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Risk-weighting for Dutch NHG guaranteed mortgages under Standardised Approach
How should the risk-weighted exposure amounts for Dutch NHG guaranteed mortgages be determined under the Standardised Approach?
Under the Standardised Approach, the risk-weights for exposures secured by mortgages on residential property are set by Articles 123 to 125 of the Capital Requirements Regulation (CRR). In the case of residential mortgage loans that are guaranteed by a Dutch National Mortgage Guarantee (‘Nationale Hypotheek Garantie (NHG); ‘NHG-mortgages’), the risk-weights for such exposures may be amended in accordance with the credit risk mitigation framework of Part Three, Title II, Chapter 4 of the CRR, provided the bank has determined that the NHG guarantee meets the conditions of, in particular, Articles 213 to 215 of the CRR.
Risk-weights must be determined at the level of individual NHG-mortgages, taking into account the specific NHG terms and conditions applicable to each individual exposure. This is particularly important as the NHG terms and conditions are regularly revised (see the link below), which may significantly impact the determination and size of risk-weights for different NHG-mortgages. How changes of the NHG terms and conditions affect the calculation of risk-weights is illustrated by two examples with regard to two recent amendments to the NHG terms and conditions.
Pillar I requirements
Banks are expected to determine capital requirements for individual exposures, on the basis the applicable CRR provisions. With respect to NHG-mortgages the actual coverage of the guarantee should be taken into account. Thus, the amortisation of the NHG coverage value, as well as the 10% own risk factor explained below, are expected to be taken into account in the establishment of the protected amount (the factor GA as laid out in Article 235 of the CRR). Another important aspect to consider is the part of the exposure that may benefit from the preferential (35%) risk-weight for mortgages on residential real estate, after taking into account the effects of the NHG guarantee. This is further explained in the two examples below.
Additional Pillar II requirements
In addition to the risk-weights and capital charges for NHG-mortgages under Pillar I, DNB expects banks applying the Standardized Approach (SA) to take into account under Pillar II the specific risk of NHG-mortgages in their internal capital adequacy assessment process (ICAAP). For example, banks need to take into account that the guarantor, the Homeownership Guarantee Fund (Stichting Waarborgfonds Eigen Woningen; WEW) may refuse a claim under the NHG guarantee due to, e.g., non-compliance by the mortgage lender or the borrower with the NHG’s terms and conditions.
Example A – NHG-mortgages issued before 1 January 2013
Prior to 1 January 2013, but in some specific cases also after that date, a residential mortgage loan under the NHG guarantee could be granted on an interest-only base, up to a maximum of 50% of the market value of the residential property concerned. However, the credit protection amount of the NHG guarantee on mortgage loans decreases over time, assuming repayment of the guaranteed residential mortgage loan within 30 years and according to the annuity method. Thus, depending on the NHG terms and conditions that apply to the individual mortgage loan, the credit protection provided by the NHG guarantee may only be partial and is decreasing over time. Moreover, following the payment on a claim under the NHG guarantee, the bank that granted the NHG-mortgage has to take any loss exceeding the guaranteed amount.
Under the standardised approach, the risk-weighted exposure amount of an NHG-mortgage that provides only partial credit protection coverage is expected to be calculated as the sum of the risk-weighted exposure amounts for the covered and the uncovered segments. For the covered segment of the exposure, the risk-weights should be determined according to the credit risk mitigation framework (CRR, Part Three, Title II, Chapter 4). For the uncovered segment, the risk-weighted exposure amount should be calculated on the basis of the risk-weights for residential mortgages applicable for the loan-to-value (LTV) segment of the mortgage loan, to which the bank is exposed (according to CRR, Part 3, Title 2, Chapter 2). The risk-weight for the uncovered segment of the exposure is determined by the LTV ratio of the individual NHG-mortgage, as banks have to take the entire loss exceeding the guarantee amount after payment on a claim under the NHG guarantee.
