The securitisation market is watching interest rates like a hawk

Interest rates continue to be the number one challenge for the European securitisation issuance market. Dutch mortgage borrowers have changed their habits, and the buy-to-let market is in the doldrums. We spoke to Alejandro Tendero Delicado, Assistant Vice President European RMBS & Covered Bond Rating at Morningstar DBRS for a mortgage securitisation roundup.

What is your general overview of the securitisation market in Europe?

Last year, the sharp increase of interest rates was very disruptive for Europe’s securitisation market, and therefore also in the Netherlands. Several transactions were delayed because the market conditions were not favourable. Issuers held off while waiting for more clarity on interest rates.

Was that the case in the Netherlands?

In the Netherlands specifically, the number of transactions was lower than the previous couple of years. While in previous years there had been around 13 RMBS securitisations, there were nine in 2023.

How about volume?

Last year was very high in terms of volumes, the highest since 2018, in fact. This was due to major transactions, including Lowland MBS7 issued by De Volksbank, which was an €8 billion transaction. Volumes in the Dutch market totalled €13.5 billion, significantly higher than in previous years.

How did the Dutch housing market in general perform?

After experiencing one of the largest house-price increases in Europe, the Netherlands saw a decline in house prices for the first time in a decade during 2023. The cost-of-living crisis and the sharp increase in interest rates eroded mortgage affordability and slowed mortgage origination.

And looking ahead?

We expect Dutch house prices to continue showing a slow growth in 2024 as interest rates stabilise and inflation eases. Wage growth has supported borrowers’ performance and its expected increase in 2024 should continue to mitigate lost purchase power because of inflation. We expect house prices to stabilise and recover from the 2023 trough. The moderation of interest rates and recovery of borrowers’ lost purchase power by the end of 2024 should limit performance deterioration and keep credit ratings of Dutch RMBS stable through the year.

Were there any notable trends in the Dutch market?

In 2022 the volume of buy-to-let (BTL) securitisations exceeded that of prime RMBS, but the high interest rate environment eroded BTL origination volumes in 2023. The BTL market is significantly more sensitive to high interest rates than traditional owner-occupied mortgages.

Also, the introduction of measures that favour first time buyers over investors and limit the housing rental market have driven away demand for BTL. We expect these political measures to continue in 2024 and for origination volumes to keep declining.

How does the Dutch BTL securitisation market compare to the rest of Europe?

We forecast the BTL market to remain weak both in terms of new origination volumes as well as credit performance. Across Europe rents have been rising but not enough to fully cover the increased mortgage payments. Investing in a new BTL property where rental yields are lower or very close to the mortgage rate is a significantly less attractive position for landlords than in the past few years where rental yields significantly exceeded mortgage rates.

While we expect a majority of BTL owners to cope with mortgage payments even with less favourable economics, those with higher loan-to-value (LTV) mortgages and with properties in areas of lower rental yield (often cities with very expensive housing) are most likely to struggle. Because of reduced origination volumes we anticipate BTL securitisation deal issuance may decline in UK, Netherlands, and Ireland.

Were there other interesting developments in the Dutch housing market?

One notable change in the mortgage market was the trend towards short-term fixed mortgages. While the interest rate environment of 2022 and 2023 has not significantly diverted borrowers toward floating rates (the share of variable rate mortgages has remained virtually unchanged among new originations), the share of mortgages with long fixed-rate periods has significantly fallen in favour of mortgages with a shorter fix-terms as borrowers expect high interest rates to be temporary.

Do you have some numbers?

Mortgages with fixed-reset periods of less than 10 years went from representing about 40% to 50% of new originations in the years between 2017 and 2021, to representing about 75% of all new originations by Q3 2023. At the same time, mortgages with fixed-rate periods between 15 years to 20 years decreased their share among new originations to 15% to 20% from about 40% for the same periods.

What’s your outlook for the Dutch securitisation?

While mortgage lending volumes are likely to remain low at current interest rates, the decrease of ECB funding means we expect more issuance as banks need to meet debt payments or refinance expired transactions. Also, more mortgage originations with higher Energy Performance Certificates from Dutch banks may lead to more green issuance.