A group of mortgage lenders has raised concerns that a recovery in Europe’s housing market will be put at risk by “hasty and excessive” proposals formulated in Brussels.
Suggestions for stricter criteria for property loans in the European Union have been put forward in recent days as a possible addition to the bloc’s capital requirements directive, which sets ground rules for financial markets and is being substantially amended after the financial crisis.
Residential property was “the asset class at the very heart of the current crisis”, according to the proposal drawn up by the European Commission. It is intended to remove the discretion that national regulators have to set their own criteria for some lending standards.
However, the European Federation of Building Societies says that the proposal would interfere with the restoration of confidence in housing markets and could jeopardise mortgage lending in countries that escaped some of the excesses of the housing boom.
Mortgage credits would become significantly more expensive for European consumers, according to the federation. “Credit institutions would be forced to pass on the additional charges to consumers,” said Andreas Zehnder, the federation’s managing director.
The proposals, if adopted, would mean banks would face greater restrictions on the amount they lend relative to a property’s value – the so-called “loan-to- value” ratio – if they want part of the loan to attract a preferential risk-weighting. The risk-weighting assigned to a loan is the basis for calculating how much capital an institution needs to hold and how much further lending it can do in order to increase its profits.
A preferential risk-weighting would only be assigned to 50 per cent of the mortgage loan value under the proposals, which are contained in a working document and are subject to a consultation that ends next month.
The federation’s criticism of the proposals is striking since it represents a part of the financial sector that is traditionally conservative and has applied tougher lending criteria than building societies in countries such as the UK. Mr Zehnder represents the building society sector in Germany, one of the few countries not to have a property bubble this decade.
Building societies in Germany and some other countries typically finance part of the value of a property only on the basis of a long-standing savings contract with a customer. Loans-to-value rarely exceed 80 per cent, compared with a tendency in the UK to grant loans of 100 per cent of a property’s value in the years preceding the financial crisis.
The federation said the Commission’s approach was “broad brush” and did not differentiate sufficiently between finance markets across the EU.
“The problems are not a matter of asset classes, but rather a matter of dubious financial practices, which led to a housing bubble particularly in Ireland, Great Britain and Spain,” said Mr Zehnder.
Get alerts on World when a new story is published