It was 2012 and Jeroen van Hessen, a former banker in the Netherlands, had an idea. Banks were still adjusting to a world shaped by crisis. ABN Amro, one of the country’s largest lenders, was owned by the government after a 2009 bailout. The eurozone’s debt woes had sparked fresh fears of chaos. And no one, it seemed, was loaning money to people who wanted to buy a home. “The banks were not lending,” he says. “We thought there was a huge gap there.”
Mr van Hessen, who had worked for NIBC, a Dutch investment bank, decided to fill that gap. His idea was to bypass the banks and encourage other kinds of investors — pension funds and insurance companies — to enter the residential mortgage business.
These institutional investors, which typically invest in bonds and other financial securities, were happy to listen to his pitch. With bond yields being held down by the post-crisis policies of the central banks, the notion of earning a higher return from mortgages was appealing.
“We thought if this is such as good idea, why didn’t anyone else think of it?” he says.
Since then, non-bank lending in the country’s €662bn mortgage market has taken off. A host of new participants, which include Mr van Hessen’s Dutch Mortgage Funding Company, now have around 20 per cent of the annual market for new mortgage lending, according to IG&H, a Dutch consultancy, up from almost nothing a few years ago.
The banks have felt the impact: earlier this year, the share of the biggest three Dutch banks — Rabobank, ABN Amro and ING — in new mortgage lending fell below 50 per cent for the first time, though they still dominate in terms of outstanding mortgages. The shift has piqued international interest, with investors in France, Germany and the UK considering investing in Dutch mortgages.
In the UK, asset managers including BlackRock have tried to make mortgage loans on a small scale. And in the US last year, non-banks — sometimes known as shadow banks — grabbed a record share of the market.
But in Europe, where rates have continued to fall, the Netherlands provides the clearest glimpse of a new approach to lending — one that conceives of a radically different relationship between savers and borrowers.
“Last year, mortgages were the holy grail all of a sudden,” says Menno van den Elsaker, manager of European structured credit at APG Asset Management. “People forget about it, but it’s only in 2013 that no one wanted to step into Dutch mortgages.”
Mr van Hessen used to work in securitisation, in which loans provided by banks, such as mortgages or credit card loans, are packaged into tradable securities. The advantage of this process, which took off in US in the 1970s and contributed to its housing collapse in 2008, lay in its capacity to open up the returns on consumer borrowing to capital markets investors.
The US securitisation market remains large, but in Europe issuance is now a quarter of its size at the 2008 peak.
Many of the Dutch non-banks that have moved in to mortgage lending are staffed by securitisation specialists. Instead of selling mortgage bonds to investors, as they did before the crisis, their clients today are pension funds and insurers on whose behalf they make mortgage loans. As such, these investors own an asset — mortgages — that would typically be held by banks.
The Dutch mortgage market provided a perfect testing ground for non-bank lending. The country’s mortgages were relatively unscathed during the financial crisis, in part because of rules that provide lenders with significant powers in the event of default. Around a third of them are still backed by a state guarantee scheme, and mortgage customers, who can borrow more than the value of their houses, benefit from tax-deductibility on interest payments.
“The [Dutch] economy has recovered very strongly from the economic crisis. There is a continuous demand for housing,” says Stef Blok, housing and central government minister, who points to a “Calvinistic tradition that people feel an obligation to repay their debts”.
Tonko Gast, the founder of non-bank lender Dynamic Credit and a former investor in securitisation in New York, points to a “dearth of investable products” for pension and insurance companies. He says there is an opportunity to transform consumer credit into “commodities” — and cut into a role traditionally held by banks. “We believe that any form of credit that is commoditisable doesn’t have a large place on a bank’s balance sheet,” he says. “The role of the banks is changing very rapidly.”
While these new players lend directly, they can also draw on the process of securitisation, often in tandem with investment banks. Dynamic Credit says it has mandates from investors for nearly €7bn in mortgages in Holland, and has benefited from short-term funding from Goldman Sachs.
Post-crisis regulations have contributed to the rise in non-bank lending. Solvency II, the EU-wide regulation for the insurance industry that came into effect at the start of this year, discourages investment in asset-backed securities.
“From a Solvency II perspective, the securitisation market just doesn’t work,” says Frank Meijer, head of asset-backed securities and mortgages at Aegon Asset Management, which manages assets for the insurance company. “What do work are whole loans, especially residential mortgages.”
