By Merijn Bosman, Dynamic Credit Partners Europe B.V.
In the past five years Dutch institutional investors have significantly increased their asset allocation towards newly originated Dutch residential mortgage loans making this one of the fastest growing asset classes in the fixed income universe.
Newly originated Dutch residential mortgage loans are an attractive sub-sector of the fixed income universe due to the relatively high margins on the loans versus other fixedincome alternatives with a similar risk profile and duration. The margins are supported by low realised losses – even during the financial crisis, the tightened statutory mortgage loan criteria introduced post-crisis and reduced competition from traditional lenders due to adverse changes in laws, rules and regulation and a shift in mortgage loan demand and supply towards longer fixed rate periods. Non-Dutch institutional investors are slowlydiscovering the opportunity and are expected to increase allocations to this asset class.Investment formats through which investors can invest in newly originated Dutch residential mortgage loans are either via participations in mortgage funds or direct wholeloan exposure via mortgage loan receivables either held by a legal entity owned by the investor or transferred directly on the balance sheet of the investor. Mortgage bondswhich are securities in a single-tranche pass-through structure were recently introduced and offer an attractive alternative to the existing investment formats. The investment formats vary in terms of their required investment size, transferability of the exposure and available exit routes. In addition, tax and regulatory (capital) treatment and mandate restrictions play a role in determining which investor format is optimal for an investor.
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