Emissions Climate: Covered Bonds Remain Negative - Demand Wanes for Unsecured Bonds - VDP Survey Findings
City: Frankfurt
Anticipated Positive Conditions for Pfandbrief Issuance
According to the latest survey conducted by member institutions of the mortgage bank association VDP in November, the overall emissions climate score, encompassing the past, present, and future (each over a six-month period), remains unfavorable, standing in the negative range. The demand for covered bonds faced a harsh -43 rating during the past period (with a range of +100 to -100).
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The survey forecasts a decrease in covered bonds demand for the coming months. At the same time, it is expected that the volume of mortgage lending, largely financed by covered bonds, will see moderate growth. This is the summary of the VDP emissions climate report.
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Covered bonds are expected to lose their appeal in the short term, as investors gravitate towards more secure investments such as unsecured bonds. Although the demand for mortgage lending is only expected to grow moderately, the continued rebound in home-buying activity can provide a stopgap for the decline in covered bonds.
As for the latest trends in U.S. mortgage lending demand and volume, the following insights have been gathered from various sources, like the Mortgage Bankers Association (MBA) and market analysis:
Mortgage Demand and Volume Forecast
- Recent Trends in Mortgage Applications: Mortgage applications experienced an 11.0% surge in the week ending May 2, 2025, following a series of ups and downs. This could suggest a recovering market, although it remains vulnerable to fluctuating rates and economic conditions[1].
- Interest Rate Environment: Mortgage rates saw a slight decline, with the 30-year fixed rate averaging 6.62% in 2025, falling from 6.88% in 2024. This moderately lower rate has improved affordability, leading to a boost in both purchase and refinance activity[5].
- Mortgage Originations Volume: Total mortgage origination volume is projected to reach $2.3 trillion for 2025, marking a 28% increase over 2024. Around $1.46 trillion is forecasted to come from purchase origination, a positive sign for burgeoning home-buying activity[5].
- Longer-Term Outlook: Industry analysts predict that mortgage lending will barely fluctuate through the end of 2026, foreshadowing a steady, but careful, growth trajectory in the sector[4].
- Market Sentiment: Despite the stabilization of the market after several tumultuous years, experts advise against significant improvements in mortgage rates in the near future. Furthermore, a relatively sluggish sales pace has been observed in the initial phase of 2025, dampening hope for dramatic spikes in demand[2]. Economic uncertainties and volatile rates are expected to constrain demand.
Summary Table
| Indicator | 2024 | 2025 (Forecast) | Trend ||--------------------------|-----------------|-------------------|----------------------|| 30-year fixed rate | 6.88% | 6.62% | Slight decrease || Total originations ($T) | ~1.8T | 2.3T | 28% increase || Purchase originations | — | 1.46T | Dominant component || Demand (Applications) | Erratic | Recovering in May | Sensitive to rates |
Key Takeaways
- The recovering demand for mortgages in early May 2025 suggests a market sensitive to rate changes and economic conditions.
- Total lending volume is set to surge significantly in 2025, with purchases constituting the majority of the market activity.
- Despite improvements, the market outlook remains cautious, forecasting only moderate growth and incremental, not abrupt, progress in the coming months[1][4][5].
- The financial sector's preference for unsecured bonds over covered bonds may be influenced by the perceived security of the former, as investors seek safer investment opportunities in the face of the unfavorable emissions climate score and waning demand for covered bonds.
- The growth in the volume of mortgage lending, primarily financed by covered bonds, can be partially attributed to the continued rebound in home-buying activity, providing a temporary reprieve for the decline in covered bonds demand.
- Environmental science, in particular climate-change research, is increasingly important for the industry, as understanding the impact of climate change on the economy and finance can help inform strategic decisions related to investment in areas like mortgage lending.
