Mortgage guarantee scheme
SGFGAS first task was in managing a public guarantee scheme for mortgages loans to low income borrowers (prets d’accession sociale, PAS, e.g. Affordable Housing Loans), compensating lenders in case of borrower’s default. A dedicated fund (FGAS) was set up to provide funding to the scheme.
The philosophy of the successive systems set up since 1993 is balancing two central concerns:
- Reducing the cost of risk for participants, by sharing the risk of borrower default between the State and each credit institution. This mutualisation takes the form either of a guarantee fund supplied ex ante under the first system (FGAS), or a provisioning mechanism in the lenders accounts and commitment by State signature, under the new FGAS.
- Preventing excessive risk taking and insufficient risk management by the lenders.
Based on these principles, the FGAS system relies on a three tiers structure:
- As long as defaults do not reach a reference default rate (defined as a percentage of the initial loan amounts determined in advance), losses are covered equally by the State and the lender (50% quota share).
- Within the default tier between this threshold and a ceiling, the lenders bear the entire loss. This tier is called the "malus" zone as it is deemed to follow excessive risk-taking by the credit institution, which should have contained the defaults below the reference rate. This rule is an incentive for risk control by credit institutions.
- In the third tier, the State intervenes as final guarantor for each loan generation beyond the ceiling referred to above ("systemic" risk). Cover is 100%.
The tiers are assessed by lender and by “generation”, that is loans issued in one year.
Nature and definition of the guarantee
The guarantee (FGAS and new FGAS) is a State guarantee whose main features are set sown by law (Official code housing and planning, article L 312-1).
In the event of borrower default, its purpose is to compensate any loss, defined as a reduction in the actuarial yield rate expected by the lender at origination, taking account, where appropriate, of the portion of ancillary costs legally recoverable from the borrower.
Two conditions must be met before a loss is compensated by FGAS: firstly, registration of the loan as NPL in the FICP (French creditor default file), and secondly, proof from the lender of the occurrence of an loss inducing event as described in the agreement (contractual recovery plan, executory court order, collective procedure, amicable or forced sale, debts deemed irrecoverable). However, SGFGAS may indemnify the loss even if FICP registration has not yet been made, for borrowers whose long-term situation is shown as compromised.
The very wide definition of default which may be compensated enables FGAS/new FGAS to intervene not only in standard litigious cases leading to a sale with, but also before the litigious stage for the bona fide borrower who has, for a particular and temporary reason (job loss, divorce, illness, etc.), been unable to meet his repayments, translating into a debt restructuring.
Such preventive action is designed to enable a borrower in difficulty to complete his ownership project under new conditions which satisfy all parties.
The guarantee covers the charges in the debit account at the lender, i.e.:
- unpaid instalments;
- interest and late payment penalties up to the legal limits;
- legal and procedural costs legally recoverable from the borrower;
- insurance premiums (death, work invalidity, loss of job) remaining due to the credit institution.
The FGAS/new FGAS guarantee does not cover cancellation compensation nor other costs not mentioned (in particular, dispute management costs).
Finally, it is a guarantee which, in principle, may only come into play when all other guarantees have been used (first lien is case of sale).
"Monitoring accounts" (« comptes de suivi »)
The loan portfolio performance is assessed per lender for each year of origination (“génération”).
SGFGAS publishes, at least once a year, monthly-updated "monitoring accounts" which set out the commitments of the credit institutions and the State resulting from the principles described above. These "monitoring accounts" allow in particular to determine when the various default thresholds and ceilings are met. A monitoring account is prepared per affiliated credit and per loan generation (one generation corresponds, unless excepted, to all loans disbursed during the same year).
The Company is also informed of the details of each loan declared except the name of the borrower, and monitors all events occurring during the life of each loan (modifications to initial capital, total early repayment, payment incidents, default, etc). It also monitors the compulsory annual declaration of outstanding amounts and quarterly declarations of payment incidents. (NPLs)
SGFGAS sends monitoring indicators prepared by its data system to the credit institution.
A monitoring account is structured as shown:
In case of loss (loan restructuring, sale of property below amount remaining due), the lender submits a claim to SGFGAS through a secure website. The interface allows for automated checks on data and for fast indemnification, usually in less than a month.
From “Old” FGAS to “New” FGAS : what has changed / what hasn't changed
When SGFGAS was established, the guarantee (old FGAS) was backed up by a dedicated fund, financed on a pari passu basis by the State and the lenders for each new loan (thus the risk sharing was in effect done upfront). In 2006, the fund was replaced with a guarantee scheme on the State signature (New FGAS).
The main changes :
- The principal difference is the absence of contributions paid when the loan is disbursed, i.e., prior to realisation of the risk covered.
- The balance of monitoring accounts (difference between contributions and default indemnity) constituted, until 2005, the guarantee fund invested in the financial markets and which appeared in the company's balance sheet. This has now been replaced by a commitment under signature which for credit institutions means provisioning up to the preceding rate of contribution to the Fund, and an obligation to bear, in the event of default, 50% of the amount of compensation, the remainder being borne by the State. (“old FGAS” benefits from 100 % cover)
- Recourse to securitization is facilitated by an indemnity guarantee of 100% to the transferee.
What hasn’t changed:
Everything else, including:
- For generations prior to 2007, SGFGAS has been given a specific mandate by the State to compensate default under the same conditions as before, always provided that the financial participation of credit institutions may only now be requested in principle in the default "malus" zone.
- The SGFGAS Board of Directors continues to fix the financial parameters of the following generation, subject to the two government representatives' right of veto.
- Keeping the "monitoring accounts": the former contribution rates have become the rates which, applied to the initial amount of the loan, serve as the basis for calculating the commitment to pay a financial contribution at the appropriate time; the same order of magnitude has been retained modulo the translation to the flat rate which depends on the intrinsic average characteristics of loans in each generation: 0.13% as an annual actuarial rate for the State and the credit institution up to a "malus" threshold equal to 0.26%. However its "malus" ceiling is limited to 0.78%, as against 1.14% for the most recent old FGAS generations (still actuarial).
Risk supervision authorities have always granted a favorable treatment for FGAS guaranteed loans in comparison to non-guaranteed mortgage loans. They benefit from a lower capital allocation ratio (risk weighting).
Thus, as of today loans with a mortgage lien have a 35% risk weighting (loans with no mortgage lien, which is often the case in France, have a higher weighting) "old FGAS" loans, as they get a 100% state guarantee cover, benefit from a 0% risk weighting.
For "new FGAS" loans, benefitting from a 50% State guarantee, the risk weighting is 17.5% (i.e. 50% of the mortgage risk weighting).
The French risk supervision authority (ACPR, Autorité de Contrôle Prudentiel et de Résolution) monitors on a yearly basis the results of the FGAS scheme and depending on the observed loss ratios, may decide to modify the risk weighting.
More information on risk weighting can be found on the following link to a notice issued by ACPR in 2014: