MORTAGE MARKET IN EUROPEAN UNION

Mortgage market forms an important part of the capital market. The mortgage market performs several functions, primarily through primary market where loans to households and businesses are giving the possibility of borrowing in order to purchase real estate or property. Available means to fund loans are collected through the collection of deposit, securitization and issuance of mortgage securities. Secondary market developed through new ways of financing, where the issuers of loans can get to liquid assets by selling loans or by issuing mortgage securities and thus create the function of liquidity. Issuers may reduce their credit risk by selling their loan and diversify their credit portfolios by purchasing special types of loans. For other participants in the mortgage market there is an option for investment in mortgage-backed securities to invest their savings, reduce their investment risks and maintain their purchasing power. In EU market there is intense competition and conditions are changing constantly. Changed funding conditions due to low interest rates and inflation, focus on the need to use capital efficiency and trends toward specialization may result of the creation of a much larger secondary market. Since EU mortgage market is diverse, on this secondary market there is tough competition between on-balance and off-balance sheet instruments based on their quality of the issuing institutions and the securities. In the euro area the situation is remarkably different than in the US mortgage market. In the EU housing loans remain on banks balance sheet since they are mostly funded by bank deposits or the issuance of covered bonds. In the EU is more difficult to remove the loans from the balance sheet than it is in the US. This fact leads to a more cautious behavior of lenders with respect to the loans originated. Different legislations concerning covered bonds and non-standardized mortgage loans resulted in lower securitization in the EU. This is bad because high securitization improves liquidity of the secondary market and reduces funding costs. All this shows that it is crucial to keep risks transparent and loans on the balance sheets of well regulated institutions in order to maintain financial stability