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Pfandbrief issuers’ business overhaul

The German Pfandbrief market, in particular the jumbo sector, has grown dramatically in recent years and assumed a larger and larger slice of European bond fund managers’ portfolios. But now many of the leading issuers face significant challenges in the underlying lending businesses that generate Pfandbrief collateral. The German mortgage banks are seeking non-traditional business opportunities, as well as starting to sort out their underperforming mortgage lending businesses. Volumes are likely to shrink.

Bernd Knobloch

These are hard times for Germany's mortgage banks. After having been spoilt by exorbitant growth rates in the 1990s, they now have to face a significant slowdown in new business.

New loans to the public sector declined by 24% in 2000, reflecting low demand as a result of shrinking state budget deficits, as well as borrowers' aspirations to go straight to the capital markets to raise funds. Even worse, a flattening yield curve has shattered the excellent earnings that were easily made by mismatching collateral assets and Pfandbrief liabilities before interest rates started to rise in 1999.

Mortgage lending has also declined, by 15% in 2000, as a result of higher interest rates and economic downturn. The favourable environment for both mortgage and public lending - especially the boost in investments after German reunification - is gone.

In fact, 2000 was the first year since the take-off of the jumbo market in 1994 that total new issue volume of jumbo Pfandbriefe fell below the level of the previous year.

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