European Supplement

Further integration of European mortgage markets

European supplement

Launched four years ago with the creation of the Forum Group on Mortgage Credit, the preliminary stage of the Commission’s consultation of stakeholders has come to an end with the publication at the turn of the year of the reports of its two expert groups – the Mortgage Funding Expert Group (MFEG) and the Mortgage Industry and Consumer Dialogue Group (MICDG). The Commission is now understood to have all the necessary information at hand for the drafting of its White (policy) Paper, the publication of which has been announced for the end of June this year.

The EMF’s role

As the Commission’s main talking partner in this initiative, the European Mortgage Federation (EMF) has played an extremely active role during this whole assessment process and has recently summarised its position on the possible further integration of EU mortgage markets in two position papers issued in January and February 2007 respectively. The Federation’s message in this respect, which is positive on the principle but more reserved as to the identification of room for such integration and the means to achieve it, has been reinforced by the findings of its co-branded 2006 EMF/MOW (Mercer Oliver Wyman) study on adjusted prices published in January.

On the principle, the EMF is clearly in favour of further integration insofar as the areas where there is room for such integration are clearly identified, the means chosen to achieve this integration are adequate and proportionate and such action would bring direct benefits for consumers and industry alike.

In this respect, the evidence provided by the EMF/MOW study published in 2003, as well as the London Economics Report published in August 2005 and the ECB study on EU banking structures published in October 2005, indicated that EU mortgage markets are already broadly efficient and competitive. However, in consideration of the work undertaken by the Mortgage Funding Expert Group and the Mortgage Industry Committee Dialogue Group, the Mortgage Federation felt that it was necessary to reassess the information contained in its 2003 EMF/MOW study to provide information on the latest developments with respect to adjusted price evolution and range. As such, the complementary study was updated in two ways: the evolution of adjusted prices and the extention of the study coverage from 8 to 13 member states.

Findings of the 2006 study

As anticipated, the 2006 study reveals a continued increase in the level of integration. Indeed, it shows that between 2003 and 2006 adjusted prices of mortgage loans have fallen in all the markets for which data was previously reported and by an average of 30 basis points, and the range of products available has significantly broadened. The reasons for this significant decrease are shown to be threefold: firstly, a significant increase in competition partly as a result of new entrants into national markets; secondly, greater price transparency due in part to a strong increase in credit intermediaries acting as a distribution channel and greater use of the internet; and thirdly, an improvement in lender efficiency in terms of cost management.

At the same time, the adjusted price range across the countries studied – which had already proved particularly narrow in 2003 (64 basis points for eight countries) – has remained unchanged between the eight initial countries and is still less than 1 per cent, even taking into account the addition to the analysis of five new countries.

Against this background, the obvious conclusion, shared by the EMF and MOW, is that it is debatable whether prices could be pushed down on all markets to the levels of the lowest-priced countries and whether this could be achieved without the benefit being offset by the costs of implementing the measures adopted to this end.

These developments do not, however, preclude further integration, especially in terms of market completeness, cross-border activity and on the funding side, and benefits to be derived from this.

Costs and benefits

This being said, the fact that the London Economics Report (August 2005) did not examine how this should occur means that any concrete measure considered would first need to be submitted to a specific cost/benefit analysis to evidence its resulting in a direct benefit. This is especially true for the consumer protection areas covered by the Mortgage Industry & Consumer Dialogue Group (MICDG). Indeed, it is worth recalling here that evidence tends to show that, for the time being, cross-border activity depends on lenders – not consumers – going abroad. The introduction of an additional layer of consumer protection rules that would involve significant costs for the industry could therefore prove counter-productive.

As a consequence, should action be deemed necessary, obstacles to be addressed first should be those legal infrastructural issues that deter lenders from going cross-border, such as transparency of enforcement procedures, security of and cross-border non-discriminatory access to credit registers and land registers and divergences in property valuation principles, as re-emphasised by the Mortgage Funding Expert Group’s report.

Against this background, the EMF strongly appreciated the work of the Mortgage Funding Expert Group’s work and report, and generally supports the group’s recommendations. Indeed, although generally recognised, this is the first time that the close link and interdependence between primary and secondary markets have been so clearly set out in an official paper. The report shows notably how increased integration of EU funding markets could, through cost reductions, improved capital management and increased competition, result in lower mortgage costs and higher product diversity for borrowers.

The EMF would like to highlight its support of a vision for an integrated European mortgage funding market which promotes high levels of competition, efficiency, transparency and stability. Furthermore, it agrees that a key element in encouraging competition into EU mortgage funding markets is to ensure that there is no discrimination based on a mortgage lender's funding strategy.

The EMF also very much supports the statement that a market-based, deregulated approach appears best able to provide efficient markets as well as maximum choice and best pricing for the consumer.

Relative to the recommendations of the report outlining the means to “promote competition in the market by enabling new companies to enter markets”, it is vital, if the European Commission is intent on maintaining the best possible conditions for a highly competitive mortgage market, to ensure a level playing field among all market actors.

The EMF is supportive of the recommendation that member states that do not as yet have covered bond legislation consider introducing some regulation in this respect. Additionally, the EMF believes that better integration of covered bond funding of mortgage loans would be achieved by facilitating the pooling of loan portfolios from different jurisdictions, in order to enable the creation of larger and more liquid cover pools.

The EMF acknowledges that the Commission has gathered, through its own consultation procedure as well as through external studies like the 2006 EMF/MOW survey, sufficiently complete and accurate information to enable it to make a thorough and realistic assessment of the current state of play of mortgage markets and to avoid any decision or measure that could prove detrimental for a market, the figures for which provide evidence enough of its efficiency.