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NHG amends terms and conditions, prudential treatment of NHG-backed mortgage loans
The Dutch Homeownership Guarantee Fund (Waarborgfonds Eigen Woningen – NHG) announced on 19 November 2019 that it would provisionally compensate mortgage providers for the expected loss in the event of default. The planned entitlement to a provisional payment is designed to meet the conditions set out in the Capital Requirements Regulation (CRR).
NHG will amend its procedures
The planned amendment to the NHG's terms and conditions means that banks acting as mortgage lenders and beneficiaries of the guarantee will be entitled to receive a provisional payment under the guarantee if the borrower of an NHG-backed loan should default. The amount of the payment will be based on a robust estimate of the bank's loss. It will also take into account any excess amount and depend on the coverage under the guarantee at the time of the default according to the applicable terms and conditions.
The NHG will make the payment at the bank's request within 21 months of the default provided all terms and conditions are met.
Banks will have the option of receiving a provisional payment not only for new mortgage loans taken out under the modified terms and conditions. It will also apply to NHG-backed mortgage loans previously taken out.
Qualification as eligible credit protection
The amendment aims to demonstrate that NHG qualifies as eligible credit protection. This is of relevance to banks that use the standardised approach or elementary internal ratings-based approach to calculate their capital requirements for mortgage loans on residential property. The planned entitlement to a provisional payment is intended to meet the conditions set out in Article 215(2)(a) of the CRR.
The NHG expects it will have completed the relevant legal documents and the associated processes in the first quarter of 2020, after which the planned amendments will take effect.
Until that time, DNB will use its discretionary power referred to in Article 215(2)(b) of the CRR to qualify the NHG as eligible credit protection under the standardised or elementary internal ratings-based approach. It will do so because of the NHG's rapid payment of NHG-backed losses, the rapid handling of loss claims, the high pay-out ratio, and the objection procedure for rejected loss claims. This applies to banks that are under DNB's direct supervision.
The NHG and the introduction of the new Basel III framework
Banks that use the advanced internal ratings-based (AIRB) approach have more scope for qualification as credit protection, as laid down in Article 183(1) of the CRR.
The new Basel III framework will be implemented in EU legislation over the next few years. Its introduction will also involve an output floor for capital requirements for banks that use the AIRB approach. Under the capital floor, capital requirements for banks that use internal models must not be below 72.5% of the capital requirements under the standardised approach. As the floor is based on the standardised approach, the stricter requirements governing credit risk mitigation will apply, as laid down in Article 215 of the CRR and elsewhere.
It is also relevant in this future situation that the NHG's amendment is intended to meet the conditions laid down in Article 215(2)(a) of the CRR.