Copious amounts of political will are required to ensure Europeans can benefit from long-term fixed-rate mortgages as discussed by the Miles Review, the European Mortgage Finance Agency says.
EMFA, to use its acronym, is backed by bancassurers such as Northern Rock to pitch the idea of government-backed securities as the best answer to broadening residential property ownership across the region.
The idea is to replicate the actions of the US’ Fannie Mae and Freddie Mac, government-backed – but not guaranteed – companies which have been extremely successful in bringing about wider access to home ownership.
Speaking at a meeting of regulators, associations and investment bankers organised by Deloitte Consulting, EMFA’s Rob Thomas argues the objectives of harmonising financial services across the EU - through the Financial Services Action Plan - will not provide enough impetus to boost the mortgage market on its own.
”The industry in Europe is inefficient,” says Thomas.
Costs are replicated and lenders are too reliant on retail deposits to fund their activities because there is a lack of mechanisms to tap institutional money through a unified capital market, as is the case in the US, he adds.
More than 60% of European mortgages are funded by retail deposits, according to EMFA figures, creating a situation whereby lenders cannot access the funding they need to provide long-term fixed rate mortgages.
”This is a problem in the UK, for example,” Thomas says.
”The 30-year fixed-rate mortgage with no redemption penalties is a superior product, but it is just not available here,” he adds.
That said, with retail savings rates falling over time there is additional impetus to provide an alternative which would enable lenders to tap into institutional money by repackaging and reselling mortgage debt along the lines of Fannie Mae and Freddie Mac.
These “government sponsored enterprises” (GSEs) are not explicitly backed by the US taxpayer, but the implicit backing is enough to enable them to obtain the highest credit rating on the debt that is being sold to institutions.
”Government involvement in the securitisation of mortgages exists in the US, Canada, Japan, but not in Europe,” Thomas says.
EMFA would enable the sale of mortgage-backed securities, while the involvement of the EU would guarantee a AAA rating for the securities (bonds) being offered to institutional buyers, he adds.
Many arguments have been raised against EMFA coming into existance, however, not least of which is the reality that the EU unlike the US is not a homogenous political entity.
Getting lawmakers who represent taxpayers across the EU to agree implicit, let alone explicit, guarantees for mortgage-backed securities will be difficult enough.
Then there are questions of winners and losers under such a system, including both lenders and borrowers. For example, mortgage borrowers in France and Germany tend to go for long-term fixed rates already, while those in Ireland, Italy, Portugal and Spain currently prefer variable rates.
EMFA has also faced questions on the position of the European Central Bank.
The Bank is already struggling with the issue of interest rate changes having less effect on home owners in France and Germany than in other eurozone member states because of their preference for fixed rates. This, it is argued, may partly explain why current record low ECB rates have had less impact in stimulating consumption in these markets.
Extending fixed rates across the EU might bring stability, but might also blunt the ECB’s ability to affect changing consumption patterns, meaning it could be harder to turn Europe around when the next global recession comes around.
These are just some or the arguments making the move to a European equivalent of Fannie Mae and Freddie Mac an intensely political one. Economic arguments alone are unlikely to help bring about a decision on an organisation such as EMFA.
For this reason, feedback suggests there will be increasingly strident moves on the part of both pro- and anti-EMFA voices in the corridors of power in Brussels and in national capitals of EU member states.IFAonline
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