Dynamic Credit: AFM has approved prospectus for Mortgage Bond programme

19 juli 2019

The Dutch financial markets regulator, AFM, has approved the prospectus for the Dynamic Credit Mortgage Bond programme. Through this, a new way of funding Dutch mortgage loans is officially ready for use. It is now possible for institutional investors to invest in a portfolio of Dutch mortgage loans in a simple, transparent and low cost way. The Mortgage Bond will appear as one line in the administration of an investor and can easily be settled. Listing on a stock exchange is optional and can be achieved in a straightforward way. Because of these attributes, the Mortgage Bond will radically change the way Dutch mortgage loans are funded.

More funding needed for the Dutch mortgage market

With Dutch banks increasingly restricted due to capital constraints, Dutch insurance companies approaching the maximum exposure to Dutch mortgage loans and Dutch pension funds reaching their target allocations to this asset class, funding from other sources, including international investors, is very necessary to finance the demand for mortgage loans in the Netherlands. Rising house prices and growth in number of houses will even increase the demand for mortgage loans. In case of a shortage of funding, chances are that mortgage interest rates will rise strongly.

A missing link for (international) institutional investors to invest in Dutch mortgage loans was a true ‘investable product’. One where the return of the loan portfolio is properly captured, yet which can be traded, settled and administered in a straightforward way. The Mortgage Bond does this and is therefore the key to real, international, diversification of funding of Dutch mortgage loans.

Jasper Koops, Portfolio Manager Direct Lending at Dynamic Credit states: “The last five years has shown a large move from banks funding mortgage loans to Dutch pension funds and Dutch insurance companies. The Mortgage Bond will now start a new chapter, by enabling a broad range of institutional investors to provide funding of Dutch mortgage loans in an easy and straightforward way. Dutch mortgage loans are an interesting investment. It requires a truly investable product like the Mortgage Bond to unlock this opportunity to a broader investor base.”

Financing for the whole duration of the mortgage

Unlike a securitisation, which normally has an effective life of 5 year, the Mortgage Bond provides financing for the whole duration of the loan. And whereas an investor effectively cannot get out of a mortgage fund, the Mortgage Bond can be traded and settled in an easy way. Investors can thus get the exposure they want and then change that exposure when they like to do so.

The way the Dynamic Credit Mortgage Bond works is straightforward: an investor can choose which segments of the mortgage market (combinations of risk classes and fixed rate periods) they want to invest in. Through the bijBouwe label these loans are then originated. Alternatively, an existing portfolio of bijBouwe loans can be bought from another investor. The loans will then be put into a separate compartment of DCMB Programme BV, a dedicated bond issuing entity. Notes are then created on just this compartment. This way investors can get the exposure they want, in a simple and transparent investment product. Interest and principal payments on the portfolio of mortgage loans are passed through to the Mortgage Bond holders.