Mortgage lenders are financing Dutch residential mortgages less and less often by selling bonds with these mortgages as collateral, new figures from DNB reveal. The decline is mainly related to a decreased popularity of securitisations among banks due to more frequent use of other forms of financing, including the issuance of covered bonds in particular.
Mortgage lenders can raise money by selling bonds to investors to finance existing residential mortgage loans (and to provide new mortgages). This takes the form of securitisations (repackaged loans) or covered bonds when the mortgages are used as collateral (see box).
The total amount outstanding in Dutch external securitisations fell 4.4% to €114 billion in 2022. This represents 14% of total outstanding residential mortgages provided by Dutch financial institutions (€799 billion). This figure was 21% in 2013.
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Securitisations involve the bundling of loans extended to households and businesses, which are then repackaged and sold as bonds through dedicated securitisation firms. In the Netherlands, these loans are predominantly residential mortgages, and the bonds are known as residential mortgage-backed securities. This frees up funds for the original lenders, such as banks and non-bank financial institutions, s-o they can provide new loans.
Covered bonds are debt securities issued by banks; these are backed by residential mortgages in the Netherlands. Banks can use these as an alternative to securitisations. The major difference with securitisations is that the bonds that banks issue are on their balance sheets. Bondholders have a claim not only on the collateral, but also on the bank.
The securitisations and covered bonds issued can be sold to investors. These are known as external (placed or non-retained) bonds. The figures in this post refer to these bonds only. Alternatively, banks can decide to hold these bonds themselves for use as collateral, for example to obtain loans from central banks. These are referred to as internal or retained securitisations, and are not included in the figures here.
Issuance of securitisations and covered bonds broadens the financing options for residential mortgage loans and helps to strengthen the European Capital Markets Union, providing businesses and consumers with improved access to capital. This, in turn, is important for the stability and diversity of our financial system, which means it is good for our economy.
In 2022, the amount outstanding in Dutch securitisations of residential mortgages held by investors went down by €5.3 billion (-17%) to €25.9 billion. In relative terms, this decline was almost twice the average since 2010.
This downward trend is partly linked to the use of other types of funding, which has enabled banks to obtain money more easily and more cheaply in recent years, for example via the ECB’s additional lending facilities and the issuance of covered bonds.
The lower share of banks in new mortgage lending was another contributing factor. Pension funds and insurers have substantially increased their investments in residential mortgages since 2014 –through investment funds or otherwise – and have invested less in securitisations. Mortgage loans have become more attractive to institutional investors, partly because the long maturities of new mortgages are well suited to the long-term nature of their commitments.
Nevertheless, new external securitisations of residential mortgages worth €3.1 billion were issued in 2022 (€5.9 billion in 2021), mainly by non-bank mortgage lenders. This was not enough to offset the effect of matured existing securitisations and to reverse the downward trend, however.
The outstanding amount of covered bonds issued by Dutch banks remained almost unchanged in 2022 (€88.3 billion), although new issuances totalled €11.4 billion (2021: €8.2 billion).Since 2015, the outstanding volume of covered bonds has exceeded that of securitisations. This may be due to a number of factors, including the lower financing cost of covered bonds, the lower costs of setting up and managing a covered bond programme and the requirements imposed on securitisations because of their more complex nature.
Although covered bonds have become more popular as a financing instrument in the Netherlands in recent years, they have not fully offset the decline in securitisations. The total amount outstanding declined by €5.3 billion (-4.4%) to €114.2 billion in 2022.
This was 14% of the total outstanding residential mortgage loans provided by Dutch financial institutions (€799 billion) in 2022, compared to 21% in 2013. The share of total residential mortgages issued that is funded by the bond market through securitisations and covered bonds has thus fallen by a third from its peak in 2013.
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