Relationship between balance sheet management and mortgage lending

Max Bronzwaer, Investor Outreach

LinkedIn profiel

Could you tell me something about the importance of the relationship between balance sheet management on the one hand and mortgage lending and funding on the other?


Max Bronzwaer - ObvionMax Bronzwaer, Executive Director & Treasurer: “Mortgages have a number of options and features embedded in them which are related to interest rate risk, liquidity risk and funding. From the customers point of view, you would like to give him as much options and freedom of choice as possible. However, there is no such choice in the capital market. An example is the right for penalty free payment. In the case of Obvion, every customer can pre-pay 20% of their loan without a penalty.

There is a net present value penalty, the amount of which is equal to the interest rare difference between the lower current rate and the old contract rate. However, against every loan there is a loan in the capital market, because banks need to fund the mortgages they provide.

But if you prepay a capital market loan, there is no such thing as a penalty free part.

Mortgages are consumer products, and balance sheet management and funding are about professional capital market surroundings.”

What tensions exist in the front office and the back office?

Stefan Meij, ObvionStefan Meij, Manager Marketing & Innovation: “Of course there is tension in the sense that marketing departmentsare naturally oriented towards customers. However, at least in Obvion, there is no classical contradiction between marketing and treasury. Treasury still feels responsible for the client relationship and partnership. Marketing also feels responsible for the financial results. But customer satisfaction is a target for every member of our management team, both marketing, treasury, operations and what have you. In practice, the marketing managers and balance sheet management is responsible for the result. So there is certainly tension, but it’s not a classical one within Obvion.”


Is it different within Obvion compared to other companies?

Max Bronzwaer: “Absolutely. In a lot of companies, the commercial division is totally separate from the treasury department. At Obvion – we are a fairly small company – the deliberate choice has been made to keep these departments close together. Treasury as well as marketing are business departments, not staff departments. That basically reflects that we are jointly responsible for customer satisfaction and financial result.”

Stefan Meij: “In practice we have lots of different opinions, but there is a good balance. From the marketing point of view, you need to be of the financial angle. But that also goes the other way around: from the treasury perspective you need to be perceptive of the customer angle.”


What points are important for marketing to take into account when considering the investment side? 

Max Bronzwaer: “The most important element for an investor is credit risk. That may sound cynical, but the performance of our portfolio is basically the only thing an investor cares for.

They only care for customers in an indirect way: Satisfied customers are calm and easy and won’t wrinkle the pond. The single most important concern is the credit risk and the quality of the portfolio, and that has always been the key policy of Obvion: responsible lending is part of our mission. What’s very good about that is that the interest of the customer and the company are totally aligned. A euro of loss for Obvion is a euro of residual debt for the client.

That sometimes leads to tough choices, where you reject applications because we think it is not responsible for this customer to get help with buying his house.” 

Stefan Meij: “We consider it our duty to discuss changing customer needs, market characteristics and issues with the – naturally more conservative – institutional investors. These changes can have a huge impact on the playing field in the lending market. An important example of these changes that can affect the way we have to look at the mortgage lending market is the rise in the number of customers with flexible/temporary labor contracts. At Obvion this has resulted into an assessment of the customer’s prospect (‘Perspectiefverklaring’) as a credit approval instrument. Other examples include model based valuations and the need for individual credit scores. In a near future, changes – maybe even disruptive ones – will certainly come from solutions based on blockchain technology.”


And what about the lending structure in The Netherlands?

 Max Bronzwaer: “I am quite positive about the lending structure, because I think these last years have, in my opinion, proven that it works. Many people think that high LTV’s are by definition extremely dangerous. Obviously high LTV’s are inherently more risky, to a certain extent, but the Dutch situation has proven where we have 112% of LTV’s, up to 2013, and gradually going to 101% next year. But there are extremely low losses in the Netherlands, if you compare it to most European countries, and certainly the US.

It is possible to have higher LTV´s in a responsible way, because lending is based on affordability and that system has worked well, even with declining housing prices which we have seen between 2008 and 2014. This due to the fact that we are very careful that people are able to pay their mortgage. And of course we have social structures and benefits, which means that if somebody gets unemployed they are able to run a household and mortgage on an unemployment benefit for a certain period of time.

It enables you to bridge 6 to 12 months and gives you the opportunity to find a new job. Divorce is somewhat different, but in the case of divorce we also have special service measures.”



In Obvion, the cooperation between marketing and the back office is already going very well. Do you have any tips for other companies to improve this relationship? 

Max Bronzwaer: “ First, get a good feeling about what the other side is doing, what the other side is worrying about. You can get a good idea about what is happening on the client side by, for example, participating in customer panels, advisory panels and so further. Also explain to the marketing people how the price of a product is build, and why some things cost money – it’s not because Treasury likes high prices, these prices obviously take the risk element into account.”

Stefan Meij: “Second, markets are moving, if you see new developments at the capital markets side, you have to incorporate these developments in the product – so it can be beneficial for the customer. If risk is reduced, this can be translated in the price of the product. Similarly, when a new product seems very appealing from a marketing perspective, it has to be checked with the capital markets side if this is desirable for them as well.

Products cannot easily be changed in the middle of the lifetime of the product.

But understanding is the most important thing, place yourself in the position of the customer. In the context of the relationship between Mortgage lending one the one hand and Funding and balance sheet on the other hand. Both the consumer/borrower and the investor/funder, are the customer and need to be treated as such.”

During the Mortgage Week 2016 (13 October) Both Max Bronzwaer (Executive Director & Treasurer) and Stefan Meij (Manager Marketing & Innovation) of Obvion will give a crash course “Who is you client (customer or investor)? The impact on your funding and marketing strategy?”.

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