A proposal for a new central Dutch institution to acquire triple-A tranches of government-insured NHG mortgages and then issue government-guaranteed bonds has been floated by a group of specialists as a means of stimulating the Dutch mortgage market, according to analysts.

The proposal for the new financing instrument, “Nederlandse Hypotheek Obligaties”, was put forward following a government request for specialists to explore the role of institutional investors in mortgage housing finance.

According to HSBC Trinkaus analysts, the proposal, put forward by the chief financial officer of NIBC Bank, Kees van Dijkhuizen (who is leaving the bank on 1 May), foresees a new product that will involve Dutch banks securitising their remaining government insured (Nationale Hypotheek Garantie, or NHG) mortgages and a new central institution, Nederlandse Hypotheek Instelling, acquiring the triple-A tranche. The institution would then issue bonds carrying a state guarantee and targeted at international investors.

The analysts highlighted that this new product would involve a double government-guarantee, on the mortgages and the bonds for the banks, and said that this amounts to a government insurance of any asset-liability mismatches. They expressed scepticism that a government would take on such a risk, and said that the creation of cover pools backed solely by NHG mortgages would be a simpler alternative.

Another covered bond analyst said the discussion about the new product is surprising given low covered bond issuance by Dutch banks, and that covered bonds backed by NHG-guaranteed mortgages would achieve tighter spreads and prevent the need for issuance of state guaranteed bonds.

An official at a Dutch issuer said that the proposal stems from what is still a high level report and that many questions remain open, such as whether banks would sell or pledge the triple-A tranche, and whether, like in the UK Funding for Lending Scheme (FLS), there would be conditions attached to the use of the instrument.

He said that the focus on securitisation rather than covered bonds was not surprising given high overcollateralisation requirements in covered bonds due to asset-liability mismatches, with this increasing asset encumbrance.

He also said that Dutch issuers face a cap on covered bond issuance that is set on a bank-by-bank basis, although this may change to a more holistic asset encumbrance limit, and that this could be behind the focus on using securitisation rather than covered bonds as a means of stimulating mortgage lending.

Dutch house prices have been experiencing a “persistent” decline, according to ING Bank analysts.

They said that Dutch house prices had their strongest year-on-year decline in January, with a drop of 9.6% to take house prices back to end-2001 levels, with a negative impact on loan-to-values of mortgage loans in Dutch cover pools.

Roughly each 1.5% decline in house prices has a one percentage point impact on LTVs, they said, with average indexed loan-to-value ratios at present close to the 80% cut-off rate that Dutch covered bond issuers apply for asset cover test purposes.

“This confirms that an increasing part of Dutch cover pools cannot be recognised as collateral under the asset cover test,” they said. “This, together with the rating agencies’ overcollateralisation requirements (i.e. low asset percentages applied under the asset cover test), explains the relatively high nominal overcollateralisation levels for Dutch pools.”

Dutch lawmakers in February agreed a package of housing measures aimed at mitigating the impact on Dutch house prices of limits to interest rate deductibility, said the ING analysts.