In this Dutch residential mortgage-backed securities (RMBS) primer, S&P Global Ratings provides a comprehensive guide to the fundamentals of the Dutch housing market, describes origination and underwriting key features, and explains how the Dutch RMBS framework works.

For a more dynamic, visual, and comparative view of the data presented in this report, access our new interactive version of the Dutch RMBS primer here.

Key Features And Risks

The collateral performance of Dutch RMBS prime transactions that we rate is among the best in Europe. This is despite their mortgage pools often having the highest LTV ratios in Europe. For example, the maximum permitted LTV ratio is currently 100% (106% when financing energy saving measures) and down from 105% in 2013. Pools often have high proportions of interest-only loans, too. This apparent contradiction is explained by several factors. Firstly, overall low unemployment rates and a strong and a diversified economy support mortgage performance. Borrowers in the Netherlands also benefit from a strong welfare system, entitled to up to 75% of their average daily income in the last year (a cap may apply) for a period of between three and 24 months after losing their job. This offers a significant safety net to borrowers and compares favorably to countries like the U.K. For most of the past two decades, total delinquencies have hovered at approximately 1% of the outstanding collateral balance, down from our Dutch RMBS index peak of 2.3% in June 2012. In our rating analysis, the archetypal foreclosure frequency in the Netherlands is the lowest in EMEA (10.5% at the 'AAA' rating level).

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Notably, the high LTV ratios do not directly reflect borrowers' risk appetite and are a reflection of Dutch tax policy, which gives credit to mortgage interest paid when calculating the overall tax due. Although this system has recently been reformed, historically it broadly meant that the more interest was paid, the greater the tax saving. This incentivized the demand for loans with high LTV ratios and interest-only loans.

Mortgage interest treatment was overhauled in 2013. From this point, tax deductibility of interest for newly originated loans was only available if the loan was an amortizing loan with a maximum 30-year duration. Pre-existing loans were grandfathered.

The prevalence of interest-only loans has affected Dutch RMBS structures, as lenders devised products that were intended to save enough money to pay off the principal of the interest-only loan at maturity (e.g., savings and investment mortgages). It therefore is very common for a borrower to have two or more loan parts associated with the same mortgaged property, with each part having different features, for example one part is an amortizing loan and the other an interest-only loan.

Products And Market Features Also Support Performance

Strong fundamentals are not the only driver of mortgage performance. The Dutch mortgage market is predominantly a fixed-rate market with long mortgage resetting frequencies. Most mortgages are fixed between five to 25 years, with long tenors preferred when interest rates were ultra-low. After rate hikes in 2022, shorter tenors were favored, as borrowers avoid locking these high rates for long periods. This feature has insulated Dutch borrowers from recent rate rises.

Owner-occupied lending is governed by the principles detailed in the Code of Conduct for Mortgage Loans. Among other things, this stipulates that affordability in the Netherlands is assessed according to a fixed table. The consumer budget advisory organization (Nationaal Instituut voor Budgetvoorlichting; NIBUD) updates this table annually. The Code of Conduct also defines how household expenses should be assessed. Both these measures limit lenders' competition by weakening affordability assessments.

The National Mortgage Guarantee (Nationale Hypotheek Garantie [NHG])

The NHG is a guarantee provided by a government-backed foundation, the Homeownership Guarantee Fund (Waarborgfonds Eigen Woningen) to protect borrowers who default on their mortgage from any residual debt upon forced sale of their main residency. For lenders, the benefit is that such losses may be limited, if conditions are met. To benefit from the NHG guarantee borrowers must pay an upfront fee equal to 0.6% of the loan amount. The NHG guarantee is widely used in the Netherlands as an estimated 40% of residential mortgages (owner-occupied only) benefit from it. The most notable change in 2024 is the increased property price limit to €435,000 (€461,100 if an energy-saving project is presented). Like the tax treatment of mortgage interest, the NHG scheme was overhauled in the wake of the global financial crisis to only cover amortizing loans. This further weakens the incentive to take out interest-only loans. The NHG only covers eligible owner-occupied loans.

The BTL market

The Dutch BTL market also benefits from strong fundamentals, underpinned by high demand and limited housing supply. The sector is not of itself new, it has historically been serviced by banks. Changes to capital rules meant that the attractiveness of BTL for banks waned. Hence, several non-banks entered the gap created by the banks' retreat (see "Dutch Buy-To-Let: A Promising New Asset Class" for a comparison of Dutch BTL with U.K. BTL).

