Mortgage market in European countries

A study of the current state and characteristics of the mortgage lending markets in the EU countries allowed us to establish the degree of development of the mortgage lending market in the country, as well as the exposure to the risk of default by borrowers and the spread of negative phenomena in the corresponding segment of the securities market secured by mortgages. The following main characteristics were evaluated: level of credit risk; variety of loan products; sales channels; availability of information and services of professional consultants.

In the EU countries, subprime loans are not widespread, which makes it possible to keep mortgage losses at a relatively low level. Ways to attract financial resources for issuing mortgage loans to a large extent determine the type of interest rates and the length of the period during which the rate can be fixed. Financing from deposits of individuals does not allow a fixed rate for the long term, the UK, Spain, Portugal, while the issuance of mortgage securities contributes to the issuance of long-term mortgage loans at a fixed interest rate Denmark, Germany.

For a better understanding of the risks of mortgage lending, as well as the possibilities of reducing them, we consider the most important practical aspects of the modeling of HMLs. One of the main factors of servicing a mortgage loan is the implementation of early repayments. Evaluation of early repayments for the loan pool should include all possible factors of occurrence, including the default of the borrower. Before proceeding to the analysis of prepayments by pool, we examine the basic properties of prepayments for individual loans. It is known that with partial early repayment, two options for changing the payment schedule are possible: reducing the loan term while maintaining the original size of the monthly payment; recalculation of the monthly payment while maintaining the original loan term.

The amount of accrued and payable interest is directly dependent on the term of use of the loan. In this regard, the vast majority of credit institutions recalculates the size of the monthly payment, and does not shorten the loan term. The differentiated payment scheme does not have the features of early repayment, in the annuity scheme, the recount of the payment after partial early repayment returns the annuity structure to its initial state, namely, that the majority of the monthly payment again consists of interest and the smaller part - repayments on the main debt. After partial prepayment is made, the payment of the principal debt is reduced and a certain period of time is required for its size to return to the previous level. The decrease is greater, the greater the amount of partial prepayment in relation to the outstanding balance.

When analyzing early repayments for a pool of mortgage loans, it is necessary to highlight the following main reasons for early repayments: real estate turnover; loan refinancing due to lower interest rates; partial early repayment; default of the borrower.

A comprehensive assessment of the risk of early repayment could prevent the occurrence of negative phenomena in the US mortgage market. However, the crisis, which could not be avoided, led to an increase in the debt burden of mortgage borrowers due to changes in the internal conditions of loans, an increase in variable interest rates, and a deterioration in the overall macroeconomic situation, growth in unemployment, foreign exchange rate, etc.

In the context of the global financial and economic crisis, the high transmission ability of the mortgage lending mechanism to spread financial shocks between national economic systems has been established. The study of the emergence and development of the crisis in the US mortgage market, as well as the systematic experience of mortgage lending in the EU countries, allowed us to identify measures to limit the occurrence and spread of negative phenomena in the mortgage market and in the related segment of the mortgage-backed securities market:

Establishing limits on the maximum growth of variable interest rates on mortgages. When issuing mortgage-backed securities at a variable interest rate, the issuer must establish a maximum limit on the interest rate at which coupon income will be paid to holders of securities. Funds raised in this way can be issued as mortgage loans with a certain maximum level, which will save the lender's profitability and limit the borrower's interest rate risk;

When establishing the maximum amount of a mortgage loan, it is necessary to assess the value of real estate not only in comparison with the current state of the market, but also in retrospect of several years. If, at the time of the loan, the value of the property grew rapidly, the market value of the collateral may be overstated. This approach will allow to determine the cost of non-profitability, purified from the effect of "rush" demand;

Assessing the creditworthiness of the borrower, which should be the basic, fundamental condition for issuing a mortgage loan, in contrast to the approach that takes into account future growth in the value of collateral and its sale at a high price or repayment of a loan using funds from rental housing;

Using a variety of models to assess the risks of securities, rather than using a uniform model for all types of instruments and investments. The presence of features of national HML markets in different countries should be taken into account when investing in financial instruments in foreign markets;

Providing borrowers with adequate, i.e. complete, relevant, understandable, non-redundant and comparative information on a mortgage loan. Adequately informing market participants of a wide range of borrowers will allow the latter to better understand and evaluate the possibilities and risks of a mortgage loan;

Implementation of properly organized monitoring and control of rating agencies, procedures for assigning and revising credit ratings of issuers, as well as issuing instruments of the securities market, which will contribute to an adequate assessment of risks and assignment of appropriate ratings.

A correct understanding of the phenomenon of cyclical development of the HML market is of high practical value both for credit organizations and for the state as a whole, allowing us to develop effective counter cyclical measures to smooth out market fluctuations.

The experience of the EU countries indicates that the type of interest rates and the length of the period during which the rate can be fixed are largely determined by the methods of attracting financial resources for issuing mortgage loans. Financing from deposits of individuals does not allow to establish a fixed rate for a long period, while the issuance of long-term mortgage securities helps to fix the interest rate for a long period. A reliable assessment of the profitability and riskiness of investments in mortgage securities is impossible without the development of high-quality models for forecasting early repayments that take into account the influence of various factors, thereby contributing to the optimization of the risk component of mortgage loans and the securities they provide. The changed conditions of modern economic realities make us take a fresh look at both the established practice of primary mortgage lending and the conditions for refinancing mortgage loans on the secondary securities market. The proposed set of measures will significantly reduce the risks of the HML system, which, together with the development of reliable models for predicting the behavior of individual borrowers and loan portfolios, will contribute to the further development of the mortgage market in Russia and the EU.