Lenders will be required to provide clearer information on mortgages, allow all borrowers to repay early their loans as part of a package of changes to be unveiled by the EU today. In future, UK borrowers, along with mortgage customers across Europe, will have to be provided with a standard information sheet outlining in easily understandable language all the product's terms. "Lenders and intermediaries alike engaged in irresponsible practices, and consumers were not warned of the consequences of their decisions," said Michel Barnier, EU internal market and services commissioner. "The draft set of rules presented today is designed to ensure a high standard of pre-contractual information and improved lending practices across Europe, while promoting a dynamic, competitive and more integrated single market for mortgage credit," added Mr Barnier. The EU's proposals come as warnings have increased about the potential problems still stored up in the mortgage market as a result of home loans made in the years of the credit boom. Last week, the Financial Services Authority highlighted so-called mortgage forebearance, whereby lenders alter the terms of borrowings to help people service their debts, as a source of future problems for the banking industry. For every one person in mortgage arrears in the UK, about two are in some form of forebearance, and credit ratings agency Moody's has warned that this could lead to more losses for British banks as people become entirely unable to make payments. An EU directive to be unveiled today (31 March) will introduce more stringent rules on mortgage lending in the EU, but critics argue this will limit lending and hurt first-time buyers. Mortgage lending is of vital importance to the European economy, representing almost 50% of EU GDP. Housing bubbles have emerged in member states as diverse as the Baltic states, Romania, Spain, the UK and Ireland, demonstrating that complex lending has not only been at the source of the financial crisis in the US, but also in the EU. According to the dominant view, at the origin of the crisis lies the spread of a risk-prone approach to lending money and, by reverse, in borrowing it. The sub-prime mortgage crisis highlighted practices which have pushed lenders to give money away without properly assessing borrowers' ability to pay it back, and these need total redress, read a 2009 paper from the European Commission. Lenders were encouraged to give loans in cases of high risk of default by exploiting a system that allows them to transfer the risk to third parties by issuing mortgage-backed securities. This is what today's directive aims to remedy. In an attempt to tackle credit market risks that were at the the root of the financial crisis, the European Commission will today publish a Directive on Credit Agreements Relating to Residential Property, the result of a year-long consultation with industry. But industry laments that their concerns have gone unheard and that instead of boosting the single market, the directive will make it harder for financial institutions to lend and for buyers to borrow. Who bears the burden? Mortgage lobbyists are unhappy with the shape of the directive as they believe it will make lenders too cautious because it shifts the burden of responsibility onto them. "The objective of this directive is to ensure that all credits provided to consumers benefit from a high level of protection," reads a draft of the directive seen by EurActiv. The aim of the directive is to encourage a single market for mortgage lenders by creating a pan-European passport for companies, and to impose stricter credit checks in response to a property bubble inflated by lenders' lax scrutiny of consumer credit. Annik Lambert from the European Mortgage Federation argues that the Commission is shooting itself in the foot. "They are not going to help markets, though the European Commission says this is their aim," Lambert told EurActiv. Lambert is referring to the stringent credit checks outlined in the directive, which she believes will make lenders too cautious and make it more difficult for first-time buyers to get a loan. "A negative creditworthiness should indicate to the creditor that the consumer is unable to afford the credit and as a consequence, the creditor should not grant the credit," reads the directive. Tanguy van de Werve, director-general of Eurofinas, the association representing consumer credit providers in Europe, agrees that the directive will lessen mortgage lender's appetite to take on first-time buyers. "The obligation to deny credit based only on the negative outcome of a narrow creditworthiness assessment could exclude different categories of borrowers, such as for example, a 25-year-old professional who might have a limited income but a long-term earning capacity," explains van de Werve. The EU changed its thinking on the draft directive in 2009 after mass foreclosures and defaults rippled through the mortgage market.'Irresponsible' mortgage lenders rapped as new EU rules come in
Mortgage borrowers will get more protection than ever before from unscrupulous lenders under proposals from the European Union.
Visit Telegraph Mortgage Services for free mortgage adviceEU mortgage law to hit first-time buyers, says industry [fr]
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Published: 31 March 2011
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