BTL loans are generally interest-only, although some lenders attach a repayment loan part if the exposure exceeds a certain LTV ratio. The prevalence of fixed-for-life products is not as clear as in the owner-occupied space, with some lenders offering fixed-to-floating products. Compared to consumer mortgage products, the fixed-rate period for BTL is generally shorter, from under a year to up to 10 years.

No regulatory LTV ratio limit applies to BTL products, but most lenders will accept applications up to an LTV ratio of 80%. However, competition in the sector means that 85% LTV ratios are becoming more common. Valuations are usually based on the lower of (1) the discounted cash flow of the estimated rental income; and (2) the bricks and mortar appraisal.

Debt service coverage ratios (DSCRs) are used instead, with the aim of ensuring the rental stream alone is sufficient to support mortgage payments. Minimum DSCR requirements vary by lender but 1.25x is the most common.

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As a new asset class, Dutch BTL RMBS volumes are still below those of its closest peer, U.K. BTL. Its performance since its inception has been strong, with a solid track record even throughout the COVID-19 pandemic. That said, political headwinds surround the sector (see "Dutch Buy-To-Let: Down But Not Out").

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Residential Mortgage Market Overview

The Netherlands has one of the most mature mortgage markets in Europe despite modest nominal lending growth over the last decade. According to the Dutch National Bank (De Nederlandsche Bank; DNB) roughly half of Dutch households have a mortgage product. Total mortgage lending increased to €808 billion in Q3 2023 from €657 billion in Q3 2013, representing an annualized growth rate of just under 2% (source: DNB data). However, house price inflation normally means that borrowers take out larger loans over time, and Dutch property prices increased by roughly 6% annually over the same period, according to Kadaster. This suggests that real lending growth may have been negative. We believe two of the main factors behind this trend are the gradually reducing maximum LTV ratios at origination and the lower proportion and appeal of interest-only loans, given recent tax rules.

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Barriers to entry in the mortgage business are lower than in some European jurisdictions. While in countries such as France, Italy, Portugal, and Spain only credit institutions with a banking license are allowed to extend mortgage loans, this is not the case in the Netherlands. Even if the Dutch residential mortgage market is dominated by banks, several financial institutions, insurance providers, and pension funds also serve the market. The professional BTL market (i.e., not oriented to consumers) is largely unregulated as a product and several non-bank lenders have entered this sector since 2017 with at least eight professional BTL mortgage providers operating in the Netherlands.

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The market's composition has changed, with the last 10 years seeing institutional investors (investment funds, insurers, and pension funds) join banks as mortgage providers. According to DNB, the share of institutional investors in mortgage production increased to more than 20% in 2023 from under 10% in 2014.

Mortgage origination platforms where mortgages are originated by one entity and then allocated to investors are becoming more popular. Consequently, investment funds in particular increased their participation in the Dutch market to more than 10% in Q3 2024 from under 1% in 2014. The share of securitization as mortgage ownership has been decreasing.

Other Notable Features Of The Mortgage Market

Origination and underwriting

Intermediaries generally submit all mortgage applications. Estimates indicate approximately 4,000 brokers in the country acting on their customers' behalf. This contributes to a lower degree of customer loyalty than in other countries as mortgages as a product are chosen more on a price basis and less on a relationship basis.

Historically, a qualified appraiser inspects the property. Exceptions may apply to low LTV ratio cases in which a fiscal appraisal (WOZ-beschikking) is sometimes used. Recently automated valuation models have emerged in the market.

The mortgage process is highly digitized and standardized, with the entire application process being online and documents exchanged on a single platform (Hypotheken Data Network).

Specific underwriting legislation ("Tijdelijke regeling hypothecair krediet") normally governs the underwriting of loans. This does not apply to professional BTL products.

Adverse credit history

The Netherlands maintains an extensive database on adverse credit history with the Bureau Krediet Registratie (BKR). When a negative credit event occurs (the most common being payment arrears) a BKR registration is recorded. Prime lenders will be against advancing loans to borrowers with BKR registrations and these loans are rarely included in securitizations. The exception is a handful of pre-2008 transactions, which had a material exposure to such borrowers.

Energy efficiency housing initiatives

Although 44% of Netherlands' residences were built before 1970, the country has one of the highest shares of energy-efficient properties in Europe, based on the reported energy performance certificate (EPC) distribution.

