Whose interests are protected by the new Mortgage Directive?

Michel Barnier, Member of the European Commission in charge of Internal Market and Services (on the right), received Jack Lew, US Secretary of the Treasury. Probably the EU needs the American experience on how to lead the real estate market to a total collapse (European Commission photographic library).

At a time when very few European consumers decide to look for a mortgage to buy a new home and the European lenders very sparingly grant such loans, the European Commission found the opportunity to launch its new initiative on a Mortgage Directive, supposedly to better protect consumers. Under the experience of the past four years with the great credit crunch in the US and in a number of EU member states like Ireland and Spain, this new Directive makes more sense in protecting the careless credit institutions from their own sins rather than helping consumers.

Which market?

The collapse of the American credit market in 2008 after the years of the mortgage boom and the subsequent disintegration of the credit system in many EU member states, have led today to an environment of very low-interest rates. Unfortunately this generous drop of the cost of money works only in one way. Banks are being refinanced by the European Central Bank at an interest rate cost very close to zero, but this bonanza of new and very cheap capital does not reach the consumers. The new Commission Directive says nothing about that. It doesn’t either take any provision for consumers to benefit.

In any case, if the EU Commission wanted to introduce real protective measures for consumers and the wider credit system, the Directive should have provided some concrete limits about the permitted degree of indebtedness relating family income and debt. It could also provide limits to the allowed percentage of the mortgage over the value of the property to be acquired. For example it could have banned mortgages exceeding a certain percentage of the value of the property or it could have introduced limits on the debt to income ratio.

Instead of that the Directive contains wishful thinking in relation to consumer protection without any concrete measures taken. For example it provides that “Creditors will be obliged to hand out to consumers a standardised information sheet (ESIS) that will allow them to shop around to identify the best and cheapest credit offer for their needs. The ESIS will be user-friendly and will also include detailed information on the characteristics of the loan on offer. Consumers will, for instance, be alerted to the risks associated with the offer, e.g. in relation to variable rate loans and foreign currency loans”.
As for the risks related to variable interest rates or loans in foreign currencies no bank can reassure its clients about the future. It’s an economic impossibility. Whenever such loans prove detrimental to borrowers, as it happens presently in the case of the Dutch and the Hungarian mortgages, no measures whatsoever have been proposed by the Commission to alleviate the burden to consumers.

Understandably when such problems take wide dimensions in a country’s financial system the issue is automatically transformed into a national crisis, with far-reaching repercussion. The Commission did nothing during the past decade to prevent such crisis when it was obvious that the mortgage boom would lead to a market collapse.

Allowing tied sales

The new Directive also fails to ban tied sales. That is other financial products being quasi obligatory for consumers, when they agree a mortgage with a bank. For example insurance for the property in question is usually ‘offered’ by the lender or an affiliate insurer in a package deal together with the mortgage. According to the Commission’s announcement, “Consumers will also profit from more competition through a general ban on tying practices. Tied mortgage products that have proven to be beneficial to consumers in the past (e.g. some insurance or savings products) or future products that will be assessed positively will still be allowed”.

If this is not hypocrisy words have lost their meaning. Everybody knows that tied sales are banned by the commercial law from time immemorial. The Commission however while offering this as special treat to consumers it concludes that tied products “that have proven to be beneficial to consumers in the past…will be allowed”. For God’s sake do they take the 500 millions of European consumers as morons? In reality this is an open invitation to banks to exploit their dominant position and impose on consumers sales of tied products, which are banned altogether by the very fundamental legal principles. All in all nor the timing neither the content of this new Directive is beneficial to consumers.