‘Under-water Mortgages’ to Remain Risk for Banks for a Decade
THE HAGUE, 08/04/14 - The Dutch central bank (DNB) is assuming that it will take at least another 10 years before a large portion of the mortgages that are currently ‘under water’ will be out of the danger zone again, the supervisory body writes in its semi-annual Financial Stability Review published Tuesday.
Mortgages are termed ‘under water’ if the mortgage debt is higher than the market value of the home. About 30 percent of Dutch mortgages are currently under water.
According to Aerdt Houben of DNB, the under-water mortgages are no acute balance sheet problem for the banks. “It is a potential vulnerability. The actual losses on the mortgage portfolio are minimal.”
But Houben does say the under-water mortgages can hit the banks indirectly. “Home-owners with mortgage debt higher than the value of their home are more vulnerable and reduce their spending. This has its effect on the economy.”
DNB’s prognosis is based on a scenario in which house prices rise by 2 percent annually from 2014. Then prices would return to the level of 2008 in 10 years, when 75 percent of the present under-water mortgages would be above water again. For the mortgages then still remaining under water, the problem would however be ‘obstinate’, DNB writes.
The supervisory body makes a comparison with the previous house crisis in the 1980s. In that case, the under-water problem disappeared completely within ten years, mainly because mortgage debt relative to the value of the homes was a good deal lower. If house prices were to remain constant and no extra mortgage redemption to take place, two-thirds of the mortgages under water at end-2012 would still be under water in 10 years.
The biggest portion of the risk on under-water mortgages is run by the government. This is because over half of the mortgages that are under water carry a National Mortgage Guarantee (NHG). The government is then in case of possible forced sale of a home the guarantor for the remaining debt. This limits the risk for the banks.