Various energy efficiency initiatives exist for borrowers, with several lenders already applying an interest rate discount for the highest energy-efficient homes. Furthermore, the 100% LTV ratio limit can rise to 106% if a renovation project shows that the property's energy-efficiency will increase. Properties labeled class E, F, and G will be banned from public and private rental markets starting in January 2030. From 2026, when a heating installation needs to be replaced, the switch must be to a "greener" system, notably hybrid heat pumps. Supporting such initiatives will for many borrowers, come from financing (secured or unsecured). For more information, see "Building Energy Regulations And The Potential Impact On European RMBS".

Operational Considerations

Primary servicing of Dutch prime mortgages is mostly automated and outsourcing for both banks and non-banks is common. Special servicing decisions are typically made or controlled by the original lender/seller. The Dutch mortgage market is very mature and served by several entities that could step in if a servicer becomes unable or unwilling to perform its duties during a transaction's life. Therefore, we believe the potential effect of disruption on the issuer's cash flows is limited in a typical Dutch RMBS transaction. The caveat to this is the operational risk inherent in some Dutch BTL pools, which may contain both commercial assets and complex loan mechanics, requiring a more hands-on servicing approach.

The RMBS Market

Investor-placed Dutch RMBS issuance has been depressed for most of the last decade. Regulatory changes partially explain this phenomenon, as Dutch banks find it more difficult to remove securitized products from their balance sheets. Also, issuers have generally preferred to issue covered bonds as they are usually cheaper to fund with longer tenors, while RMBS are instead used to diversify a bank's funding and investor base or as collateral for the European Central Bank's refinancing operations.

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Transaction structural features

Transactions are typically structured with a single 'AAA' rated senior tranche when the notes are retained or with a full capital structure when investor-placed (the case for all BTL transactions issued to date).

Amortization is sequential with two waterfalls often used, i.e., a revenue priority of payments and a principal priority of payments with mechanisms to mitigate short-term liquidity constraints such as liquidity reserves and principal borrowing (principal receipts used in the revenue waterfall, subject to conditions). Loss-provisioning via a principal deficiency ledger (PDL) occurs when a loss in the collateral is realized. This contrasts to the scenario in some jurisdictions where a PDL is recorded when the asset has defaulted but no losses are verified. In some Dutch transactions, on or after the first call date, notes can be redeemed at the then outstanding principal minus any recorded principal deficiency. The presence of this optional redemption feature is not commensurate with our 'AAA' rating definition, i.e., that the issuer has an extremely strong capacity to meet its financial obligations.

Notes usually encompass a variable interest rate coupon (three-month EURIBOR plus a margin) which steps-up after the first call date (normally five years after issuance). As assets tend to be fixed for long periods, Dutch RMBS often enter in swap agreements with large banks. While the most popular type of swap used is the total return swap--in which all collateral revenue is swapped for the weighted-average cost of the notes plus a guaranteed excess spread--an interest rate cap is used in some cases.

Revolving features, i.e., the purchase or replacement of certain assets for a period is another feature of some prime pools and is subject to annual percentage limits (often under 3% of the outstanding pool) and tight eligibility criteria.

Our historical rating transition rates reflect the market's strong collateral performance. Nevertheless, rating actions may also be underpinned by factors other than collateral performance, such as counterparty and criteria updates, among others.

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Securitization Legal Framework Overview

Unlike some European jurisdictions with specific securitization laws, this is not the case for the Netherlands. As such, a series of mechanisms are used to achieve the isolation of the securitized assets (typically via a true sale) and their detachment from the originator/seller credit profile.

Insolvency remoteness of the special-purpose entities (SPEs)

Dutch securitizations are structured to support the concept of insolvency remoteness of the vehicle that holds the collateral backing the issued notes. In the absence of a specific securitization law, insolvency risk cannot be fully excluded, hence the importance of the remoteness element.

We consider different elements of the SPE's constitution and transaction documents that support the concept of bankruptcy remoteness. These include but are not limited to restrictions on objects and powers, debt limitations, independent directors, restrictions on a merger or reorganization, among others, which are discussed in detail in our legal criteria.

Security over the SPE's assets

Parallel debt arrangements are widely used in Dutch transactions. Under this principle, the SPE pays the security trustee amounts equal to the amounts due by the SPE to the secured parties. This creates a claim of the security trustee against the Dutch SPE allowing that in an eventual enforcement available funds are applied according to the transaction waterfall.

Co-shared ownership of assets is rare, but some structures contain residual cases. This format is normally avoided in securitization because of the added complexity of requiring the cooperation of other creditor(s) upon collateral enforcement.

