A report sponsored by Europe's Mortgage Insurance Trade Association reveals that there is over 500 billion ($639.3 billion) in untapped mortgage potential across Europe. The report, conducted by consulting firm Mercer Oliver Wyman concludes that over 80% of growth potential is most likely to be in higher risk lending products, a segment that includes low down payment, highly-indebted or non-traditional borrowers.
"The commercial pressures on mortgage lenders have never been greater - with margins falling in most countries, the credit cycle turning and house prices now stagnating in many markets," said Mercer Oliver Wyman Director Matthew Sebag-Montefiore. "In this tough operating environment, Basel II is threatening to flood capital into the mortgage sector, with the lower risk-weights that will apply to conforming, prime mortgages. This leaves the lenders with a very tricky position as to where they can find the next wave of profit growth."
The greatest potential for growth is found in Germany, Italy and generally throughout the Central and Eastern European region. These jurisdictions simply do not have the mortgage product availability to include certain risk profiles from accessing mortgage credit. "The potential for growth is significant, especially in those countries whose economies are large but where the mortgage markets are less sophisticated," said the report.
The lenders best prepared to tap into this segment potential in the markets are those with the ability to access low-cost deposits and other diversified sources of funding while providing better recognition and management of the increased risk associated with these new products. Certain countries are already beginning to see the presence of non-bank players in the mortgage market have influence on the demand for credit.
In the U.K., innovative non-bank players have opened up access to mortgage credit for certain underserved risk profiles, added the report. Italy and Spain have also seen the entrance of new mortgage players that could tap into their growth potential. The report found that both these countries offer the highest potential of growth in percentage terms. The problem is, in order to enter these markets, one must be perceived as Italian or Spanish, as several cultural barriers need to be overcome before setting up shop.
The Australian Macquarie Bank recently announced plans to set up its mortgage originating services in Italy. Macquarie Bank Italia will open offices in Milan and Rome within the next three months, with the business headquartered in Milan. Specialist mortgage lender Oakwood Group has also tuned into these sectors to build its mortgage businesses.
Oakwood home loans recently bought Amber home loans' mortgage portfolio worth GBP102 million ($195 million) and Oakwood also worked with Merrill Lynch on the sale of Mortgages PLC. The group has also established a presence in the Spanish market via its Spanish Mortgages Direct and is currently looking into starting up a lending program in Italy. In the next year, the group plans to raise approximately $12 billion through the securitization markets. "There is a lot of room for growth and what has really facilitated the growth in this segment of the market is the growth in the securitization markets," said a company spokesman. "Oakwood has established a series of specialty finance businesses in multiple jurisdictions and those assets end up being securitized."
But establishing a presence in these markets takes time. Oakwood Group said it approaches both its operation in Spain and Italy with a long-term view because of the significant cultural differences. The plan, said the spokesman, is to start off with a broker-like business and move into buying portfolios and eventually assume a lending business. In Italy the group plans to pair up with a local institution as a means to cross the cultural barrier that would otherwise pose a problem.
"The European mortgage industry is at a turning point," said Sacha Polverini, Chair of the Authority. "The past 10 years have seen excellent asset growth rates for the majority of lenders, which have been driven by rising house prices and falling interest rates, low credit losses and a relatively stable economic environment. Consolidation is occurring within and between national markets, with a Champions League' of lenders emerging."
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