final european_forum_2nd_quarter_2009

ForumIssue 2Mortgage Market

Adapt and surviveIn the current climate insuranceproviders must radically rethinkhow risk and reward are shared

The expert’s viewWhy Professor Stefan Kofnerbelieves that mortgage insuranceis an integral part of a healthy market

EUROPEAN

Are governmentschemes the key?

How public/private partnerships could ensure thelong-term success of homeowner protection programmes

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WelcomeINSIDE THIS ISSUE

3. STAVING OFFREPOSSESSIONCould private sectorinvolvement take thepressure off governmentsupport schemes?

8. THE ROAD AHEADWhy insurance marketsneed to adapt in order tosurvive the current crisis

12. EXPERT Q&AProfessor Stefan Kofnerdiscusses the future roleof credit risk mitigants

14. MACRO ECONOMICOVERVIEWThe European Union/Eurozone in focus

16. LOCAL SNAPSHOTEconomic indicators andhousing market statistics

18. ROUND-UPNews and events fromGenworth Financial

19. IN PERSPECTIVEThe Genworth view onpivotal market issues

Welcome to the latest issue of Genworth Financial’sEuropean Forum.

There’s no doubt that the current state of the globaleconomy is still giving us much to talk about. They saythat a week is a long time in politics – and it seems sixmonths is a very long time in finance in the presentclimate. Stock markets continue to be volatile, the future

of many banks is still uncertain, and matters pertaining to housing andmortgages are far from settled.

As the financial crisis continues, many homeowners across Europe arestruggling to meet their mortgage obligations and many may well end uprelying on support from government schemes. In our special report onpage 3, we examine exactly what support is available in the UK, Ireland,Spain and Italy.

If the ongoing state of flux has brought one thing into sharp focus, it isthe importance of risk management. Decisions that organisations make inthe here and now will shape their futures and could make the differencebetween success and failure in the long term. On page 8, Robin Webster,Genworth Financial Europe’s Chief Risk Officer, looks at how the ability toadapt to a constantly shifting environment is vital to achieving responsiblegrowth in a challenging environment.

Also in this issue, we are delighted to feature an exclusive interview withDr Stefan Kofner, Professor of Housing and Real Estate Economics andauthor of Die Hypotheken- und Finanzmarktkrise. He gives us his insightsinto how the housing markets are going to play out and what needs to bedone to get them back on track.

Whilst writing, I would like to introduce Tonia McAllister as CountryManager for the UK. Tonia will be leading commercial activities for MortgageInsurance in the UK, in addition to her responsibilities for the Irish platform.I won’t be going far and will keep a strong interest in the UK in my widerpan-European role.

I hope you find that our second issue offers an interesting read and furtherfood for thought,

Tammy RichardsonManaging Director, CommercialMortgage Insurance Europe, Genworth [email protected]

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Like a very large stone in a very dark pond, theglobal economic crisis has sent ripples aroundthe world. As much as the bank failures werethe first stage of the ‘credit crunch’, what isbeginning to be felt now is the impact upon thegeneral public as jobs are lost, credit lines arewithdrawn and people find themselvesstruggling to make ends meet.

Governments, as a result, have been putunder pressure to help provide financialassistance to those that could lose their homes.In Europe, the response varies significantlyfrom country to country, with some rushingthrough brand new policy and modifyingexisting programmes. So just what is thecurrent state of play and are borrowers reallygoing to be protected? Here we focus on theUK, Ireland, Spain and Italy.

View from the UKFigures from the Financial Services Authorityshow that repossessions in the UK for 2008were up 68% on 2007 – from 27,900 to 46,750.And at the end of 2008, a total of 377,000mortgage accounts were in arrears. With someorganisations estimating 75,000 repossessions

Staving offrepossessionAs the financial crisis continues to bite,governments are taking action to protecthomeowners struggling to meet mortgagepayments, but are they doing enough andwhat role is there for Genworth?

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in 2009, the road ahead is going to be tough.The Homeowner Mortgage Support

Scheme (HMSS) was announced by thegovernment in December 2008 and is due tobe introduced by the time we go to print, withthe intention of helping those who havesuffered a temporary loss of income to stay intheir homes.

The scheme will allow lenders to reduce aborrower’s monthly mortgage payment, withthe deferred payments rolled up, added to theprincipal, and paid at a later date when theborrower’s financial circumstances haveimproved. The following rules apply:• The mortgage must be for less than

£400,000• The household savings must be less than

£16,000• Monthly repayments can only be cut to 30%

of the original• The rest of the payment can be deferred for

up to two years.

Of course, there are many more qualifyingcriteria, but HMSS is the third scheme in theUK to offer help with mortgages – alongsidethe Mortgage Rescue Scheme (MRS) andSupport for Mortgage Interest (SMI). HMSShas, however, been heavily criticised and, atthe time of writing, it is unclear how manymortgage providers are actually going to signup to the scheme.