The calculation of the risk-weighted exposure amounts for an NHG-mortgage with partial credit protection coverage, can be further clarified by the following numerical example A:
Stylized example A (amounts in thousands)
Consider an NHG-mortgage, issued before 1 January 2013, with the following characteristics:
- The exposure is eligible for the retail exposure class, under Article 123 of the CRR
- Outstanding nominal amount of loan (50% interest-only): EUR 95
- Market value of the residential property: EUR 100
- Credit protection amount of NHG guarantee: EUR 70
For the purpose of this example, it is assumed that the exposure amount of the NHG-mortgage equals the outstanding nominal amount of this loan.
Calculation of the risk-weighted exposure amount for this NHG-mortgage:
- The LTV ratio of this loan is 95% (= 95/100 * 100%). The amount from EUR 0 to EUR 70 is covered by the NHG, while the amount from EUR 70 to EUR 95 is uncovered.
- To the segment that is covered by the NHG guarantee, a 0% risk-weight is assigned, based on the credit risk mitigation framework and, in particular, Article 214 of the CRR (Sovereign and other public sector counter-guarantees).
- To the segment of the loan that remains uncovered by the NHG guarantee (i.e. EUR 70 to EUR 95) the risk-weight for exposures fully secured by the mortgage on residential immovable property is assigned, taking into account that part of the uncovered segment has an LTV ratio above 80%. Thus, for the uncovered segment of this NHG-mortgage, a risk-weight of 35% applies to the part of the loan with an LTV ratio below 80% and a 75% risk-weight applies to the remainder. This follows from Article 123 (Retail exposures) and Article 125 (Exposures fully and completely secured by mortgages on residential property) of the CRR.
- Hence, the average risk-weight for the NHG-mortgage in this example is 15.53% [= (70/95 * 0%) + ((80 – 70)/95 * 35%) + ((95 – 80)/95 * 75%)] and the risk-weighted exposure amount for this particular NHG-mortgage is EUR 14.75 [= (70 * 0%) + ((80 – 70) * 35%) + ((95 – 80) * 75%) = 15.53% * 95].
Example B–NHG-mortgages issued after 1 January 2014
For more recent mortgages, issued after 1 January 2014, banks have to take 10% of a potential loss related to such mortgage on a pro-rata basis, following the payment on a claim under the NHG guarantee. Note that since 1 January 2013, the NHG terms and conditions require that guaranteed loans are redeemed at least on the basis of a 30-year annuity mortgage loan, subject to a few exceptions. This 10% ‘own risk’ (10% eigen risico) includes the outstanding amount of the mortgage loans, unpaid interest and additional costs.
Banks that apply the Standardised Approach are expected to calculate the risk-weighted exposure amount for this 10% own risk, taking into account that this 10% own risk is in fact uncovered by the NHG guarantee. This can be further clarified by the following numerical example B:
Stylized example B (amounts in thousands)
Consider an NHG-mortgage, issued after 1 January 2014, with the following characteristics:
- The exposure is eligible for the retail exposure class,
under Article 123 of the CRR
- Exposure amount: EUR 95
- Market value of the property: EUR 100
- Credit protection amount of NHG guarantee: EUR 85
(i.e. before the 10% own risk cut-off)
For the purpose of simplification, it is again assumed that the exposure amount of the NHG-mortgage equals the outstanding nominal amount of this loan.
Calculation of the risk-weighted exposure amount for this NHG-mortgage:
- The LTV ratio of this loan is 95% (= EUR 95/EUR 100).
- In nominal figures, EUR 85 of the total exposure amount of EUR 95 is covered by the NHG guarantee. However, due to the 10% own risk of the borrower, the degree of credit risk protection equals 90% of the NHG guarantee, i.e. EUR 76.5 (= 90% * 85). The risk-weight for this NHG covered segment of the exposure is 0%, according to the credit risk mitigation framework and, in particular, Article 214 of the CRR.
- The uncovered part of the exposure consists of a segment up to an LTV of 80% with a risk-weight of 35%, and a remaining segment with a risk-weight of 75% (according to Article 123 and 125 of the CRR respectively). Thus, the risk-weighted exposure amount of the uncovered segments of this NHG-mortgage is EUR 12.475 [= ((80 – 76.5) * 35%) + ((95 – 80) * 75%)).
- Hence, the total risk-weighted exposure amount for this individual NHG-mortgage is EUR 12.475 [= (0% * 76.5) + ((80 – 76.5) * 35%) + ((95 – 80) * 75%))].
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