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EU set to finalise rules on mortgage lending

The European Union is seeking to avoid housing bubbles with a set of common rules for mortgage lending in efforts to avoid property bubbles that have resulted from reckless lending.

EUROPEAN Union negotiators are expected to finalize the bloc’s first common rules on mortgage lending on Monday, in an attempt to avoid a repeat of property bubbles that helped fuel the euro zone’s debt crisis.

The legislation will force lenders in Europe’s 6.5 trillion euro mortgage market to check the creditworthiness of potential customers and their ability to repay, effectively banning self-certified or “liar” loans.

The rules would also make it illegal for those carrying out credit checks within banks and other lenders to have their pay linked to the number of mortgages they approve – a practice blamed for encouraging irresponsible lending in the past.

“We are hoping to conclude talks with the European Parliament on Monday on these important new rules to protect consumers and mortgage holders,” said a spokeswoman for the Irish EU presidency, which will negotiate on behalf of EU governments.

If a deal is reached, the draft rules will need to be rubber-stamped by the full parliament and EU governments before entering force in mid-2015.

Irresponsible home lending in the United States created a domestic housing bubble that, when it burst, helped to spark the global financial crisis.

Similar property bubbles in Ireland and Spain left banks holding hundreds of billions of euros in bad debts, forcing governments to prop them up and then seek euro zone bailouts when the expense proved too much.

As well as seeking to avoid reckless lending, the rules also increase consumer protection by making it harder for lenders to seize homes from borrowers who fail to keep up with repayments.

Other elements in the regulations are designed to encourage cross-border competition between mortgage providers, for example by requiring them to provide certain information in a standardized way to consumers across the bloc.

Regulators believe greater competition between lenders in different countries will result in a better deal for consumers and contribute to the bloc’s economic recovery.

Reuters

Readers' comments

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  • @Richard – thanks for that. There’s a very interesting section in the press release – Creating a fair single market for mortgage credit – FAQ:

    19. What does the proposal do to reduce the risks associated with foreign currency loans?

    In some Member States (e.g. Poland, Hungary), a significant part of mortgage credit agreements taken out by households and individuals for their private residences are denominated in foreign currencies, like the Swiss franc. More than 90 % of mortgages in Latvia, Romania and Estonia are issued in a foreign currency. However, foreign exchange lending is not limited to the newer EU Member States; in Austria, more than 38 % of outstanding mortgage credit is denominated in a foreign currency. Foreign currency lending allowed consumers to benefit from mortgage interest rates which were lower than in their own countries, but at the same time exposed them to currency risks, which could increase the cost of their loan expressed in domestic currency significantly, potentially leading to an increasing number of defaults and foreclosures.

    This proposal will ensure that when a lender or intermediary offers a mortgage credit contract denominated in foreign currency that the borrower is made aware through information and personalised explanations of the related currency risks and the effects thereof on the cost of their loan. In particular, the information provided to the consumer should include information on the exchange rate used for calculating and adjusting the exchange rate spreads and the rate used for converting repayments as well as clear risk warnings about the risks of foreign currency loans. The information provided to the borrower should also provide clear examples of the impacts of exchange rate changes both in an upward and downward direction. Finally, the proposal should also ensure that creditors do not overestimate the repayment capacity of borrowers by ensuring that they carefully consider the consumer’s ability to repay the loan now and in the future.

  • Richard Bourke says:

    @Clive

    The UK Council of Mortgage Lenders seems to like it. Probably because they can now compete more easily abroad. Single Market, and all that.

    CML response to EU Mortgage Credit Directive announcement

    It took them two years of negotiations to get these measures, limited as they are, in place. Presumably against the background of furious lobbying by the mortgage lenders.

    We all know the tricks from the UK. Low-Start Mortgages, Endowment Mortgages (what a fiasco they turned out to be!). There’s similar stuff going on in every country, and it’s a tightly protected market.

    A directive that imposes a cool-off period, standardised information to allow sensible comparisons, insure mortgage portability and increase cross-border competition on mortgages.

    Come on! Just because it’s from the EU, judge it on its merits. If you’ve ever been in negative equity in a tied mortgage (I have) you’ll know that this is progress.

    One thing in it (I can’t find the actual directive, this is from the press release The Mortgage Credit Directive) that looks likely to be relevant to Cyprus in the not-too-distant-future.

    “The Directive will also require creditors to apply reasonable forbearance when being confronted with consumers in serious payment difficulties”.

    It comes at a cost, of course. To the banks. Loan write-offs go up.

    But it’s simply necessary in the aftermath of a severe property bubble, which a huge proportion of the population in hopeless negative equity, to get the economy moving again. That’s the way Iceland did it, that’s the way Ireland is (slowly) doing it:

    Personal Insolvency Act 2012

    and if the relevant politicians in Spain and Cyprus are anything other than proxies for the banking industry, it will be the way they do it too.

  • Clive says:

    This is another go at the UK’s financial sector. Most mainland Europeans rent property so will have little effect on them; meaning the mainland MEP’s will vote for it.

    Take to say goodbye to the EU basketcase.

  • Pete says:

    Agree entirely Gavin; many people voted for the UK to join the Common Market but I’m damned if I can remember a similar referendum to join a super state. That should obviously read a ‘super sized state’ and apparently about to grow further if last nights news is anything to go by.

  • Pippa says:

    Too little too late for most of us. As Cyprus seems to pay little notice of any EU legislation it does not like already what hope is there is this changing practice here?

  • Andrew says:

    This should (help?) drive down house prices further and put people into negative equity. I am worried about cross border lending,if that could happen. Imagine Cyprus Banks being let loose on the rest of the unsuspecting Europeans!. They want to stop liar loans. Which liars are they talking about. Could that be the Banks, the Lawyers or the Developers I wonder. Surely they can`t mean the poor guy who is trying desperately to find a away to put an overpriced roof over his child’s head.

  • Gavin Jones says:

    So ALL EU countries will have to adhere to these new rules – just as they’ve done so when it comes to keeping within budget deficits and other EU directives.

    It’s high time that this EU ‘project’ was put down like the mad dog that it’s become. It should have remained a Common Market: nothing more, nothing less.

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