Peter Williams, Executive Director of theIntermediary Mortgage Lenders Association(IMLA), says: “Eighty per cent of the shortfall willbe covered by government and 20% by lenders,but lenders are also bearing a huge admin cost –the cost of no capital repayments and full houseprice risk. So it is understandable that, currently,only 70% of lenders have agreed to sign up.”

HMSS is designed to complement the othertwo schemes and pick up where SMI leaves off.But even with three schemes in place, Williamsis concerned about how many people will besupported. He estimates 3,000 may be coveredby MRS, with SMI and HMSS helping perhaps6,000 and 10,000 respectively. Compare thiswith the number of repossessions and there issome disparity.

“The most pressing issue is that all of theseschemes cost money and there is going to be afairly horrendous round of public expenditure cutsover the next two to five years,” says Williams.“In practice, we are not going to be able to holdon to what we might have arrived at.”

The Irish perspectiveIn stark contrast to the UK, the latest figuresfrom the Irish Banking Federation indicate thatthe total number of houses repossessed by allmainstream mortgage lenders in 2008 was anastonishingly low 96. This equates to one in10,000 mortgages, as opposed to one in 35mortgages in the UK.


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It is perhaps unsurprising then, that the Irishgovernment has not felt it necessary tointroduce new policy and has merely broughton to the statute books the existing industryCode of Conduct on Mortgage Arrears. As ToniaMcAllister, Genworth’s Country Manager forIreland and the UK explains: “The Code hasbeen around for some time, and was welladhered to by the industry. It emphasises theneed for lenders and borrowers to try allpossible options for reaching a solution beforea repossession order is applied for.”

In February this year, the Financial Regulatoradded in a new clause stipulating that thelender can’t apply for a repossession orderunder the courts within the first six months.McAllister feels this will have no significanteffect. “The reality is that the average time ittakes for a mortgage arrears to end up in thecourts for repossession in Ireland is three years.So by bringing this six-month period into law, it’snot really doing anything in practice.”

McAllister draws attention to the MortgageInterest Supplement scheme, which has beenoperating for some time and aims to provideshort-term income support to eligible peoplewho are unable to meet their mortgage interestrepayments. In the 12 months to January 2009,the number of people claiming this assistancerose from 4,100 to 8,500. As McAllister pointsout: “The number claiming on this scheme hasincreased and could cause a problem for thegovernment from a public expenditureperspective. Put simply, when the legislationwas introduced, it didn’t expect to be providinghelp to this number of people.”

What’s happening in Spain?The number of borrowers in arrears in Spain hasseen a rapid increase. From 0.75% of totalvolumes at the end of 2007, figures rose to 2.38%

by the end of 2008.This equates to roughly95,000 mortgages out of nearly four million.

In December last year, the Spanishgovernment introduced a package of measuresto help homeowners in difficulty. The mostrelevant initiative allows unemployed borrowersto delay up to 50% of their monthly mortgagepayment for two years.The government hasindicated that it believes the scheme will helparound 500,000 mortgage holders. This schemehas the following characteristics:• Mortgages must be less than €170,000• The mortgage loan must be current at the

point of applying for the deferral• The duration of the deferral is two years• The 50% payable must equate to no more

than €500 per month• The Spanish Credit Institute (ICO), an arm of

the Spanish Treasury, will guarantee up to12% (€720m) of the total amount allocatedfor the scheme (€6bn) if the consumerultimately defaults.

Borrowers who take part will have access to apersonal loan of up to €12,000 to pay the deferredamount. Once the deferral period is up, they willhave to start paying the monthly mortgage andthen, a year later, start paying off that personalloan (for a maximum period of 15 years).

As Tomás Poveda, Government Relations,Genworth Financial, explains: “This means thatlenders are going to have to give a personal loanto an unemployed borrower. This is saddlingpeople in trouble with even more debt, in thehope that they will sort themselves out by thetime the payments restart. And with thegovernment only guaranteeing 12% of loans, itis not surprising that lenders have beenunhappy. Borrowers are afraid of taking on moredebt, but in some cases feel there is no optionif they want to keep their home.”

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The story in ItalyItaly was the quickest country off the markwhen it came to introducing new legislationto help borrowers. This is, perhaps, in light ofthe fact that new pignoramenti (the litigationprocess to obtain foreclosure) rose 17% tothe end of the first quarter in 2008, taking thetotal to 129,300.

In July last year, Decree DL93 became law,stipulating minimum standards for banks andfinancial intermediaries. This legislation is byno means as radical as that in the UK andSpain. And what separates this from all theother schemes is that there are very feweligibility criteria.

As Sara Turri, Loss Mitigation Manager,Genworth Italy, explains: “DL93 stated thatborrowers both current and in arrears couldmove to a lower instalment amount. Providedthat the bank had signed up to the scheme,customers could take advantage of it.”

In the simplest terms, DL93 allowsborrowers to renegotiate the terms of theirmortgage. This enables them to benefit from alower interest rate and, subsequently, a lowermonthly payment, which is then applied for therest of the term of the loan.

