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Joachim Michel (Head of Consumer Banking NIBC Bank Germany) Michel Kant (Head of Consumer Banking NIBC Bank)

What can we learn from the Germans?

February 2013

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Germany

Pre crisis several Dutch mortgage lenders have started originating in Germany

Germany was attractive because of the size. Furthermore it was perceived as a traditional market that was lagging in comparison to other markets

The reality after a few years of crisis: Germany is in a far better shape than the other European markets

What is the secret behind the success of Germany?

* Dr. Klein: Trendindikator Baufinanzierung 09/12 and 11/12, all figures relate to 2012

** Immobilien & Finanzierung 17-2011, p. 582-583

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What can we learn from the Germans ?

The German housing market is the exception to the trend: its price has remained stable over time and is slowly increasing

Nominal house price development in Europe

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What can we learn from the Germans ?

The mortgage volume of new mortgages has decreased since the crisis in all European countries, except Germany whose new mortgage volumes remained stable

Gross new mortgage lending in Europe

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What can we learn from the Germans?

2005 2006 2007 2008 2009 2010 2011 20120

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Interest rate 10 year fixed

Substantial lower mortgage rates in comparison to other countries

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Market characteristics

80 million inhabitants

Mortgage balance outstanding EUR 918 bn

Savings balance outstanding EUR 1970 bn

Owner occupied is 46%

Prime market

Key differences with The Netherlands

1. Less government support

2. More conservative products

3. More traditional distribution

4. More regional differences

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1. Less government support

In Germany, only mortgage interest payments for investment properties are deductable from taxable income

Hence, compared to other jurisdictions the speculative character of property ownership in Germany is limited to rent income from investment properties (tax deductibility of mortgage interest payments)

From a tax perspective, the holding period for real estate (investment and owner occupied property) ought to be 120 months (10 yrs.) to avoid gain on capital taxation

The fungibility of real estate is therefore lower since there are no short and midterm tax free capital gains achievable

For consumers real estate always is a longer term investment

* Dr. Klein: Trendindikator Baufinanzierung 09/12 and 11/12, all figures relate to 2012

** Immobilien & Finanzierung 17-2011, p. 582-583

The tax system is not attractive for owner occupation

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2. More conservative products

* Dr. Klein: Trendindikator Baufinanzierung 09/12 and 11/12, all figures relate to 2012

** Immobilien & Finanzierung 17-2011, p. 582-583

The German mortgage market is a purely prime market with fairly standardised products

75% of the mortgage loans have an annuity repayment method with loan maturities of 30 to 35 years

Only a few years back, a bank’s typical requirement for borrowers was to provide 20% equity. Today, there are only a few mortgage banks that originate loans with higher LTVs

However, the majority of loans still follows this 80-20 rule

Past experience has shown that pure high LTV lending does not seem to be an option in the German mortgage market

Characteristic ValueAverage LTV new loans 78%

Average age first time buyer

38 years

Average amount new loan

EUR 159.000

Average fixed interest term

12 years

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3. More traditional distribution

* Dr. Klein: Trendindikator Baufinanzierung 09/12 and 11/12, all figures relate to 2012

** Immobilien & Finanzierung 17-2011, p. 582-583

Germany has a very fragmented banking market. In 2005, 2340 banks existed including 490 savings banks and 1390 cooperative banks

Distribution of mortgages is dominated by banks with a market share of 78%; in the intermediary market Hypoport and Interhyp have a substantial market share

Commission payments to intermediaries is still allowed

During crisis many customers turn to their local cooperative banks and savings banks to deposit their funds in presumably safe havens allowing them to offer extremely competitive mortgage rates

Independent brokers are finally established in the German market. However, still strong concentration on traditional banks due to high expertise.

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4. Regional differences

The price for a detached single family house clearly depends on the region

The wealthier the area, the higher the price for a house

Prices are lower in the East, gradually increasing going from East to North, down to the West and South

Prices are generally higher in the city in comparison to the country side

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Key drivers of German mortgage market stability

Property has not been an asset for speculation

– A home is rather (made) a place to stay

Conservative credit attitude – no “exotics”

– Variable rate products hardly offered by traditional banks that still dominate the market

– Low LTVs with annuity mortgage dominating the market

House price development is fairly stable

– Price development has not given much room for speculation

– Inflation stabilises the price level and may trigger further increase

General economic development in Germany

– Germany has so far managed to mitigate the burden of the crisis

– Unemployment is at a moderate level

Access to stable funding via Pfandbrief

“Home sweet home – a place to stay”

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Key driver of German funding market

Majority of the German mortgage lenders attract funding on the Pfandbrief market

Pfandbrief is similar to Dutch Covered Bond: a bond issued by a bank secured with a collateral pool of mortgages

Differences with the Dutch Covered Bond:

– Long history of 240 years without any losses

– Incorporated in the German law

– LTV maximised at 60%

– A lot of liquidity in the bonds

– Strong standardisation

Resulting in cheaper funding than RMBS or Dutch Covered Bond (up to more than 1%).

Pfandbrief as most stable funding source

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Conclusions

Lessons learnt from the German market:

– Standardise the mortgage and funding market as much as possible

– Remain conservative and avoid any exotics

The Netherlands is already in a transition phase towards the German market

– Reduction of interest deductability

– Annuity becoming the leading product

– Gradual reduction of LTV level

– Foundations created to standardise RMBS and Covered Bond