1 Whats Ahead for EU Mortgage Markets? ELRA General Assembly Brussels, Belgium 27 April 2009 Whats Ahead for EU Mortgage Markets? ELRA General Assembly Brussels, Belgium 27 April 2009 Kerstin FISCHER European Mortgage Federation

Structure of Presentation 1.Introduction to the European Mortgage Federation (EMF) 2.Definitions 3.Market Trends 4.State of Play 5.Next Steps 6.Conclusions 2

The Voice of the EU Mortgage Industry1 EMF: a product federation - all categories of mortgage lenders Membership: EU MS & Accession Countries Representing mortgage industry at EU level => retail & funding sides European Covered Bond Council (ECBC) since 2004 Important sector in the general EU economy: 6.1 trillion outstanding (end 2007) = 50.1% of aggregate EU GDP Access to housing for 70.4% of EU population 3

4 Defining Home loans 2 Two categories of mortgage credit, based on the borrower: residential and commercial Residential mortgage credit/Home Loans = credit to consumers as per EU definition of consumer: a natural person who is acting for purposes which can be regarded as outside his trade or profession 3 categories of Home Loans: classic mortgage loans: secured by real estate property and granted for housing purposes; ERS: Mortgage loans secured on real estate property but granted for consumption purposes; Housing loans, i.e. granted for housing purposes but non-real estate secured or unsecured loans.

5 Value of EU Residential Mortgage Market Source: European Mortgage Federation

6 Outstanding Mortgage Loans in the EU – 2006 & 2007 (mil. )3

7 Mortgage Markets Growth rate (%) & Source: European Mortgage Federation

8 Mortgage Debt as % of GDP – 2006 & 20073

9 Owner Occupation in Europe –

House Price y-o-y growth rates (%) –

Mortgage CBs outstanding as % of total outstanding mortgage loans –

Mortgage Covered Bonds outstanding – 2007 (mil. )3 12

13 Booming Mortgage & Housing Markets until mid Interest rates at a historic low thanks to favourable economic context Significant decrease in mortgage loan prices due to: Increasingly strong competition within the Industry Banks increased efficiency: consolidation, outsourcing Abundance of liquidity: cheap funding on capital mkts Very high consumer demand as a result of: Increased affordability: low interest rates; decrease in prices; general increase in households incomes & strong product innovation (LTVs/maturities/flexib) Change in demographic organisation of households Expectation of continued increase in house prices

: A Turning Point4 US Sub-Prime Crisis: Result of abundant liquidity & continued house price growth Relaxing of credit underwriting conditions Funding through securitisation: loans/risk do not remain on lenders balance sheets Securitisation process has developed, becoming much more complex and less transparent Global Financial Crisis: Impacts on EU Majority of EU lenders do not grant sub-prime loans & primarily fund through savings deposits & covered bonds But EU banks invest in US securitisation portfolios containing sub-prime loans – primarily relying on CRA ratings In 2007, EU banks discover existence of risky loans in their portfolios => Result: Very strong loss of confidence, drastic drying up of liquidity on EU markets and, finally, a credit crunch

State of Play in the EU by November EU Industry acknowledges a slow-down in the mortgage market in a general context where: Property markets in a number of MS are witnessing a decline in their price growth rate (DK, ES, UK) and even some price falls (IE) Consumer demand is easing due to general increase in prices and decline in economic perspectives As a result, either due to lack of liquidity or out of caution, EU lenders have: Strengthened their credit underwriting conditions Increased the price/cost for riskier loans 15

Stakeholders Reactions: EU Commission (1)5 EU regulation of mortgage industry today: Institutional regulation aiming at banks economic soundness & general financial stability: CRD/Basel II Product regulation: consumer credit, time share Horizontal consumer protection: UCP Directive 2007 Commission White Paper: further integration of EU mortgage markets: MC = access to housing for 67% of EU citizens Financial sector outstanding= 49.6% of EU GDP 2007 Linked to construction sector = major driver of economy COM: further integration would benefit consumers/ lenders => lower costs & increased product diversity. (integration: not defined) 16

Stakeholders Reactions: EU Commission (2)5 To achieve further integration, DG MARKT considers four types of measures: Comparative studies on desirability of regulation / harmonisation: equity release loans; credit intermediaries; tying/ UCP; non-banks Removal of legal obstacles to cross-border activities: registration, enforcement & valuation Facilitation of cross-border funding in the EU Further consumer protection measures (PCI, ESIS) However, a number of these proposals have been superseded by the crisis, and today the Industry has other, more urgent priorities 17

Stakeholders Reactions: EU Industry (1) 5 Integration = EU cross-border activities Lenders do go cross-border through subsidiaries & M&A Integration = EU price convergence Range of adjusted prices in the EU is <1% and continuously converging, thanks to: Increased competition, lender efficiency, and greater price transparency Integration = EU market completeness Markets are broadly complete and the product range is continuously broadening, but there are gaps (DE; IT; P) Missing products: ERL; fixed-rate & sub-prime products In principle, there is room for improvement 18

Stakeholders Reactions: EU Industry (2)5 Pre-Crisis EU mc markets: broadly integrated Level of cross-border activity depends on individual lenders appetite / objectives (economic context) Margins left little room for further price reductions Market completeness level: could be improved in principle However, the crisis has changed the landscape: Lenders tend to avoid new risky undertakings, to fall back on markets they know best; Prices are increasing (re-evaluation of risk, increased interest rates); and Product diversity is narrowing rather than widening. 19

Lessons learnt: Where do we go from here? (1)6 Here & Now - Industrys priorities: overcome current crisis + restart a dynamic & sustainable business, in a context where: MS sensitivities to global crisis vary widely, depending on: Choice as to major funding technique: deposits, CBs, MBS Level of exposure to US securitisation Range of products: attitude to more risky products State of housing market & consumer demand Causes of the crisis in the EU mainly result from: EU markets sensitivity to US ups & downs: global distribution of risk through securitisation proved to lead to contagion rather than to mitigation Loss of confidence resulting in drying up of liquidity Lack of transparency of securitisation process: investors relying on CRAs/not aware of real risk level Some relaxing of credit underwriting conditions 20

Lessons learnt: Where do we go from here? (2)6 EU markets wide diversity calls for certain targeted concrete measures rather than wide harmonised scheme Causes of crisis: clear differentiation EU – USA Responsible lending standards applied by all lenders: framework of indicators (still to be defined) Level Playing Field : Same business, same risks, same rules Adequate information to consumers, allowing for a well-informed choice (Code/regulation?) Min. level of responsibility for the loan originator: Who does not keep loans on balance sheet? Improved transparency of the securitisation process and rating agency procedures? Increased reliance on mortgage insurance to mitigate lenders risks? 21

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