In January 2009, DL93 was supplementedby DL185/08. Under this, the government hasagreed to pay the portion of variable ratemortgages’ monthly instalments that exceed4% – so if a borrower’s interest rate is 5%,the government pays 1%. What’s more,variable rates from 2009 will be calculated onthe more favourable ECB benchmark rate andnot Euribor.

Valeria Picconi, Country Manager, GenworthItaly, says: “These may seem like relativelysmall measures, but it is worth noting that inItaly you refer to foreclosure rather thanrepossession, as lenders sell borrowers’properties to third parties in auctions. And ifforeclosure does begin, the average time forthe process is five years, and people stay intheir home until the end of the foreclosure. It isa far more socially aware process – they don’tjust put people on the street.”

According to the Italian Banking Association,DL93 has benefitted around 46,000 borrowers.What remains to be seen is the impact ofDL185/08. As Picconi points out: “Historically,Italy has a very high public debt, so thegovernment doesn’t have the money to supportthe industry as in other countries. If it has to payout many mortgages in excess of 4% interest,then there could be difficulties.” However,given the recent reduction in Euribor, the impactof this decree could be relatively limited.

On 25 February, the Italian Minister ofEconomy and Finance, Mr Tremonti, signedthe so-called Tremonti Bond Decree. Thegovernment will buy bonds issued by Italian G

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banks to increase Italian banks’ capital inorder that credit keeps flowing to householdsand companies.

Lenders taking part in this programme mustallow borrowers to suspend the monthlymortgage instalment of their primary residencefor at least twelve months, when the borroweror a member of the household is unemployedor is temporarily suspended from employmentdue to the current economic crisis. Thesuspension ends once the borrower/memberof the household finds a new job or startsworking again in the same company. Borrowerscould benefit from this suspension until31 December 2011.

The Genworth angleIt is evident that each of the four countries isfacing its own challenges – both in terms of thelevels of mortgage arrears and repossessions,and whether the schemes in existence aresufficient or even workable.

It is also clear that while the schemes willprovide a measure of support to eligibleborrowers, there are people who do not fitthe criteria, who may well need assistance.Both of these are areas in which privateenterprise can play a role – and Genworth’sexpertise and experience means that it is wellpositioned to do so.

On the first matter of workability, FrancescaArcidiaco, Government Relations, GenworthFinancial, points out that not only can Genworthhelp and advise in the set up of schemes, it canalso help governments avoid massive potentialproblems further down the line.

“With something like HMSS, thegovernment is taking on a massive liability,”she explains. “They may be helping 10,000borrowers and guaranteeing 80% of theinterest deferred. But they don’t know how

many they are ultimately going to have to payout. It’s not their expertise to analyse loanportfolios and look at performance dataand work this out, and that’s whereprivate sector involvement can help becausethis is what we do every day. At a timewhen there is huge focus on the pressureson taxpayer’s money being spent in thecrisis, we can help quantify and limit thegovernment’s exposure.”

Perhaps more significantly, however, is whatcan be achieved through ‘work outs’ on loansprotected by Genworth. One of the biggestcriticisms of the schemes in the UK, Irelandand Spain are the eligibility criteria that areimposed. By definition, this means that certainpeople are falling through the net and could endup losing their homes.

As Arcidiaco explains: “Genworth worksvery closely with its clients to come up withsolutions that are, hopefully, mutually beneficialto both lender and borrower. For instance, wecan help with deferred payments, the waivingof certain charges, refinancing or reducingmonthly payments. There are instances wherewe may even clear the arrears ourselves ifthe cost of doing so is less than the potentialcost of a claim. Ultimately, work outs shouldbenefit all parties.”

All possible work outs are based on a set ofGenworth criteria, but these are far moreflexible than those in government schemes.“We are a private company so we can be a lotmore discretionary,” says Arcidiaco. “Whereasthe government schemes are rigid.”

As the financial crisis continues to play outand the government schemes across Europekick in, keeping a close eye on what ishappening and being able to advise and offersolutions, could be the thin line betweensuccess and failure.


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Being a keen motorcyclist, one of my greatpleasures is to sit down in front of the televisionand watch the MotoGP. It never ceases toamaze me how skilful the riders are, pushingthemselves and their machines to the limit inpursuit of the chequered flag and the marchtowards the World Championship.

I’m always fascinated when it’s raining andwe have a ‘wet race’. The visibility is lower, thetrack becomes treacherous, and danger lurks atevery corner. The irony is, that although the laptimes become much slower, the marginbetween winning and being an also-ranbecomes much greater. In fact, a wet raceprovides a great opportunity for those with thegreatest skills to outdistance their rivals andestablish an unassailable lead. Valentino Rossiin motorcycling, and Michael Schumacher inFormula One are both serial winners andmasters of driving in the wet.