Some Dutch non-bank lenders have been active on a smaller scale for several years, though they have acted on behalf of insurance companies. Syntrus Achmea, a mortgage fund, originally merged mortgages into one fund in 2004, though it has recently increased its mandates from pension funds.
“It has been a well-kept secret,” says Ido Esman, a director at Syntrus Achmea. “It’s now an asset class.”
Martijn Delahay, 42, recently needed a mortgage. He was able to borrow from Munt, a brand of DMFCO, for 10 years at a fixed rate of just 2.1 per cent. “It’s like the new bank,” he explains. “It’s the new type of mortgage in Holland.”
Mr Delahay is one of thousands of customers who have borrowed from pension funds. One aspect of the Dutch market that allows non-banks to lend en masse is its network of mortgage brokers. Onno Karssen, an independent broker in Amsterdam, estimates that 10 years ago 70 per cent of his business came through banks. Now, he says, half of his business comes from non-banks.
In the Netherlands as elsewhere, longer-term loans present a challenge for banks reliant on short-term funding. Pension funds, conversely, will have commitments running over decades, which they may want to match with long-term assets.
As a result, pension funds can offer competitive rates. From Munt, the label of Mr van Hessen’s mortgage company, rates on a 30-year fixed-rate mortgage at 80 per cent loan-to-value can be as low as 2.8 per cent, according to a mortgage comparison website. For Rabobank, the lowest rate is 4 per cent. At ABN Amro, it is 4.1 per cent.
“It’s good for the consumer, it’s very smart competition,” says Mr Blok on pension fund lending. “I recall very well that when I started as a housing minister four years ago there were only the larger banks that were providing mortgages.”
These rates are low for consumers, but to many bond investors they seem deliriously high. “If you look at the yield pick-up versus Dutch government [debt], it’s remarkable,” says Aegon’s Mr Meijer, who adds that his mortgage fund has recently seen big inflows from other European parties.
Non-banks often provide a strikingly simple vision of the lending process. Last year, a group of Dutch companies, including Syntrus Achmea, launched a scheme to lend €3bn of mortgages to the 2.5m individuals paying into the country’s health and welfare pension fund. The fund would also invest in the loans. That meant borrowers were effectively investing in their own housing debt.
“We did not see that before,” says Mr Esman, who says there is “a substantial amount of interest” in the scheme.
Technology, which allows new platforms to lend without an expensive network of branches, is another factor. “A lot of people are not ready yet to try a market like Munt, because they are scared,” says Mr Delahay. “But in Holland, people are trusting new parties more and more.”
Some investors are wary. They point to the experience of APG, the country’s largest pension fund, which originated mortgages under its own label in the late 1980s and 1990s. “Our experience is if you ever want to get rid of it, there’s basically no one you can go to except the original originator,” says Mr Elsaker. He suggests securitisation remains attractive for pension funds.
Many investors compare the trading of whole loans with securitisations, which benefit from a global marketplace. There is no blueprint for short-term trading of mortgages themselves. “I’m not saying it will be a toxic product, but if . . . one party does want to get rid of it, there is no exit here,” says Ruben van Leeuwen, a securitisation analyst at Rabobank.
Another concern for investors is reputational risk. “We have to make a decision about the credit risk of the borrower but we do not want to get directly involved with the consumer,” says Mr Elsaker. “We’re investors in capital markets. All dealings with the consumer — it’s not something you can take lightly.”
Many non-banks say they are not promising liquidity. “If you invest, you are in principle stuck for 30 years,” says Mr van Hessen. “This is why this is a perfect asset for a pension fund, and less for funds with a short-term horizon. Or banks for that matter.”
In the EU where the mortgage market is worth about €7tn, policymakers are eager to reduce the dominance of the banking sector. Meanwhile, the Dutch trends have political momentum: the housing minister has recently travelled to London and Asia to promote investment in the country’s mortgages.
With interest rates ticking higher, bonds may look more attractive to pension funds than mortgages. But proponents of non-bank lending see a longer-term play. The new Dutch model could be exported to tap into the expanding ranks of the middle class who will one day want to become homeowners.
“This is a model we think can be used in many countries,” says Mr Gast, whose company has opened an office in Indonesia. “It’s pretty extreme the amount of people [who] come into the middle class,” he adds. “In Asia, we see a very good model. It’s super-scalable.”