This figure could reach as high as EUR1,600 billion in potential new mortgage lending across Europe. Progress towards Europe’s ambition of providing consumers flexibility and choice in financial services will be an important part of fulfilling this unmet demand.
The report (sponsored by Europe’s Mortgage Insurance Trade Association (MITA)), Risk and Funding in European Residential Mortgages – responding to changes in mortgage demand, examines potential sources of future demand and concludes over 80% of growth potential is most likely to be in higher risk lending products. These market segments include low down-payment, highly-indebted or non-traditional borrowers. In part, these new market opportunities reflect a changing Europe: rising house prices, declining savings rates, increasing numbers of single-family households and immigrants wishing to purchase property as a means of wealth accumulation and social acceptance. Properly handled, this increased market activity promises a 15% addition to Europe’s current level of home lending. The potential benefits are greatest in markets with less developed specialist sectors (such as Germany), less developed mortgage markets (such as Italy), and generally throughout the Central and Eastern European region.
The study notes that three types of “winners” will emerge from the competition to provide these more innovative and niche products:
First, highly rated universal banks with access to low-cost deposits, other diversified sources of funding and the scale and sophistication to recognize and manage the additional risk posed by these new products;
Second, specialist providers with superior product knowledge, a focused marketing strategy, a willingness to embrace unconventional distribution alternatives and consistent access to secondary market investors willing to provide funding; and
Third, risk management specialists such as mortgage insurers that act as risk partners on higher risk products, improve asset quality through highly rated credit protection, diffuse product innovation within and across markets and enable lenders to target demand with additional product and service flexibility.
The 93-page study also indicates that a fundamental shift in the regulatory climate is required to ensure that the widest group of borrowers has access to competitive mortgage loans. Consistent with the introduction of more risk-sensitive capital regulations for lenders and more dynamic accounting standards that limit traditional “rainy day” reserving policies, the study notes that regulators can facilitate better risk management, for example, by encouraging the shifting of risks to other market participants in either the capital markets or to third party specialists such as mortgage insurers.
Sacha Polverini, Chair of MITA comments: “The European mortgage industry is at a turning point. The past ten years has seen excellent asset growth rates for the majority of lenders, which have been driven by rising house prices and falling interest rates, low credit losses and a relatively stable economic environment. Consolidation is occurring within and between national markets, with a “Champions League” of lenders emerging. The Mercer Oliver Wyman report demonstrates that over the next decade there will be clear winners within local markets. Those winners will be characterised by superior underwriting management; superior risk management and more sophisticated funding techniques that can be used to lower the overall cost of lending – and improve lending profitability.”
Matthew Sebag-Montefiore, Director, Mercer Oliver Wyman states: “The commercial pressures on mortgage lenders have never been greater – with margins falling in most countries, the credit cycle turning, and house prices now stagnating in many markets. In this tough operating environment, Basel II is threatening to flood capital into the mortgage sector, with the lower risk weights that will apply to conforming, prime mortgages. This leaves the lenders with a very tricky position as to where they can find the next wave of profit growth from.
“We think this report highlights some of the big profit opportunities for them. We identify the high risk sector in the broad sense as a big opportunity across most of Europe; for example, in Germany, Italy and France amongst others, it is currently underserved and margins are high. The challenges of risk management and funding in this segment are significant but ultimately, for the winners, that makes the profit pool all the more defensible. History suggests that the first movers will acquire the skills and competences required to win, via superior underwriting, servicing and funding, and go on to dominate these markets over time.
“Making money in mortgages is getting harder than during the golden years of sticking the net in the pond, but there are some big opportunities out there, particularly in higher risk lending, where the capital exists to underwrite the risks, either in-house or in third parties. It’s a case of ‘who dares wins’.”
Sacha Polverini concludes: “As students of the European residential lending market, MITA commissioned this report to understand and communicate the changing nature of the European mortgage lending business. Numerous studies have concentrated on differences between markets. MOW has highlighted the efforts needing to be undertaken by lenders to meet and, where possible, anticipate this emerging demand. Unsurprisingly, low down-payment lending represents the largest and most immediate opportunity available, and the experience of MITA members within and outside Europe suggests that this market segment can be developed to generate substantial economic and social benefits with no significant increase in risk to the bank or the greater banking system.”
