Bank originators have been dominant in the Dutch mortgage market for the past decades. Currently, they are still responsible for the majority of Dutch mortgage origination. However, they are quickly losing market share to other institutional investors such as pension funds, insurance companies and investment funds.

In the Dutch mortgage market, 2018 marked the year that non-bank originators were responsible for more than 15% of the new origination [1]. For these types of investors, the market value of their portfolio is very important for their financial reporting. In order to provide some insight into the valuation developments for these investors, we look back at how the mortgages that have been originated in 2018 have performed over the past years, as well as how the recent market developments have affected their valuation.

• Valuation index remained relatively flat from 2021-Q1 to 2021-Q3, primarily due to stabilizing primary mortgage rates as spread levels reached their lowest levels in 2021-Q3.
• The steep house price increases that The Netherlands has experienced over the past years have a rather limited effect on the actual valuation of the mortgage as the cumulative impact reaches 0.5% in terms of valuation in 2021-Q3.

Figure 1: Dutch mortgage Valuation Index 2018. Source: LoanClear, European DataWarehouse, HDN, Hypotheekbond

When assessing the valuation index for the 2018 cohort it stands out that the primary trend from 2019-Q1 to 2021-Q3 has been upward. From 2019-Q1 to 2021-Q3 the valuation index has increased from 103.15% to 111.01%, a 7.86% increase. This upward trend is primarily caused by the primary mortgage rates, on which the discount rate is based, moving down. To illustrate, the top-6 lowest interest rates (excluding action rates) for 20 year fixed-rate periods annuity loans in the non-NHG 80% LTV segment have decreased by 1.09% on average from January 2019 to September 2021 [2].

Primary mortgage rates in the Dutch market have been showing a downward trend for the past decade [3], driven by decreasing financial market rates as well as increased competition in the Dutch mortgage market, as we have seen the number of active mortgage labels increase from 70 in 2014 to 95 in 2021 [2]. Decreasing rates in combination with the relatively long duration of the loans results in a significant value increase for these loans.

From 2021-Q1 to 2021-Q3 the valuation increase seems to have come to a halt as spread levels (relative to swap rates) decreased to an all time low in 2021-Q3 [4]. This in turn halted the decreases in mortgage rates. After quarter end some interest rate increases have been observed as swap rates increased.

Developments in market rates are definitely the main driver of Dutch mortgage valuations, as can be seen in Figure 1. There are, however, some other interesting trends occurring in the Dutch housing market that also affect the valuation to some extent. One trend that stands out and is a hot topic in The Netherlands is the rapidly increasing house prices. From 2019-Q3 to 2021-Q3 house prices have, on average, increased by 17.5%. From the start of 2018-Q1 to 2021-Q3 the house price index increased by as much as 41.2% [5]. For the 2018 cohort that means that a significant ‘safety cushion’ has been created as the probability of a loss in case of a foreclosure has decreased significantly.

Effect of house price developments on the index

We analysed the impact of house price increases on the valuation of the 2018 cohort in order to quantify this component. More specifically, a valuation index of the 2018 cohort was created by using an adjusted methodology where the house prices were kept constant for the valuation exercise, so ignoring indexation. This index was compared to the ‘regular’ valuation index for the 2018 cohort to assess the impact of the house price developments of the index. The results of this analysis are shown in Figure 2 below.

Figure 2: Dutch mortgage Valuation Index 2018, impact of house price increases. Sources: LoanClear, European DataWarehouse, HDN, Hypotheekbond

If the value of the collateral of a mortgage increases this reflects a lower risk for the mortgage investor. Conceptually, this lower risk will result in a higher value of the mortgage. The impact of house price increases on mortgage valuations is twofold. First, it affects the discount rate as the primary mortgage rates for lower LTV loans are used for determining the discount curve. Second, it affects recovery cash flows in case of defaults. The impact of the latter is neglectable on a portfolio level, as delinquencies on Dutch mortgages are low [6]. The analysis shows that the value appreciation caused by increased house prices is limited. In 2021-Q3 the difference is found to be only 0.5%. When we break down the portfolio we find that the indexation has virtually no effect on the segment of NHG loans, which represent 27% of the total cohort. This is due to the fact that there is no rate pickup for a higher LTV NHG loan as compared to a low LTV NHG loan. On the non-NHG part of the cohort we do observe an impact. With indexation applied we find that 60% of the non-NHG segment of the cohort resides in the 60% – 70% LTV range. Without indexation, the majority of the non-NHG loans move to the 80% – 100% LTV segment. The difference between the top-6 average lowest rates (excluding action rates) offered in the 60% – 70% LTV segment compared to the 80% – 100% LTV segment ranges from about 7 bps to 20 bps for the most popular segments. This rate pickup for higher LTV loans works its way into the valuation as the discount rates are based on the primary market rates.

With the decreasing mortgage rates over the past years we have also found that the rate pickup for for higher LTV segments has decreased, dimishing the effect of the indexation impact.

While the impact on valuations may be limited, Dutch house prices are expected to increase further in 2022 with expectations from ABN AMRO [7], ING [8] and Rabobank [9] at 12.5%, 9.9%, and 14.9% respectively. This will further increase the safety cushion for investors in this 2018 cohort. Therefore, significant losses on foreclosures are unlikely in the near future. More relevant for investors of this cohort will be the developments of interest rates as we have seen significant increases recently and they are expected to increase slightly more [10]. In combination with the relatively long duration of the loans in the 2018 cohort this will result in a decreased portfolio value in the short term. More on this in our next update of the Dutch mortgage valuation index.

Index construction

The index is constructed from loan-level data of Dutch RMBS deals provided by European DataWarehouse. Loans are divided into segments, based on criteria that drive performance. Subsequently, the segments are scaled to match the balance distribution of loans originated in 2018 based on HDN data. Ultimately, the segments are valued using LoanClear’s mortgage valuation model, tailored for index valuations and aggregated to get the final index value.

Disclaimer

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[1] DNB – New mortgage loans mainly provided by institutional investors

[2] LoanClear - Analysis based on Hypotheekbond data

[3] DNB Data – Deposito’s en leningen van MFI’s aan huishoudens, rentepercentages, gecorrigeerd voor breuken (Maand)

[4] Dynamic Credit Dutch Housing Market Update Q3 2021

[5] CBS Statline – Bestaanden koopwoningen; verkoopprijzen prijsindex 2015=100

[6] LoanClear – Dutch mortgage arrears back to pre-pandemic level

[7] ABN AMRO – Woningmarktmonitor januari 2022

[8] ING – Woningmarkt – Wat is de economische stand van zaken op de woningmarkt?

[9] Rabobank – Piek prijsgroei bereikt, maar afkoeling huizenmarkt lijkt nog ver weg

[10] ABN AMRO – Hypotheekrente verwachting

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