How banks finance mortgages

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To remain competitive, French banks grant mortgages at rates that barely guarantee them equilibrium. This strategy holds as long as they benefit from a lower-cost resource, such as regulated savings. By turning to the markets, they will have to review the equation.

Will the fine mechanics come to a halt and the cost of mortgages increase? Generalist banks now grant loans at unbeatable rates, thanks to one of the cheapest resources on the market, regulated savings, subsidized by the State (PEL, PEP). But the depletion of this inexpensive resource and wider recourse to market products could get the better of this commercial aggressiveness.

A third of housing loans _ or even half, depending on the institution _ is financed thanks to collections from PELs and, for a residual part from PEPs, at a cost of around 2%. However, “a substantial number of lenders do not generate sufficient profits on real estate products alone to cover the cost of economic capital”, notes the firm Mercer Oliver Wyman in a study for the European Mortgage Federation: the amounts borrowed by individuals are too low to amortize the fixed costs (distribution, issues and services) incurred by the banks.

The pace of deposits is slowing down
In reality, as the managing director of a bank explains, “a private individual who acquires real estate can today go into debt over fifteen years cheaper than the French State! This is enough to demonstrate that the banking system largely subsidizes mortgage loans.. Clearly, mortgage has become a commercial issue and institutions do not hesitate to break their margins. By selling a mortgage, a bank imposes a domiciliation of the borrower’s wages, thus ensuring the loyalty of a clientele for more than fifteen years _ or even more with the extension of the duration of the loans. Faced with the long-term profit, a sacrifice on the margins is not very painful, especially at the price of the resource. There will always be time to make this account profitable by selling additional products.

But can these balances continue if this resource runs out? Already, the share financed by regulated savings has fallen, under the mechanical effect of the twice as rapid increase in loan applications compared to the collection of PELs. The rate of deposits on PELs slowed down, falling from 5.2% annual growth in June 2003 to 4.7% last June, and that of PEPs accentuated its fall from _ 6.2% to _ 6.6%. The big difference is that , “after having stagnated, the resources of the PEL are beginning to decline with the reduction in the number of new subscriptions”, observes Marie-Christine Caffet, head of markets and trades at the National Confederation of Crédit Mutuel.

The reform of the ELP in 2003 was not neutral. By linking the advantages of the PEL to the subscription of a mortgage (State bonus reserved for borrowers), it has restored the product to its primary purpose. But ended its main use, that of a savings product. The majority of subscribers did not take out mortgages at the end of the PEL, because the rates offered by “free” mortgages were more attractive. However, “as a savings product, the PEL provided cheap cash for the banks… which themselves used it to finance competitive loans. It is this cycle that was broken by the reform of the ELP”, explains Michel Mouillart, professor at the University of Paris-X Nanterre specializing in real estate issues. As a result,“savers have turned to the stock market and life insurance, which cannot be used by banks directly because these collections do not appear on their balance sheets,” adds Marie-Christine Caffet. Michel Mouillart thus believes that the gradual disappearance of this cash will generate liquidity risks, the effects of which will be visible from 2005.

But the banks assure that there is no cause for alarm. Some have launched substitute products for the long-term savings generated by the PEL, such as savings accounts whose rates are subsidized according to customer loyalty, which makes it possible to capture this cash over the long term. They also have the cushion of sight deposits (current accounts) and passbooks or short-term deposits.