Sitting in the drizzle on the motorway theother week, I started thinking about the currenteconomic climate, and how insurance and

credit markets are working, and I came to theconclusion that for the next few years, steeringa safe course in these markets will be like ridingin the wet. Much has already been writtenabout how the world financial markets gotthemselves into the present situation. Whilstthis is interesting, we need to stay focused onour own road ahead. As individuals andorganisations, we can only hope to influencesystemic issues to a marginal extent. What wecan influence, however, is which customers wedo business with, and how we do that safelyand better than our peers.

Everything to play forFirst of all, let’s not allow ourselves to get intothe mindset that the race has been cancelled.The fundamental consumer need of access tocredit for house purchase remains. People stillhave a need for insurance against theunexpected. The value of Genworth’s productsis being demonstrated on a daily basis,providing mortgage lenders with an important

The road aheadThe current economic climate demands a predictive ratherthan a reactive approach to risk from insurance markets, saysRobinWebster, Chief Risk Officer, Genworth, Europe

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risk mitigant, and individuals with a safety netwhen, for one reason or another, they cannotmeet their obligations. Many providers havewithdrawn from this market. Together with ourpartners, we remain committed to servicingthese markets.

My second thought was: “how long will thecurrent storm last, and how severe will it be?”One of the key concepts of economics (andinsurance) is that the environment goes incycles, and we can predict the future – witha reasonable degree of certainty – by looking atthe past. As an industry, we are familiar witheconomic and statistical models that predict thefuture with 95% confidence levels, and scenariomodels that cater for 1-in-200-year events. Mycontention is that over-reliance on such modelscertainly was a key contributor to the bankingcollapse. Ironically, because these models arebased on deep analysis and intellectual rigour,they became acknowledged as reality, whereasin fact they are an interpretation of a number ofpossible outcomes. Also, because they rely

greatly on past observations, they arevulnerable when the environment undergoes aparadigm shift.

The lesson of historyIn 2007, certain parts of the UK experienced twoseparate 1-in-200-year events in the spaceof just six weeks! Floods. Possible paradigmshifts that were missed range from changingclimate patterns to property development onflood plains.

In my view, a key paradigm shift betweenthe recessions of the 70s, 80s and 90s and thecurrent situation are the combined impacts ofglobal trading, 24-hour news gathering, instantelectronic trading, and deregulation. Result: amarket change that is faster, deeper, morevolatile, more exaggerated than almost anybodypredicted. Ironically (and don’t hold me to this),the recovery may be faster than we predict forthe same reasons.

And the key lesson? Over-reliance onmodels is like riding the motorbike by looking

“We provide lenderswith an importantrisk mitigant andindividuals witha safety net”


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exclusively at the instruments. Experience,common sense, scanning the environment forchanges and challenging the models is vital.

With very rare exceptions, winning drivershave learned their skills over many years. Theyspot the dangers ahead and know when topress ahead and when to hang back. Youwouldn’t hire a driver for your team merely onthe basis he was fastest to the first corner,and similarly you would incentivise him to winthe championship, not just the first race.Financial services need to learn from this. Thereal test is sustainable, safe business thatdelivers benefits over the longer term.

At Genworth, this concept is fundamentalto us and drives our relationship with ourcustomers. Having relationships that aremutually beneficial, with an appropriatesharing of risk and reward over the long

term is vital. Easily said, but what exactlydoes this mean?

Understanding risk driversWe work with our clients to develop a veryclear yet sophisticated understanding of riskdrivers and how these are evolving over time. Itis to our mutual benefit to understand this sothat we can model how we expect our portfolioto behave, ensure that we are not subject toadverse selection, and so that we can fine-tuneunderwriting in the light of experience. As anexample, for the UK market we have workedwith a key client to develop a sophisticatedscoring model, OmniScoreTM, which we believehas contributed to that client achieving a betterthan average delinquency experience (whencompared to the average reported by theCouncil of Mortgage Lenders) by predicting C

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“The real test issustainable, safebusiness thatdelivers benefit overthe longer term”


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good and bad credit risk at relatively highloan-to-value bands. We also use our experienceand expertise to enrich our clients’ understanding.The current climate has reinforced the need for’gold standard’ underwriting; clearly wordedand tightly defined master policies protect bothparties and enshrine best practice. Recently,two of our partners in different Europeancountries changed their long-standing mortgageunderwriting methodology to our gold standard,even for the low LTV uninsured part of theirportfolio. Experience has taught us that riskmanagement should never have to apologise formaintaining high standards. What worked in abenign market will not necessarily work in adifficult market.

Adapt and surviveWhen Valentino Rossi rides in the wet, whilstthe fundamental design of the bike is the same,he’s on different tyres and using differentengine settings, gear ratios and brake settings.He rides more cautiously, and uses less leanangle in the corners. In business, it’s the sameconcept. Sometimes we cling on to theexperience that’s served us well in the past andexpect it to continue to work when theenvironments changed, when in fact we shouldbe adapting our riding technique. There are twodangers: denial and overreaction. The formermeans we will write bad business where weused to write good, and the latter means westop writing business. As Genworth has movedinto this new environment, we have workedclosely with our clients to respond in terms ofpricing and underwriting changes. Occasionallythese discussions have been difficult, but mycontention would be that these are verynecessary and important discussions to ensurewe continue to write business in the newenvironment that is profitable for both parties.

