NETHERLANDS: An Introduction to Capital Markets: Securitisation

Introduction  

In recent years, the Dutch securitisation sector underwent notable changes, influenced by financial, economic, and regulatory factors, amidst evolving European regulations. There was a decline in residential mortgage securitisations and an increased reliance on alternative funding sources.

Financial and Economic Developments 

The Netherlands have a traditionally strong residential mortgage loan securitisation market. In 2022, the total amount of Dutch residential mortgage securitisations outstanding decreased by EUR5.3 billion (-17%) to EUR25.9 billion, according to the latest figures of the Dutch Central Bank. This decline was almost twice the average since 2010. The downward trend can be attributed to the use of alternative funding sources by banks, which have become easier and cheaper in recent years. These include the European Central Bank's additional lending facilities and the issuance of covered bonds. Another contributing factor was the reduced share of banks in new mortgage lending. Since 2014, pension funds and insurance companies - either directly or through investment funds - have significantly increased their investments in residential mortgages, reducing their investments in securitizations. The attractiveness of mortgages as an investment for institutional investors has increased, as the long maturities of new mortgages align well with the long-term nature of their liabilities. In 2022, new external securitisation issuances for residential mortgages totaled EUR3.1 billion (EUR5.9 billion in 2021), predominantly by non-bank mortgage lenders. However, these were not enough to offset the expiration of existing securitizations and reverse the downward trend. In addition, banks reported for three quarters in a row over 2023 a decline in demand for mortgage loans (the first quarter a change in demand of -83%). The main factors for the declining demand are the rising interest rates and expectations in the housing market, including price developments. Also, more banks have tightened their underwriting criteria. The main reasons are the general economic outlook and the creditworthiness of households applying for mortgages. With regard to the Buy-to-let market, it is noteworthy that it is becoming less profitable as a result of measures to deter investors from the housing market, such as the transfer tax, buyout protection and the proposed law on affordable rent (Wet betaalbare huur) to regulate intermediate rent.

European Legal and Regulatory Developments 

 The legal and regulatory landscape of the securitisation sector in the Netherlands is largely dictated by European legislation and regulation. One of the most notable is the ongoing review of the Securitisation Regulation by the European Union (EU), which underpins the securitisation sector in the Netherlands. The focus of the review is on harmonising and simplifying disclosure requirements, clarifying roles and responsibilities of those involved in securitisation transactions, and potentially establishing a new framework for synthetic securitisations. Another significant development which will have a strong impact on the Dutch securitization sector is the introduction of the EU Green Bond Standards and sustainability requirements is a significant development impacting the Dutch securitisation sector (in 2023 various ‘green’ securitisations have been set up in the Netherlands). These measures aim to enhance sustainable finance and incorporate environmental, social, and governance (ESG) factors into investment decisions. These initiatives reflect the EU's commitment to sustainable finance and its goal to align the financial sector with wider climate and sustainability objectives. Thus, the securitisation sector's future trajectory is being shaped by these evolving regulatory expectations.

Legal and Regulatory Developments in the Netherlands

 In addition to the European developments that affect the Dutch securitisation sector, there are also several national developments that, while perhaps not primarily and directly aimed at the securitisation sector, do clearly have an impact on it.

