December 10, 2013 may have been a turning point in the field of European banking policy. In order to avoid the appearance of new property bubbles, the European Parliament adopted a text allowing the entry into force of many rules governing mortgage loans. The obligation of lenders to control the debt ratio of customers, the right of scrutiny of the European Banking Authority (EBA), and information to consumers on the risks of debt should be the workhorses of this coming reform.
Why supervise home loans?
The origin of the crisis: over-indebtedness
Everyone today is aware that the economic crisis that hit Europe in 2009 started a year earlier in the United States following the subprime crisis. This somewhat technical name hides in fact uncapped variable rate real estate loans, granted to households whose repayment capacity was insufficient. And precisely, to cover the risks of non-payment due to a too high debt ratio, the North American credit companies have found nothing better than to impose significant TEGs from the start.
And over-indebtedness created the housing bubble
From month to month, American households found it more and more difficult to pay the monthly payments on their mortgage. They declared themselves in a state of over- indebtedness one after the other, and the credit companies could only note these payments which did not return. Problem: the money that the credit companies had loaned to the borrowers, they had themselves borrowed from others. Double problem: this other person had himself borrowed it from someone else.
The domino effect: when no one reimburses anyone anymore
A first credit company encountered payment difficulties, embarrassing its creditors. The creditors of his creditors were affected, and no one had any money to lend to anyone. Consequence: the real estate projects in progress were stopped, and the successful projects could not find a taker because nobody wanted to lend to households anymore.
Final result: a real estate bubble
Ultimately, the United States was left with unfinished real estate projects, completed but unsold real estate projects, and foreclosed borrowers. As the credit companies had borrowed from European financial institutions, the crisis was moved to Europe.
Arrival of the real estate crisis in 2009 in Europe
Spain and Ireland had based their development model on that of the United States. They therefore found themselves very quickly with this real estate bubble, which put the banks in financial embarrassment. The rest is well known, Europe comes to the rescue and injects money into the system. It was at this point that voices were raised to reform, so that this kind of excess did not happen again.
The European reform on the supervision of mortgage loans
Mandatory evaluation of the future debt ratio
According to the text adopted by an overwhelming majority of MEPs (596 votes in favor, 65 votes against, 31 abstentions), lending financial institutions will be called upon. They have an obligation to control the debt ratio of applicants, and not to lend them if they are in a delicate financial situation. In France, only the banks impose this rigorous self-discipline. They do not lend if the future debt ratio is above 33% of net taxable income. But this is not the case elsewhere in Europe.
The European Banking Authority will be the gendarme
The European Banking Authority (EBA) is designated as the gendarme by the voted text. The institution will have to investigate the respects and violations of the debt ratio control rule in different countries. It will then have to ask the competent national authorities to act. This could mean that if the ABE. notes that a French credit company is reluctant to set up a control system, it will notify the AMF (Autorité des Marchés Financiers).
It remains to be seen now whether the national bodies will have legislative tools to compel the recalcitrant to join the ranks.
Obligation to inform borrowers
The text adopted by the European Parliament provides for the obligation by lenders to present informative documents to borrowers. Credit risks, cost of operations, a priori Europeans will have the same protection tools as the French consumer.
Consequence for the mortgage in France
Towards tighter control of the debt ratio
The measure voted by the European Parliament is in line with the National Register of Credits to Individuals (RNCP), provided for by the Hamon law. Admittedly, this structure is difficult to set up, however it will undoubtedly represent an interesting tool for financial institutions. If the text of the European Assembly is adopted by the European Council, the establishment of this register will be of great interest. Do not expect too much in France, however, because it must be admitted that the risk of a property bubble in France is low.
Take out a mortgage in France
If the banks will not commit when the borrower debt ratio reaches 33.1%, some credit companies will. However, they act with caution because they have learned the lesson of 2008/2009. But above all, very few mortgage loans in France are taken out with a variable rate, most of them are at fixed rates. And when the rates are variable, they have a cap, that is to say a maximum percentage of upward variation.
A homeowner cannot sign his mortgage as soon as it is granted. It must first be given an official prior offer, containing the information and warnings that MEPs wish to see disseminated to the European Union. Then, the borrower has an additional period of 10 clear days before the amount is transferred to his account, this is the Scrivener Law period. The fact is that in France, we have understood the interest of protecting the consumer before everyone else.
The European real estate loan framework is welcome
A reform framing the home loans on the European level will be welcome. It will effectively limit or even prevent future property bubbles. Europe is slowly returning to the path of growth, and no one wants to spoil this recovery with over-speculation.