Associations in Holland score triple-A ratings due to government backing
Solidity of Dutch guarantee is tempting in troubled times
The demise of Ujima Housing Association at the end of last year was a wake-up call both to housing associations and to the bankers that have lent them billions.
The association was taken over by L&Q Group after it became insolvent and the sector’s reputation as a low-risk place to lend money was tarnished.
But what if an association four times Ujima’s size failed on the same scale?
As Keith Jenkins, a partner at law firm Winckworth Sherwood, observed last week, no single association would have the resources to step in.
This problem has seen the National Housing Federation eyeing up a Dutch model, in which housing associations pay into a fund that guarantees their loans (Inside Housing, 15 August).
Waarborgfonds Sociale Woningbouw charges associations a percentage of their outstanding loans in exchange for triple-A rated guarantees.
The organisation has been running for nearly 25 years, has guarantees on loans totalling more than €67 billion, and expects to issue another €35 billion by 2012.
And at a time when UK associations have seen the price of new debt rocketing, it is not hard to see the attraction of the Dutch scheme.
WSW estimates that without its guarantees associations would be paying as much as 10 per cent more for their loans.
If a bank calls on WSW to pay a loan it has guaranteed, it can tap the defaulting association’s assets – for example, by asking it to mortgage properties – to meet as much of the payment as possible.
Beyond this, it would have to cover the payment from its €400 million reserves. Participating associations also have to agree to help meet payments if the fund’s reserves are insufficient. This brings its total available capital for meeting liabilities to more than €2.1 billion.
But if all this were not enough, WSW has one final ‘backstop’. All its guarantees are ultimately backed by Holland’s government and municipalities – it is these guarantees that give the organisation its triple-A ratings.
If that sounds generous on the part of the government, bear in mind that Dutch housing associations are entirely funded by private finance.
‘I think the really big difference [from the UK] is that what we have in Holland is a sustainable, self-financing system,’ said Erik Terheggen, policy manager at WSW.
‘The only support from the government is the guarantee – and a guarantee on the budget of the state is nothing.’
Discussion of the elaborate security structure behind WSW’s guarantees is also a fairly academic exercise, because no bank has ever called on it to make a payment.
‘We don’t wait for default to happen,’ said Mr Terheggen.
‘Before we give a guarantee we make sure the [association] is in a financially healthy situation, and our [rules] give us a mandate to interfere whenever we think necessary,’ he explained.