Transfer of Receivables 

The Netherlands is awaiting the implementation of the EU's directive on credit servicers and credit purchasers (EU 2021/2167; NPL-Directive). This directive, which aims to further develop secondary markets for non-performing loans, could have significant implications for the securitisation of such loans. The NPL-Directive includes measures to remove undue barriers to credit servicing and the transfer of bank loans to non-bank entities. Once implemented, the NPL-Directive is expected to strengthen the ability of banks to manage and offload their non-performing loans, potentially leading to increased securitisation of these loans. The NPL-Directive also amends the Mortgage Credit Directive (2014/17/EU) with the introduction of the notification requirement – in line with the existing obligation for consumer credit pursuant to the Consumer Credit Directive (2008/48/EU) – to inform the consumer about the transfer of receivables of the consumer mortgage loans. Such a notification requirement is at odds with the undisclosed assignment (stille cessie) often used to transfer consumer loan receivables without notification (except in certain default events). The notification requirement does, however, not apply if the original lender continues to manage the loan on behalf of the SPV. In deviation from the standard rule and unlike for consumer credit, the proposal stipulates that for the transfer of a mortgage credit by way of ‘transfer of contract’ no cooperation from the borrower is required if the (original) credit provider continues to manage the credit agreement. This newly proposed provision - should the legislative proposal be adopted as is - allows for the transfer of mortgage credit without the required cooperation of the borrower.

Debt Collection Services 

Another legal development is the Act on the Quality of Debt Collection Services (Wet kwaliteit incassodienstverlening). This act, which is currently in legislative process, aims to regulate the debt collection sector, providing better protection to debtors and improving the quality of debt collection services. It introduces a licensing requirement for debt collection agencies and stipulates that they must meet certain quality requirements. This act could indirectly influence the securitisation sector, particularly in relation to securitisations involving consumer loans.

Sustainability  

The Temporary Mortgage Credit Scheme (Tijdelijke regeling hypothecair krediet) will, from 2024, incorporate sustainability by allowing additional borrowing for energy-saving measures. This enables borrowers to finance these measures without being entirely constrained by loan-to-income criteria (LTI), promoting energy-efficient homes. This aligns with the government's sustainability goals, encouraging homeowners to invest in energy conservation and contributing to the broader aim of reducing greenhouse emissions. It's a significant step towards greening the Dutch housing stock and promoting sustainable finance in the mortgage sector. In this context, it is also worth mentioning the recent call by the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten; AFM) to price in climate risks, such as an increasing chance of flooding and damage to the foundations of homes, in the housing market (Verdiepende analyse Inprijzen klimaatrisico’s).

Consumer protection and ex officio reviews  

In recent years, Dutch courts have increasingly initiated ex officio reviews in consumer cases, including those related to consumer credit and mortgage loans. This review process involves the court independently assessing whether European rules for unfair commercial practices, including consumer credit and mortgage loans have been complied with, even if these issues have not been raised by the parties involved. Key areas of focus during the reviews include pre-contractual (in the form of the Standard European Consumer Credit Information form, SECCI), contractual information obligations and unfair commercial practices. The use of variable interest rates in loan agreements that lack a clear reference interest rate has also given rise to much discussion. The Dutch Financial Services Complaint Institute (Klachteninstituut financiële dienstverlening; Kifid) has ruled in these circumstances that lenders must use a market interest rate as (previously) set by the Dutch Central Bank as the reference rate. Following these decisions and spurred on by the regulator, many lenders have initiated compensation schemes. These rulings and subsequent compensation schemes highlight the growing emphasis on ensuring fairness and transparency in the provision of credit and mortgage loans in line with European standards.

Tokenisation in Securitisation 

 A final interesting development is the increase in popularity of cryptocurrency, stable coins or other blockchain based securities. This phenomenon is described as tokenisation and could also impact the securitisation market. Tokenisation enhances efficiency, transparency, and accessibility, presenting a new frontier for the securitisation sector. Depending on the characteristics of the tokens, these could be regulated by the Markets in Crypto-assets Regulation ((EU) 2023/1114; MiCAR). A practical example of tokenisation is the recent trend of tokenising real estate assets, whereby property can be divided into multiple tokens, each representing a fraction of the property's value, and companies issuing tokens representing a fraction of a debt security, such as a corporate bond. As tokenisation continues to gain traction, it could revolutionise the securitisation sector and beyond.

Conclusion 

The securitisation sector in the Netherlands continues to evolve in response to various financial, economic, legal, and regulatory developments. The implementation of new regulations, the impact of EU initiatives and the introduction of tokenisation are shaping the future of the sector.