EU legislation protecting home buyers approved in Parliament

European Parliament. Committee on Economic and Monetary Affairs ( ECON). Meeting on mortgage credits. (European Parliament Audiovisual Services).

It was high time that the European Union authorities took action to protect home buyers from the insatiable appetite of banks. Mortgages constitute the standard tool for households to acquire, usually, their first home. For consumers this is a very long term engagement, especially for wage earners. Given the fact that mortgages may span up to forty years it is extremely difficult for both borrowers and lenders to make accurate predictions.

It’s not only that. The difficulty to predict what will happen in the real estate market and the impossibility to make sure that take home pay will be enough to service a mortgage after, say, twenty years gave room to completely flippant decisions. On top of that, the introduction of the euro eleven years ago to countries like Greece, Spain, Italy, Portugal and elsewhere in Eurozone was a huge ground breaking change, for both citizens and lenders in those countries. For one thing, the banks never in the past had chased the consumers to give them a loan, preferably a mortgage for a home. The responsibility however for the exaggerations weighs on the banks, all Eurozone banks.

Irresponsible banks

Irresponsible lending and borrowing during the years before the crisis, up to 2008, and the potential scope for more irresponsible behaviour by other market players, including credit intermediaries and non-credit institutions, have been identified by the European Commission. Banks and construction companies cooperated closely and ended up to offer home mortgages to practically anybody, even for a second or third property. In the US this practice became anecdotal, with the ‘NINJA’ loans to borrowers, with No Income, No Job no permanent Address. In the European Union on many occasions loans and mortgages were denominated in foreign currencies, making the whole affair even more risky.

The bubble bursts

As from 2010, when the financial crisis landed in Europe, the banks started having problems. Within a year all over the European Union the banking sector became problematic, mainly due to the burst of the real estate bubble. More than €5 trillion of taxpayers’ money were spent in the EU to support the recovery or the resolution of hundreds of banks. However, not one cent was spent to support the unfortunate mortgage holders, who saw the value of their homes decreasing to unheard before levels.

In Ireland, Greece, Spain and elsewhere the real estate market is still in such a bad shape that it’s impossible to sell any property even at one third of the mortgage value. Apart from that, the real economy crisis, which followed the financial crash, sent unemployment rates to historical high levels. Thus, a large percentage of mortgage holders were deprived not only of the ability to serve their loans, but also of the basics.

© European Union 2012 PE-EP

In view of all that, the European Commission proposed some months ago and, yesterday, the EU Parliament accepted to introduce new legislation to protect home buyers against the worst risks. “For most families, a mortgage is the biggest and longest financial commitment they make. So we need these rules to drive progress towards an EU-wide mortgage market that is stable, integrated, and above all sustainable, with a high level of consumer protection, good information and balanced relations between lenders and borrowers”, said the legislator Antolin Sanchez Presedo (S&D, ES) who introduced the relevant decision in the European Parliament.

The legislation will cover mortgages on residential property, including an office space and building land. The measures were approved in the plenary house of the legislature by 596 votes to 31, with 65 abstentions.