Fitch: Repayment Vehicle Adjustment Cuts Dutch IO Mortgage LTVs

LONDON--(BUSINESS WIRE)-- 01 April 2015

Repayment vehicles attached to Dutch interest-only mortgage loans (IOs) partly mitigate the risks associated with high leverage, Fitch Ratings says. Our calculations show that loan-to-value ratios (LTVs) adjusted for this factor could be significantly lower than actual LTVs by the time the IO loans mature.

Many Dutch IO borrowers have to make monthly contributions to a repayment vehicle to avoid delinquency status, which means significant value can build up in the vehicle. Our adjusted LTV calculations gave different levels of credit to repayment vehicles with different risk profiles. Full credit was given to savings vehicles with guaranteed returns, in line with our rating methodology, providing there is a sub-participation agreement in place.

For insurance and investment products, we assumed that accounts will accumulate up to 70% and 50% of the target value, respectively, with the shortfall based on the difference between expected yearly returns on the products and the effective return of the S&P 100 over a 30-year period ending in December 2008.

Under these assumptions, and if house prices do not change, the adjusted LTV for a typical Dutch RMBS pool falls to around 75% after ten years, and 54.5% after 30 years - one-third lower than the actual LTV of 83% at maturity. The size of the gap between the two is highly sensitive to our assumptions and to mortgage pool seasoning.

Our adjusted LTV calculation suggests that leverage in the Dutch IO market is lower than it appears, due to the widespread use of repayment vehicles. However, in our Dutch RMBS ratings analysis, we give no credit to the build-up of funds in insurance and investment vehicles, as no information is generally available on fund build-up or the composition of investments, and the effectiveness of the pledge of beneficiary rights to the RMBS issuer is uncertain.

The use of repayment vehicles may reflect the motivation of Dutch borrowers, who historically have been attracted to IO loans by mortgage interest tax deductibility, rather than affordability concerns. This is in contrast to the UK, where borrowers are more likely to have opted for a high LTV IO loan because they could not afford a higher deposit or monthly instalments. This may explain why Dutch IOs outperform UK IOs, despite higher CLTVs.

We discuss the relative performance of the two markets in a new Special Report, 'Comparing UK and Dutch Interest-Only Mortgages,' published on Thursday and available at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

Criteria Addendum: Netherlands - Residential Mortgage Loss and Cash Flow Assumptions

Comparing UK and Dutch Interest-Only Mortgages: Despite Higher LTVs, Dutch IOs Outperform UK IOs

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Fitch Ratings
Pierre Soens
Director
Structured Finance
+44 20 3530 1488
Fitch Ratings Limited
30 North Colonnade
London
E14 5GN
or
Mark Brown
Senior Director
Fitch Wire
+44 20 3530 1588
or
Media Relations
Athos Larkou, +44 203 530 1549
[email protected]

Source: Fitch Ratings

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