In one country recently, we have workedwith a client to implement new valuationprocesses that are outside the market normsfor the country they are operating in. Whilst thecommercial justification for doing this has led tosome difficult discussions, by applying rigorousanalysis and creative thinking, we have comeup with something that works in the interestsof not only ourselves and our client, but also theultimate purchaser.

The role of corporate governanceFinally, some commentators have cited a failureof corporate governance as the prime cause ofthe recent institutional failures. Whilst this maybe partly true, in my view this is far toosimplistic. It’s like blaming the race scrutineerswhen you’ve lost the race. Effective corporategovernance is of course vitally important,particularly in financial services; more importantis a culture throughout the organisation thatunderstands and champions sensible, balancedcommercial decision taking based on long term,sustainable and safe growth.

This is easily said, but less easily done.It needs a clear, unambiguous alignmentbetween recruitment, objectives setting, rewardsystems and recognition. It needsmeasurement systems that operate over longertime horizons, and it needs the ability to say‘no’ when competitors are prepared to chaseshort-term market share at the expense oflong-term sustainability.

So, as the traffic started to clear on themotorway, my musings came to an end and itwas back to navigating the road ahead. As afinal thought, as the new motorcycle seasonapproaches, and as the economic outlookcontinues to deteriorate, who is going to provethemselves both literally and metaphorically tobe the masters of riding in the wet?


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Many commentators have written about thecurrent crisis, but few have offered a timelyand authoritative explanation in one concisework. In his latest book, Die Hypotheken- undFinanzmarktkrise, Stefan Kofner presents justthat. Professor Kofner, who lectures in RealEstate Management at the University of Zittau/Görlitz in Germany, also touches on the futurerole of private mortgage insurance. Here is hisperspective on where the market is heading.

Prof. Kofner, weren’t there warning signs ofhow severe the current market crisis could be– and what could have been done to avert it?Yes: in fact, this is sometimes called “the crisisthat came announced”. As early as 2003, thesub-prime market share price went through theroof. House price inflation was accelerating andimproved risk transfer mechanisms led to creditexpanding and multiple credit bubbles. In theUS, the Federal Deposit Insurance Corporation(FDIC) and Fannie Mae sounded the alarm backin 2005. Still, even the pessimists didn’t foreseehow domino effects would lead to a crisis ofthis magnitude and severity.

What do you think are the key lessonsfrom the current market turmoil formarket participants?To start with, everyone should keep theirside of the street clean. We can’t haveunsustainable demands on return and growth –we need to look at bonuses, risk management,attitude to risk, the culture of organisations,values and the responsibility towards theborrower at the end of the chain. We needa return to solidity and must put a stop tobuilding castles in the air. This change needs tocome from the very top – executives need tolive new values and lead by example.

How did the crisis impact the mortgagemarkets in Europe?The mortgage markets in Europe are alldifferent from each other, and maybe that’s agood thing. In Germany, residential propertyis more or less financed as before; this hasalways been a conservative market. Thecommercial sector, however, suffers from a lackof funds for refinancing. Other markets such asHungary and the Baltic states have experienced

“We need a secondpair of eyes”Author and academic Professor Stefan Kofner gives his viewon how mortgage insurance can limit runaway risks in the future

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significant upheavals. In Eastern Europe, theextremely high proportion of foreign currencymortgages has led to instability.

If you could look into the future, how do youthink mortgage-lending markets will lookonce the crisis is over?Very dull. We’ll probably see quiteconservative structures harking back to the1950s. Banks will only finance reliable debtorsand ask for minimum deposits of 20%.Capacious and liquid markets for securitisedrisk will be a thing of the past. At best, bankswill be able to pass on part of their risk tothose mortgage insurers with the highestcredit ratings. Many investments in corporatereal estate simply won’t happen, so cityscapeswill change more slowly.

Do you think more regulation will benecessary, or should mortgage-lendingmarkets be free to develop more liberally asthey did in the past? For instance, UK PrimeMinister Gordon Brown is talking of banning100% mortgages.Crude bans won’t help. Nevertheless, we haveseen that markets cannot regulate themselves.For example, novel financial instruments,whose systemic risk potential was completelyunknown, were immediately used on auniversal scale. This was an enormous gamble.So we need intelligent and global regulation thatdoesn’t stifle innovative products, but preventstheir wholesale diffusion before their risks andside effects are known.

What do you think about the future roleof credit-risk mitigants (such as mortgageinsurance) and to what extent did the currentmarket situation change their meaning forthe financial system?

