45% a year ago.

UK’s mortgage market is softening, as buyers become more cautious amidst economic and political uncertainties.

In August 2019:

New loans to first-time buyers fell by 2.1% y-o-y to 33,300, based on the latest Mortgage Trends report released by UK Finance.

New loans to home movers fell 8.2% y-o-y to 33,610.

Remortgages with additional borrowing fell by 5.7% y-o-y to 17,720.

Mortgages for buy-to-let house purchases fell by 3.3% y-o-y to 5,900.

Yet gross mortgage lending was still up by about 3.2% in the first nine months of 2019 from the previous year to £198.3 billion, compared to 1.4% growth last year, according to the BoE. In the first nine months of 2019, the value of loan approvals for house purchase rose by 4.9%.

REFERENCES:

https://www.ebf.eu/united-kingdom/

https://www.bankofengland.co.uk/statistics/data-collection/institutions-in-the-uk-banking-sector

https://www.globalpropertyguide.com/Europe/United-Kingdom/Price-History


NOTES

NOTES

Mortgage Markets

100 ECR Party

ecrparty.eu @ECRparty @ECRparty @ECRparty

ECR Party is formerly known as ACRE PPEU. Registered in Belgium as a not-for-profit organisation and partially funded by the European Parliament. Sole liability rests with the author and the European Parliament is not responsible for any use that may be made of the information contained therein.