13 September 2011

EMF published September 'Mortgage Info' newsletter

'Covered bonds - looking forward'

With over €2.5 trillion outstanding at the end of 2010, covered bonds continue, more than ever, to play a key role in bank funding strategies. The €600 billion issuance during 2010 evidences the ability of the asset class to provide essential access to capital markets, even during volatile market conditions, notably thanks to a stable investor base. Their consistently strong performance and quality features have attracted the attention of regulators and market participants worldwide, which has in turn led to an increasing recognition of the macroprudential value of this asset class. The challenge today for the covered bond industry is how to take on board the lessons learnt from the crisis whilst reinforcing the essential features and qualities that have made the asset class such a success story.

After several years of turmoil in the financial markets, it is essential that we now look critically at our current funding models in order to increase further their resilience in the event of future funding crises. Against this background, the covered bond community is committed to developing a quality label for covered bonds. This initiative is intended to result in multiple benefits with an enhancement of the overall recognition of and trust in the asset class.

'Towards a European mortgage market'

The mortgage market represents more than 50 per cent of the EU’s GDP. It is characterised by rare crossborder activity, fragmented markets and growing concentration, although differences regarding funding and distribution channels remain among European countries. Although the epicentre of the crisis was placed in the US subprime market, the EU has suffered its impact through different channels. The exposure to derivative products (irresponsibly packaged, rated and traded), the worsening of financial and economic conditions and the widening of imbalances are the most relevant. The bursting of the “housing bubble” in some European countries and the tensions in other Member States such as those that had assumed important credit risks in foreign currency worsened the situation.

Over-indebtedness is at the heart of the crisis. We need to respond to all the challenges that it poses. The new legislative package on economic governance underlines the links between public and private debt. Public debt has already reference values at EU level. Now it is also necessary to address the issues of the excessive indebtedness in the private sector and of the credit as a whole. Three perspectives must be taken into account: the macro-economic, related to credit evolution, limits and uses; the structural, to protect savers and taxpayers; and the prudential to tackle the problems arising from highly leveraged institutions.  Achieving a first class regulation for mortgage markets is a key step in the right direction.

Other articles included:

• A review of the Spanish mortgage market
• Brazil’s mortgage growth – the challenge to overcome the depletion of subsidised funding
• Spanish market: putting things into perspective
• News in brief (ECON Committee Meeting 31/08/11, The EMF speaks out, EMF appoints new Head of Economic Affairs, ‘Home owning and renting in housing policy’)

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