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Monday, 23 January 2012

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


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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

The Dutch mortgage market is characterised by high loan-to-value ratios. Consequently, the majority of loans in arrears are also in negative equity. Reported loss severities are typically higher on loans that have been foreclosed upon through a court auction process. However, the low level of activity in the residential market means that consensual sales have become more difficult to complete. These factors combine to not only reduce the incentive for servicers to complete foreclosures through forced sales, but also to reduce the volume of consensual sales.
"It is important to note that absolute arrears levels remain relatively low despite the recent increases, particularly when compared to other European jurisdictions," says Gavin Crawford, Associate Director in Fitch's European RMBS team. "However, the increase in late-stage arrears, which Fitch expects to persist in 2012, is causing a build-up in potential foreclosure stock."

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

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

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

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

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

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

21 comments:

  1. Hi Ernst.

    I found your website by chance, googling about mortgage default in the Netherlands...that's right, I'm another victim!

    Perhaps you could give me some quick advice - or at least share some knowledge since is so hard to find information on the subject. I have a house in Amsterdam and due to separation from my ex-partner, the situation now is very different than when we bought it. We're both expats, he still lives in the property but I no longer live in the country. I've been doing my outmost to keep paying my part of the mortgage, hoping the house will sell. It's been over a year the property is in the market with hardly any offers, except speculative ones about 30% less than our asking price.

    So, if you're still reading this blablabla, my question to you would be - what are the consequences of a default in the mortgage? The house's already been for sale for 14 months, so the bank can see we're trying to get the best price. But my main concern is the outstanding debt after an eventual sale does happen. How do banks normally deal with the remaining loss? What are the alternatives for debt relief for a person like me?

    Would be great to hear from you and thanks for working on such an interesting blog on the subject. Buying a house in the NL was an emotional move - in the direction of having a home, not an investment in the housing market - but life turned out to take me into a different direction and the current economy doesn't seem to forgive or even allow changes these days! Also, I've read in quite a few places that the expat community, like myself, is suffering with the housing crisis.

    All the best

    ReplyDelete
    Replies
    1. I am very sorry to read that the two of you broke up. And unfortunately, I don't have an easy advice.

      It is still possible to sell a house at the RIGHT price, but alas this is not the price that you want or need to have for it.

      If you want to sell your house more quickly, you need to move your sales price closer towards the 'speculative prices' you were talking about, as these are the prices that people are seemingly willing to pay.

      If I could give you one piece of advice, it is to talk with the bank that gave you the mortgage. Talk about your situation and about the fact that your house has been for sale for 14 months already. Ask them what kind of arrangements they can offer for a residual debt, when it emerges.

      Be proactive and please wait not until the economic sh*t hits the financial fan.

      I think that banks appreciate it when you step forward yourself.

      One other thing you could do is letting your house for rent, but do this only with a renowned and bonafide mediation bureau specialized in distinguished tenants with short contracts (preferably expats), as tenant protection is very strong in The Netherlands. And don't leave your house empty, because of the 'krakers'.

      Unfortunately I don't expect the housing market to recover quickly and I do expect the housing prices to drop for at least another 20%.

      But please don't give up and be proactive towards the people that gave you the mortgage. I hope this helped you a little and I wish you good luck with your situation.

      Regards,

      Ernst

      Delete
  2. Hi Ernst
    many thanks for the reply, I was planning to talk to the bank, just needed to know if there were other alternatives. It's still unclear to me how residual debt after the sale is normally handled by the banks, as it looks we'll have to drop the price considerably to end this story. The loss might be significant and I couldn't find any information online on the subject.
    Kind regards.

    ReplyDelete
  3. I'm very sorry that I couldn't give you more detailed information. Concerning the way how banks will handle residual debt: I truly don't know, as it depends on the individual situation.

    In most cases, you can talk to banks in a decent way when you act proactive and solution-minded. However, if you wait until the very last moment with solving your problems, banks are not so 'nice' anymore. So it is good that you take the initiative to solve your problem.

    And of course I'm sorry to hear that you have to drop your price, but that is unfortunately a consequence of the insane housing market that we had between 1995 and 2006.

    Good luck and let me know how things went (you can use the email address in my profile, as I am the only person that reads it).

    Cheers,

    Ernst

    ReplyDelete
    Replies
    1. Hi Ernst,
      many thanks again, I'll definitely speak to the bank to find out more. Will keep you posted! Cheers!

      Delete
  4. One more common do is lead aggregation - vendors pay for, bundle and resell Mortgage leads. The result is leads of dubious excellence that may be days or even weeks aged.FHA

    ReplyDelete
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  6. Hi Ernst
    We are in the same position as the lady with the mortgage.
    Did she get any help from the bank?
    After 4 1/2 years of keeping up with the payments (had a tenant for one year who destroyed the house, and being in the position that we could only charge half of the payment for rent - council rules), we could not keep up any longer.
    We made an appointment to see if the matter can be resolved for all parties, we wrote a letter to the CEO of the bank, with the only reply the acknowledgement of our letter, they sold the house at auction for half of its worth. We have proof of all the correspondence. They have now, after 7 years completed their admin and has now sued us for the outstanding amount!
    So, I would really like to know if the banks was of ANY help to the other lady?
    The document they provided does not have any of our signatures and we are now waiting for that to be sent to us.




    ReplyDelete
  7. Hi Lurita, Thank you for your reaction to this article. I'm really sorry to hear about your current situation. Perhaps you can send me your story through a personal mail to my mail address, as displayed in my profile. Then I will turn it into a personal story: anonymous or with your name, if you want.
    Unfortunately, I did not hear from the aforementioned lady anymore. As most of my commentators respond anonymously, it is impossible to keep in touch with them. I hope she found a solution in the meantime and I hope that you will find one soon,

    Get in touch with me if you like.

    Kind regards,

    Ernst

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