31 October 2012

EMF: Mortgage Info – October 2012

The European Mortgage Federation published its October newsletter, including i.a. articles on: Structural Reform in EU Banking - a UK Perspective; Over-Indebtedness - an Irish Perspective; and The Norwegian Housing Market and Norwegian Covered Bonds.

Structural Reform in EU Banking: a UK Perspective

In early October 2012 the EU’s High-Level Expert Group on reforming the structure of the EU banking sector, chaired by the Governor of the Finnish Central Bank, Erkki Liikanen, presented its report and launched a short consultation on its recommendations. The Group was established to consider whether reforms to the structure of EU banks were required, on top of other regulatory reforms to the banking sector currently in train, to reduce the probability and impact of bank failures so that vital economic functions provided by banks can continue, and vulnerable retail banking clients are better protected.

The foremost structural change that the Group proposes is to ring-fence a bank’s proprietary trading activities in order to separate them from its retail banking operations. Universal banks would continue to be able to operate, but would have to structure their corporate group accordingly into separate subsidiaries.

This suggestion reflects in different ways parts of both the UK’s Independent Commission on Banking recommendation to ring-fence retail banking operations, and Paul Volcker’s prescription for the US to prohibit proprietary trading by deposit-taking banks. These are all variations in tackling banks’ complexity and interconnectedness, recognising that those banking services whose continuous availability is essential to society need to be better insulated in the future so that large, complex banking groups can be credibly exposed to market forces, rather than enjoying implicit guarantees from taxpayers.

Over-Indebtedness: an Irish Perspective

This article reviews the voluntary and regulatory initiatives applied by mortgage lenders in Ireland when dealing with residential mortgage borrowers and briefly considers the forthcoming comprehensive personal insolvency and bankruptcy regime.

The mortgage arrears problem arising from the economic crisis that developed from 2007 occurs in the midst of an economy grappling with high unemployment, low consumer confidence, weak consumer demand and a housing market that is down 49 per cent in value since peak according to the Central Statistics Office. Although unemployment has stabilised and there are some signs that house prices may have begun to recover in Dublin at least, a return to a fully-functioning mortgage market is still some way off.

Bank practice and regulations governing mortgage arrears are moving at present from a short-term focus to more long-term solutions. To date, some 85,000 mortgages have been restructured by banks. The forthcoming non-judicial personal insolvency regime expected in early 2013, as well as bilateral lender-borrower engagements to agree long-term forbearance arrangements, introduce more certainty of medium- and long-term outcomes for borrowers and credit institutions.

The Norwegian Housing Market and Norwegian Covered Bonds

Norway has a current population of 5 million and there are a total of approximately 2.3 million dwellings in the country, which corresponds roughly with the number of households. Nearly 80 per cent of Norwegians own their own dwelling.

Private financial institutions are the dominant provider of residential mortgages to the household sector, accounting for 96 per cent of total outstanding mortgages (the total amount being equivalent to approximately €320 billion). Close to 50 per cent of the financial institutions’ total lending to customers is in the form of residential mortgages, so the housing market is very important to the Norwegian financial sector, both on the asset side and on the liability side of the balance sheet as a potential source of covered bonds issuance.

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