Putting Our Houses in Order: Reforming the Mortgage Market

30/05/2012 10:58 BST | Updated 29/07/2012 10:12 BST


Contrary to the old saying, buying property is no longer as safe as houses. Under the influence of the economic crisis, the ineluctable rise of house prices has proved to be somewhat less ineluctable than previously believed. All over the EU, the property market has been stalling and home owners in countries such as Spain and the Netherlands are now saddled with mortgage debt exceeding the current market value of their homes. In the UK too house prices are struggling to recover from the downturn. Next week, the European Parliament is expected to discuss plans for reforming the mortgage market in order to stabilise it and better protect consumers.

Let's not forget that dodgy dealings with mortgages are what started the current crisis. Lower lending standards in the US meant many people who shouldn't have got loans, leading to the country's biggest-ever house price boom. Prices nearly doubled in just over a decade until boom turned to bust in 2006. Mortgages had been given to many people who had no realistic chance of ever repaying the loan. While prices continued to rise spectacularly, it was possible to gloss over that, but once the property bubble burst, it aggravated the problem. As many of the questionable mortgages had been sliced up and sold in packages around the world, the difficulties associated with them were quickly exported elsewhere, ushering in the financial crisis. Any attempt to revive the economy should take into consideration that it was mortgage problems that lit the fuse of disaster last time round.

But there is another reason reforming the mortgage market is so important. Due to the size of the market and the importance of property to everyone, it is not something we can afford to overlook. Home ownership stands at nearly 70% in the EU and in 2009 residential mortgage lending amounted to more than €6 trillion, 52% of the EU's gross domestic product.

A European Commission proposal to make the mortgage market more stable is currently being scrutinised by the European Parliament. The directive aims to create a responsible and competitive pan-European market for the benefit of consumers. It aims to promote customer mobility and cross-border activity and create a level-playing field by stipulating conditions for creditors and credit intermediaries, setting out the form and content of information to be included in advertising, creating an obligation for creditors and credit intermediaries to make general information available on the range of credit products at all times and entitling consumers to be informed when there are changes to the borrowing rate. The proposal also introduces the right to repay the credit before the credit agreement ends and the creation of out-of-court redress bodies to resolve disputes between consumers and creditors and credit intermediaries, as well as many other measures.

Mind you, mortgage markets vary throughout Europe, reflecting national circumstances and traditions. The directive does not set out to change that as one size does not fit all, but it does aim to ensure a consistent and reliable market.

It is now up to Parliament to go over the proposal and improve it. Spanish socialist Antolín Sánchez Presedo is in charge of making a recommendation to his fellow MEPs. Although he broadly welcomes the Commission proposal, he thinks there is a lot of scope for further improvement. In his draft report he calls for more details on the information borrowers should receive before taking out a mortgage including, standards for early repayment, switching lenders and the right to convert a foreign currency mortgage into a national currency. Mr Sanchez Presedo also suggests provisions to better guarantee the correct valuation of properties so that lenders don't become over leveraged due to overvaluation of their properties. In addition he has come up with ways to decrease market-share concentration, reduce the proportion of interest-only loans and ensure that income checks become more common when lenders assess mortgage applications.

It remains to be seen if other MEPs agree. The Parliament's economic and monetary affairs committee is scheduled to discuss it in June and it is expected to go to plenary in September.

Photo: Antolín Sánchez Presedo © European Union 2011 PE-EP/Pietro Naj-Oleari

If one's home is one's castle, then perhaps this proposal could prove to be the moat and drawbridge. To be continued.