The market for mortgage-backed securities andcredit default swaps has disappeared and itwon’t come back. In effect, the state has nowrelieved banks of their risks on a massive scale.As a result, conventional risk managementis crowded out. As soon as the currentexceptional circumstances are over, the stateneeds to withdraw. Only then will lenders takeresponsibility for the risk they commit to bymanaging it appropriately.

This is where private mortgage insuranceshould be the central plank – it is a classicinstrument for risk transfer. It has a tried andtested, transparent business model, with manyyears’ experience in the management of creditrisks; it diversifies risk across regions andover time; it retains prudent reserves for lossyears; it acts as a second pair of eyes when itcomes to taking on risk and it does not whollyimmunise lenders from the consequences oftheir behaviour, which means there is still ahealthy respect for risk.

It is established, highly regulated and alreadywell understood by the authorities. That’s why itshould play a significant role in the future.

Do you believe mortgage insurance can be abeneficial tool to protect banks’ capital?Absolutely, and I also believe that mortgageinsurance can help avoid the systemic risksthat led to the current crisis. It can be anintegral part of a working, healthy market forthe transfer of mortgage risks by actually takingon risk rather than just dumping it elsewhere.Mortgage insurance companies have a naturalinterest in warning banks against taking on toomuch risk, and that role is more important thanever today.

Die Hypotheken- und Finanzmarktkrise ispublished by Fritz Knapp Verlag, Frankfurt

“Mortgage insurancecan help avoid thesystemic risk that ledto the current crisis”

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The European Economic and Monetary Union(EMU) recession continues to deepen, withEurostat issuing a flash estimate of -4.6%year-on-year in Q1 ’09 due to sharply weakeningglobal economic activity, collapsing world tradeand global financial crisis.

A massive contraction in the Germaneconomy is dragging down the EMU’s GDP.Economic sentiment improved in April for thefirst time in 11 months, but still remains at verylow levels compared with long-term norms.This is undermining prospects for investment,employment and consumer spending. Retailsales keep decreasing and the outlook forconsumer spending still appears pretty bleak.

Inflation is stable at a record low in April andlooks likely to fall further, while unemploymentcontinues to be at highest historical levels. Theoutlook appears bleak, in line with economicactivity expectations.

A summary of key economic indicators across theEuropean Union and the Eurozone

Macroeconomicoverview

Consumer spending is expected to be mutedover the coming months. In May 2009, theEuropean Central Bank announced non-standardmeasures (purchase of covered bonds),extended repo maturities and cut rates to 1%.

The Eurozone16 European Union member statescurrently use the single European currency:Austria, Belgium, Cyprus, Germany,Finland, France, Greece, Republic ofIreland, Italy, Luxembourg, Malta, TheNetherlands, Portugal, Slovakia, Sloveniaand Spain.

Non-participating EU member statesBulgaria, Czech Republic, Denmark, Estonia,Hungary, Latvia, Lithuania, Poland, Romania,Sweden and the United Kingdom.

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Data supported by IHS Global Insight unless stated otherwise.

GDP Growth Rate

-6

-4

-2

0

2

4

2005 2006 20082007 20102009

%C

hang

eon

last

-ysa

me

perio

d

EMUEuropean Union -27

Source: IHS Global Insight

Forecast(@May ‘09)

Unemployment

7

8

9

10

11

12

-20

-10

0

20

10

30

2004 2005 2006 2007 2008

Une

mpl

oym

ent

Rat

e%

EMU, Unemployed People (R)EMU, Unemployment Rate

Source: IHS Global Insight, Bloomberg, European Commission

2009 20112010

Unem

ployedP

eople%

Change

onlast-y

same

period

Forecast@May ‘09)

New Business Interest Rates Home Purchase Lending

4.0

4.6

5.2

5.8

7.0

6.4

Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09

%

CML (WA IR on new mortgages)EMU IR Lending for Home Purchase

Sources: European Central Bank, CML

Mar-09: 4.3%Mar-09: 4.2%

CPI Growth Rate

0

1

2

3

4

5

2005 2006 20082007 20102009%

Cha

nge

onla

st-y

sam

epe

riod

EMUEuropean Union -27



Money Supply & Lending

0

5

10

20

15

-40

-20

40

20

0

2006 2007 2008

M1

–%

Cha

nge

onla

st-y

sam

epe

riod

M1 Money SupplyGross Lending for Consumption (R)Gross Lending for Home Purchase (R)

Sources: European Central Bank, IHS Global Insight

2009 2010


Gross

LendingG

rowth

3M

onthM

ovingA

vg–

%C

hangeon

last-ysam

eperiod

New Business Interest Rates Lending for Consumption

6.5

7.2

7.9

8.6

10.0

9.3

Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09

%

UK IR Loans for Consumption up to 10kEMU IR Lending for Consumption

Sources: European Central Bank, Bank of England

Mar-09: 7.4%Apr-09: 9.5%

2643 P14-15 Euro Macro Genworth Iss2.indd 152643 P14-15 Euro Macro Genworth Iss2.indd 15 9/6/09 21:56:159/6/09 21:56:15

16

Local snapshotThe bigger pictureGDP plunged by 1.9% quarter-on-quarter inQ1 2009 – the largest decline since the thirdquarter of 1979 and significantly deeper thanhad been widely expected.