Commingling risk

Commingling risk occurs whenever cash belonging to the SPE is mixed with cash belonging to a third party or enters an account in a third party's name such that, in the third party's insolvency, it is lost or frozen. Most commonly, the risk arises in respect of collections that the originator/servicer of the securitized assets continues to collect on the SPE's behalf.

Dutch RMBS commonly use a collection foundation account held with a highly rated bank, meaning borrowers do not pay into a servicer's account but into an account in the SPE's name (the collection foundation). If we assess that the collection foundation is bankruptcy remote under our legal criteria, we do not model any commingling stress. In some instances, when borrowers pay directly into an account in the originator/seller's name, a commingling guarantee mitigates the potential commingling risk.

Our assessment of commingling risk considers both the amounts accumulated in the servicer collection account before the servicer's insolvency (accumulation risk) and the amounts that may be paid to that account following the servicer's insolvency before the borrowers are notified to pay into the issuer account (notification risk).

Our considerations depend on the transaction's structural mitigants and account for counterparty risk relating to the account bank where the servicer collections are held. Dutch RMBS transactions tend to structurally mitigate this risk by using bank accounts with appropriately rated banks and rating triggers.

Setoff risks

Potential setoff risks could arise if the originator/seller becomes insolvent. Employee setoff risk arises when mortgage repayments are netted against salaries due and unpaid by the originator. In most RMBS transactions the collateral's eligibility criteria excludes inclusion of mortgages provided to the originator's staff.

Deposit setoff risk arises when borrowers offset their mortgage repayments with deposits held with the originator when the originator is a deposit-taking entity.

For construction deposits, if the seller were to become insolvent and fail to pay the deposit on the construction loan to the borrower, the borrower may be able to set off the amount of the undrawn deposit against the amount owed to the issuer under the mortgage loan. In some RMBS structures an originator typically provides a construction guarantee or a construction deposit account exists at the transaction's inception.

Lastly, as some mortgage lenders are insurance companies, a setoff risk can arise due to the failure of these entities on meeting their insurance policy obligations. Typically, these products are a marginal portion of RMBS collateral within our rated transactions, and, in such cases, we believe the risk is remote even at a 'AAA' level in accordance with our global RMBS criteria because setoff risk can only be triggered if several events occur (i.e., insurer default, borrowers attempting to exercise setoff risk, and courts acknowledging setoff risk rights). Setoff risk in savings-related mortgage products is typically covered by a sub-participation agreement.

Clawback risk

Our clawback risk assessment depends on the level of comfort provided in legal opinions in combination with solvency certificates provided by the seller.

Securitization Versus Covered Bonds

Dutch mortgages are sometimes securitized or used as collateral in a covered bond program. Covered bonds finance almost 25% of the outstanding residential loans in the Netherlands and in 2022 represented 50% of the banking capital market funding in this jurisdiction. The Dutch covered bond market comprises 14 residential mortgage-backed programs from nine issuers, representing over €169 billion of outstanding issuance (see "Dutch Covered Bond Market Insights 2024"). Some of the large Dutch banks previously had master trust programs, but have gradually phased them out, favoring covered bonds and unstructured mortgage investment funds instead.

The recourse to the issuer and the consequent lack of risk transfer is the main difference between covered bonds and RMBS. Since in covered bonds the credit risk remains with the originator, it has a greater incentive to manage it more actively. Covered bond programs have dynamic cover pools so that assets that repay or that are no longer eligible are replaced, compared to RMBS, where the pool is generally static, and assets are not replaced. Finally, covered bonds tend to have bullet maturities, while in most RMBS transactions, principal collections are transferred directly to investors (see "Covered Bonds Primer").

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Related Criteria

• Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
• Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
• Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
• Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
• Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019
• Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
• Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds, Dec. 8, 2014
• Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
• Principles Of Credit Ratings, Feb. 16, 2011
• Methodology For Servicer Risk Assessment, May 28, 2009

Related Research

• European RMBS Index Report Q1 2024, May 16, 2024
• Economic Outlook Eurozone Q2 2024: Labor Costs Hinder Disinflation As Rate Cuts Loom, March 26, 2024
• Covered Bonds Primer, March 19, 2024
• Dutch Covered Bond Market Insights 2024, Feb. 5, 2024
• European Housing Markets: Forecast Brightens Amid Ongoing Correction, Jan. 25, 2024
• European Structured Finance Outlook 2024: Pushing On Through, Jan. 9, 2024
• Building Energy Regulations And The Potential Impact On European RMBS, Sept. 6, 2023
• Dutch Buy-To-Let: Down But Not Out, April 19, 2023
• Dutch Buy-To-Let: A Promising New Asset Class, March 21, 2018