Fannie Mae-No Politics (FNMA)

[Demar]

Europeans Import U.S. Mortgage Models
October 7, 2013
http://online.wsj.com/article/SB10001424052702304176904579110941131532048.html?ru=yahoo&mod=yahoo_hs

U.S. taxpayers had to rescue mortgage giants Fannie Mae FNMA +2.68% and Freddie Mac, FMCC +3.55% but that isn't stopping some European governments from adopting similar programs and institutions.

The Dutch government recently announced it will seek to develop its own version of Fannie and Freddie to take some pressure off its banks' balance sheets and help revitalize the local housing market. Meanwhile, U.K. and Italian officials are implementing policies aimed at helping more people buy homes by getting the state to partly guarantee certain types of home loans—a project that resembles the mandate of the U.S. Federal Housing Administration.

The shift toward explicit government subsidies in these European mortgage markets is raising eyebrows. The plans reflect mounting concern among policy makers that a dearth of bank lending is stymying fragile economic recoveries. But some experts question whether these policies will instead stoke housing bubbles or lead to a system where banks increasingly lean on governments to back their lending to riskier borrowers.

"It's deeply irresponsible," said Philip Booth, professor of insurance and risk management at Cass Business School in London. "It reduces incentives for banks to monitor loans [and] it distorts the credit market by ensuring they don't take on the full risk of the loans they make."

Fannie and Freddie don't make loans but instead buy them from lenders and package them into bonds. In 2008, they were rescued by the U.S. government, a move that ultimately required more than $150 billion in taxpayer aid. Meanwhile, the Federal Housing Administration, a U.S. government agency that guarantees mortgages for certain borrowers, said last month that it needed a cash injection from the U.S. Treasury as losses on legacy loans mount. In the wake of the taxpayer rescues, several U.S. lawmakers pointed to Europe's mortgage model as an example of a free-market alternative.

There was some securitization of European mortgages before the crisis but nothing like in the U.S. A major difference is that European mortgages are mainly funded by savings deposits or covered bonds.

As banks cut their risk appetites as they seek to bolster their capital ratios in the face of stiffer regulation, some European governments feel they have no choice but to intervene to get credit flowing.

The U.K. Treasury on Tuesday will present the details of its latest "Help To Buy" policy, in which the government will guarantee a portion of certain mortgages.

Under the plan, a home buyer will need to put down a 5% deposit on any property valued at up to £600,000 ($960,066). In return for a small fee from a bank, the government will then guarantee nearly 15% of the property's value. The program is set to run for three years.

The project's proponents say it will get people who don't have large savings onto the housing ladder while encouraging property developers to build more homes. Similar policies have worked in Canada and Australia, analysts say.

U.K. housing starts have increased in recent months but still are 40% below their peak in 2007, according to recent government data.

"You have to go back to the 1980s to see as few houses being built in the U.K.," said Huw Van Steenis, a banking analyst at Morgan Stanley. "It's not that house builders don't want to build, but regulation has changed what banks can finance." But there are fears that the £12 billion the U.K. government has committed to the guarantee program could stoke a housing bubble. Recent Bank of England data showed that the number of mortgages approved in the U.K. rose in August to the highest monthly total since February 2008. "This scheme is not needed and is not a risk worth taking," said Rob Wood, chief U.K. economist at Germany's Berenberg Bank.

In the Netherlands, authorities are going a step further and setting up a state-sponsored mortgage vehicle with strong parallels to Freddie Mac and Fannie Mae. The Dutch government, which has offered mortgage guarantees since 1995, last month announced a deal with banks and pension funds to develop a national mortgage institute, known as the Nederlandse Hypotheekinstelling, or NHI, which it hopes will be up and running next year.

Dutch banks will be able to transfer some mortgage portfolios to the NHI, which will package them into bonds and sell them to large investors like pension funds and insurers. The Dutch state will guarantee so-called national mortgage bonds, enabling the banks to borrow at more favorable rates as they benefit from the Dutch government's triple-A credit rating.

Banks can only transfer low-risk loans that are covered by the government's existing mortgage-guarantee plan. Lenders will remain liable for any default risk and will have to pay the Dutch state a fee if they want to use the facility.

The NHI aims to issue at least €50 billion ($67.79 billion) worth of bonds within five years. That would represent roughly 8% of the total mortgage debt in the Netherlands.

In Italy, where homeownership is high and only a small minority of households have mortgages, the government in August approved a measure ordering Cassa Depositi e Prestiti, a state-owned financial institution, to supply local banks with more than €2 billion in funds for new mortgages to be used for those buying their first home.

It is the first such measure in Italy, where mortgage lending fell by half last year to €26 billion.

Banks say that some details remain unclear, but it may be a first step toward a larger program. Roberto Nicastro, general manager at UniCredit SpA, Italy's largest bank by assets, this summer explicitly cited Fannie Mae and Freddie Mac programs while appealing to a parliamentary finance committee to approve a guarantee program whereby the CDP would guarantee €70 billion in new mortgages over the next three years.

A public guarantee is "the only way to restore confidence," Mr. Nicastro said.