By Eric Veyrent, Deputy Chief Executive Officer, Head of Administration and Finance, Crédit Logement
The French mortgage market or the French home financing market is the third largest European market in terms of new origination. The peculiarity of this market is the guaranteed loan or, more specifically, the “caution” as the main guarantee.
This guarantee, delivered by an insurance company or a financial institution, is an alternative to the classic mortgage “hypothèque” registration. In 2014, guaranteed loans represented 61% of new home loans in France with a constant growth over the last decade. In comparison, the registration of mortgages, or loans guaranteed by a “hypothèque” represented only 37% of new home loans in France.
In the case of a guaranteed loan, the borrower has a choice between either a guaranteed loan or a mortgage. The full amount of a guaranteed loan is covered by the guarantee and not just the high loan-to-value (LTV) tranches. No additional guarantee is needed. A large range of home loans (bridging loan, long-term loan – up to 30 years, etc.) or borrowers (first time borrower, buy-to-let borrower, etc.) are eligible for the guaranteed loan.
For borrowers, it’s interesting to note the price competitiveness of the guaranteed loan. On average the up-front premium or fee amounts to 1%, allowing the avoidance of mortgage registration. This guarantee is more flexible: quick to obtain and with no extra cost in the case of early repayment. For borrowers, the guaranteed loan is the easiest way to obtain a rapid and competitive loan offer from a lender.
For banks, the key benefits of the guarantee are as follows: an automated and secured process to obtain the guarantee approval, full and rapid compensation when a guaranteed loan is in default, and a recovery process fully managed by the guarantor.
The main added values of the guaranteed loan are:
- The guarantor provides an independent and second risk analysis.
- The robustness of the guarantee does not depend on the value of the real estate at the time of default.
- The guarantor provides a global risk mutualisation relying on a high level of risk division.
The main guarantors of guaranteed loans in the French market are Crédit Logement (the market leader), CEGC (a subsidiary of BPCE), CAMA (a subsidiary of Crédit Agricole) and CMH (a subsidiary of Crédit Mutuel).
La Banque de France stated in its December 2015 French financial system risks evaluation that regarding the home financing market, the guaranteed loan system was “robust”. The guarantees are recognised as risk mitigation according to Art. 201 of the Capital Requirements Regulation (CRR). Guaranteed home loans are eligible for refinancing through SCF, SFH and securitisation transactions, and guaranteed covered bonds are eligible for low risk weights according to Art. 129.1.e of the CRR.
A solid guarantor with a proven business model
Crédit Logement has been licensed in France since 1975 and has the status of a financial institution (société de financement) regulated by the French banking law (23/12/2013 decree) and the French financial regulator ACPR. The company has a solid financial structure, being owned by highly respectful French banks such as BNP Paribas, Société Générale, Crédit Agricole, Crédit Lyonnais, Crédit Mutuel and the French Post bank.
Crédit Logement’s core business is to guarantee home loans to individuals. The loans are presented by partner banks, most of whom are also Crédit Logement’s shareholders. Crédit Logement currently has more than 100 active banking partnerships. The Crédit Logement financial guarantee is based on the principle of risk pooling, with each borrower contributing to a Mutual Guarantee Fund.
Crédit Logement has a 33% share of the French residential market (mortgages and guaranteed loans) and a 60% share of the French guaranteed loan market. Crédit Logement has also recently developed specific cross-border guarantee activities with regional banks located near the French border.
As of the 31st of December 2015, Crédit Logement’s outstanding guarantees amounted to €283 billion and its annual guaranteed production reached €80 billion. More than 7 million borrowers have already benefited from the Crédit Logement guarantee. Crédit Logement is rated AA low by DBRS and Aa3 by Moody’s, both with a stable outlook.
A highly secured and automated approval process
No approval delegation is given to the lender. All guarantee applications are transmitted automatically by the banks through two channels: via an exchange of computerised data or via an extranet. Each guarantee application is analysed by a scoring system in addition to an expert system (a set of limits and professional rules: LTV; debt-to-income ratio; etc.) with two main axis of analysis: the borrower’s ability to repay the loan and the margin on the property or on the borrower’s entire possessions. Crédit Logement’s guaranteed borrowers base is also checked automatically. 50% of all files are approved and cleared through the automated approval process. The remaining 50% are reviewed by experts because they are not compliant with the pre-defined set of criteria or have a low score.
Fully in charge of the collection process
Regarding the default claim, Crédit Logement takes over the recovery of loans in default from the first payment claimed by the bank through to the recovery completion (final losses paid or loan put back on track). The bank has to contact Crédit Logement after three monthly repayments are overdue. Crédit Logement covers the current overdue repayments and the subsequent overdue repayments.
The key objective of Crédit Logement is to quickly assess the client’s solvability:
- If the borrower manages to repay late instalments, the file comes back to the normal situation in the book of the lender (50% of cases are put back on track within six months).
- Otherwise, Crédit Logement requests the bank officially to declare the file as a defaulted loan and at that point in time repays the lender the full amount outstanding.
Crédit Logement takes all of the actions necessary to secure its position: register a judicial mortgage; sell the property on the market to obtain the highest recovery rate; or proceed to an auction to sell the property.
Robust risk servicing
In 2015, for Crédit Logement:
- 810,000 new guarantee applications were processed (14% were refused).
- 11,500 claims for payment were received from lenders. €337 million euros were paid out to lenders. €115 million euros were recovered.
Crédit Logement has the lowest doubtful ratio of the French market. The ratio stands at 0.79% compared to the French market average of 1.73%. Crédit Logement forecasts its ratio will stabilize in 2015.
This article was originally published in the EMF-ECBC newsletter Market Insights & Updates in February 2016.