The annual Consumer Price Index (CPI)moderated to a 15-month low of 2.3% in Aprilfrom 2.9% in March and a peak of 5.2% inSeptember 2008. The rise in unemploymentslowed in April, but it is expected to continuerising substantially further throughout 2009 asthe economy continues to contract.

A closer look at key macroeconomic indicators andhousing market statistics

Housing and lending:Consumer spending contracted again in Q4 ’08,and is expected to be very weak for a while.Rising unemployment is affecting spendingdecisions and diminishing bargaining power.The savings ratio will head up further.

The housing market is expected to remainextremely subdued and mortgage lendingwill remain weak. Repayment problems willworsen. Home repossessions are up 23%quarter-on-quarter and 51% year-on-year in Q1and seem likely to rise significantly further.

2643 P16-17 Local Stats Genworth Iss2.indd 162643 P16-17 Local Stats Genworth Iss2.indd 16 9/6/09 22:00:039/6/09 22:00:03

17

GDP Growth Rate

-6

-4

-2

0

2

4

2005 2006 20082007 20102009

%C

hang

eon

last

-ysa

me

perio

d

EMUUK



Consumer Confidence

60

70

80

90

100

110

2005 2006 20082007 2009

EMUUK


Inde

xV

alue

s

UK New Lending Flow

-40

-60

-20

0

40

20

20062005 2007 20092008

3Mon

thM

ovin

gA

vg-%

Cha

nge

onla

st-y

sam

epe

riod

Gross Lending for Home PurchaseUnsecured Lending

Source: Bank of England CML

Mar -09: -15.2%Mar -09: -56.0%

CPI Growth Rate

0

1

2

3

4

5

2005 2006 20082007 20102009

%C

hang

eon

last

-ysa

me

perio

dEMUUK



Unemployment

4

6

8

12

10

20042002 2006 20102008 2012

Une

mpl

oym

ent

Rat

e%

EMUUK

Source: IHS Global Insight, Bloomberg, European Commission


HPI

-10

-15

-5

0

20

15

10

5

200620052004 2007 20092008

%C

hang

eon

last

-ysa

me

perio

d

Source: Financial Times HPI

Apr -09: -14.2%

Data supported by IHS Global Insight unless stated otherwise.

2643 P16-17 Local Stats Genworth Iss2.indd 172643 P16-17 Local Stats Genworth Iss2.indd 17 9/6/09 22:00:239/6/09 22:00:23

18

Putts For Charity, Genworth’s innovative fundraisingcampaign, which helped raise over €179,000 for goodcauses last year, will benefit the SOS Children’s Villagesin 2009. The initiative challenges both the general publicand professional golfers to make a successful ‘one putt’at stops along the European Tour. For each successfulone putt, the Genworth Foundation makes a donation tosupport a local charity.

Following two successful years as a European TourSponsor, Genworth Financial is also continuing as OfficialSponsor of the European Tour Statistics Programme.

The Statistics Programme enables every shot playedby every Tour member to be profiled throughout theseason, allowing fans and the media to follow playerprogress and performance in detail. The results arecollated into nine categories: stroke average, drivingaccuracy, driving distance, greens in regulation, puttsper greens in regulation, putts per round, one-putts perround, sand saves and scrambles.

Genworth will also act as a local sponsor at a numberof events on the 2009 European Tour, including the BMWItalian Open, Irish Open, BMW PGA Championship,Barclays Scottish Open, Mercedes-Benz Championship,Madrid Masters and the Portugal Masters.

Reassessing HLTV riskAs part of Genworth’s commitment to working withpolicy makers across markets, our Basel II expert, DanielGarcia, recently co-authored research outlining our viewson economic capital modelling for HLTV mortgages.

Over the last 15 years, house prices in real termshave increased significantly across developed countries.Consequently, access to homeownership has becomedifficult and new products have become available in themortgage market. First-time buyers have used HLTVmortgages to access homeownership and these havegained share in the different mortgage markets.

However, Basel II rules for capital allocation weredeveloped when HLTV mortgages were less common,therefore the impact analysis and simulations carriedout on bank balance sheets and capital holdings did notadequately take into account this new asset class. In thispaper, we show that HLTV loans perform very differentlyfrom low LTV loans, particularly under economic stressscenarios, and argue that some adjustments shouldbe made to the Internal Ratings Based (IRB) formula inorder to capture the significantly higher risk presented byHLTV loans. If you would like to see a copy of the report,contact [email protected]

Skipton partnership renewedGenworth has renewed a deal to provide mortgageinsurance to Skipton Building Society, the UK’s fifth largestmutual. “Genworth’s expertise in risk management,particularly in the HLTV segment makes them an idealpartner,” said David Harvey, Head of Credit Risk atSkipton. “We are in a challenging economic environmentand are delighted to have a partnership with a specialistinsurer.” Tammy Richardson, Managing Director –Commercial for Genworth’s European MI business,commented: “Genworth continues to help mortgagelenders find solutions for risk transfer that suit theirbusiness and satisfy the requirements of regulators. We arevery happy to be renewing our relationship with Skipton.”

