New proposals for the international mortgage industry recommend tightening lending criteria to avoid a repeat of disasters like the US subprime mortgage meltdown. Lending would be lower as a result, with implications for housing markets like Spain’s.
The Basel Committee on Banking Supervision, an international forum, is preparing new international standards for mortgage approval aimed at tightening up lending criteria, to avoid a repeat of mistakes like the US subprime mortgage debacle.
The key proposal is loan-to-value (LTV) ratios of 60 per cent or less, meaning that home buyers would need to finance 40 per cent or more (once transaction costs are factored in) of a property purchase from their own pockets. That would restrict home-ownership demand dramatically in a country like Spain, where savings are low. It would also shrink the market, and put downward pressure on house prices.
Another measure being entertained by the Basel Committee is ensuring that debt repayments do not exceed 35 per cent of household income. This becomes a key criteria when LTVs are over 60 per cent.
These proposals come on top of the directive approved last year by the European Union aimed at curbing excesses in mortgage loans, and improve consumer protection against evictions for mortgage default.
The key points of that directive were as follows:
– EU member states cannot stop borrowers handing back the keys if both the bank and the client have specifically agreed to this in the mortgage contract.
– Banks should be “reasonably tolerant” of clients having difficulty making mortgage repayments and “make all reasonable effort to resolve the situation” before starting repossession proceedings.
– The bank should sell the property at the best possible price and facilitate payment of the outstanding amount to avoid consumers having excessive debt over long periods of time.
– The bank should evaluate the consumer’s repayment capacity before approving the mortgage, but a new feature is that, for the first time, standards will be introduced at European level.
– Banks must give clients information in writing about the mortgage, which will allow them to compare offers and identify the cheapest and the one that best suits their requirements.
– The directive prohibits linking mortgage approval to the purchase of other financial products unless they are to do with insurance or saving schemes.
– Consumers may pay back their mortgage before it matures.
– Consumers are guaranteed seven days grace before they have to commit to a mortgage contract.
– The directive envisages the creation of a European “passport” that allows lenders authorised in one member state to offer their services throughout the EU, as currently is the case with investment funds.