Putts for Charityreturns in 2009

Round-up

2643 P18 Roundup Genworth Iss2.indd 182643 P18 Roundup Genworth Iss2.indd 18 12/5/09 21:53:4612/5/09 21:53:46

19

In perspectiveThere are few signs of the financial crisis easing, despite araft of government rescue packages amounting to trillionsof dollars. The consequences for homeowners are grave,with mortgage arrears and repossessions rising steeply ina number of European countries. In an effort to stem thistide, governments are now stepping in with a range ofmeasures to help beleaguered homeowners.

In this issue of European Forum we have taken an in-depth look atschemes in the UK, Ireland, Spain and Italy. While Genworth applauds the factthat governments in these countries are attempting to address the problem,we would question whether they have the experience or the technicalexpertise to support these schemes in the long term. Genworth believesthat there is a role for public/private partnership, and that although thegovernments are motivated to play a central role today, the early participationof private companies should allow, over time, the balance to shift to the privatesector, relieving cash-strapped governments of this fiscal responsibility.

But there are many with good prospects who still aspire to homeownership yet find the way barred by the absence of HLTV mortgages. Inour view, it is time for lenders to reappraise the way they operate in thissegment and develop a new approach to the management of HLTV risk. AsRobin Webster’s feature on risk management demonstrates, Genworth isideally placed to help lenders in this space. OmniScoreTM, our sophisticatedapplication scoring model, supported by our experience and expertise, canplay an important role in predicting good and bad mortgage risk.

Finally, let us consider the role of regulation. In our view, financial marketsneed intelligent regulation, which guards against systemic risk while allowinginnovation to flourish. We in Europe have much to learn from the Canadianmodel whereby all mortgage loans with a LTV of 80% and over must havemortgage insurance attached.This is widely credited as bringing stabilityto the Canadian housing market, and has been achieved by the adoption ofprudent lending criteria, standardisation of premiums across lenders and thepooling of risk across geographic locations. If adoption of the Canadian modelin Europe could stimulate new lending in a prudent and sustainable way,helping first time buyers, it can only be a good thing.

Angel MasPresident, Mortgage Insurance Europe, Genworth Financial

We would like to thank the followingpeople for their contribution to thisissue: Tammy Richardson, PeterWilliams, Tonia McAllister, TomásPoveda, Sara Turri, Valeria Picconi,Francesca Arcidiaco, Robin Webster,Professor Stefan Kofner, Frank Leifer,Guy Genney, Ed Lewin, Nick Kirby,Karen Heaney and Alfred Rinaldi.

2643 P19 Summary Genworth Iss2.indd 192643 P19 Summary Genworth Iss2.indd 19 8/5/09 23:42:138/5/09 23:42:13

Genworth Financial Mortgage Insurance Limited (“Genworth Financial”) is regulated by the Financial Services Authority in the United Kingdom.

The information, including any financial information, contained in this publication (‘European Forum’) is provided solely for informationpurposes only. While the information contained in this publication has been compiled in good faith, no representation is made as to itscompleteness or accuracy. Genworth Financial does not accept any liability for the accuracy, adequacy or completeness of any information andis not responsible for any error or omissions or the result obtained from the use of such information. None of Genworth Financial, its affiliates,directors, officers or employees shall have any liability whatsoever for any indirect or consequential loss or damage (including, withoutlimitations, damage for loss of profits, business interruption or loss of information) arising out of the use of the information contained in thispresentation.The recommendations contained in this publication are statements of opinion and not statements of fact. Genworth Financialmakes no commitment, and disclaims any duty, to update or correct or to provide notice as to any error or omission of any informationcontained in this publication. Genworth Financial reserves the right to add, modify or delete information in this European Forum at any time.

©2009 Genworth Financial, Inc. All rights reserved. Genworth, Genworth Financial and the Genworth logo are service marks of GenworthFinancial, Inc.

Genworth Financial is the trading name of Genworth Financial Mortgage Insurance Limited (registered in England No. 2624121), FinancialAssurance Company Limited (registered in England under No 4873014), Financial Insurance Company Limited (registered in England underNo. 1515187) and Financial Insurance Group Services Limited (registered in England under No. 1670707).The registered address of GenworthFinancial Mortgage Insurance Limited is 80 Strand, London WC2R 0GR.The registered address of the other companies is at Building 11,Chiswick Park, Chiswick High Road, London W4 5XR.

INT90070-05/09-UK

2643 P20 Back Cover V2 Genworth Iss2 202643 P20 Back Cover V2 Genworth Iss2 20 15/5/09 21:26:2915/5/09 21:26:29

final european_forum_2nd_quarter_2009

Documents

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