Mortgage credit reform: time to serve the real economy

Bad credit was one of the root causes of the financial crisis that sparked the current debt crisis. A report by Spanish Socialist Antolín Sánchez Presedo looks at how to better protect borrowers and put Europe's credit industry on a more solid foundation. Ahead of its presentation to the Economic Affairs Committee Wednesday, he told us more.

Lax lending practices were one of the factors that led to the financial crisis in 2008, are we still at risk?

Over-indebtedness is still at the centre of the crisis. Regulating mortgage markets would be an important first step to fight this.

The next stage will be to ensure that irresponsible lending and borrowing practices do not harm savers and taxpayers; they shouldn't cause yet another crisis.

Your report is based on a Commission proposal, but you extended the initial scope a lot. What was missing?

We have put in three new chapters. One is on financial education and what people have to know before taking out a mortgage. Then we look at what happens once people have signed a mortgage contract. We call this sound performance of credit.

The last new chapter is on market transparency. The idea here is to facilitate the traceability of each mortgage and create, for example, a register for mortgages. Once you pool them to create financial instruments, you would know at any moment what kind of mortgages are in the pool. That would make markets much more stable.

You propose a number of new procedures, are there also lending practices that should be forbidden?

Good standards should be put in place to avoid poor lending practices. We definitely need more transparent and reliable markets. I want to identify risky products and to give power to supervisory authorities to impose extra measures including consumer warnings and stricter prudential requirements so that those taking greater risks also bear the potential costs of taking such risks.

Mortgage markets differ across Europe, is this a problem or an advantage?

We should regard diversity at national level as an asset and preserve subsidiary and proportionality, but we have to remove barriers to internal markets. Models that work and result from established legal and cultural traditions should be kept, but diversity is also important for innovation and financial inclusion, because it allows for tailored products. One size for all just doesn't work.

This is why we need more competition. Concentration in the financial industry is increasing. The market share of the five biggest lenders in every member state is now over 75%. More competition is very important to promote efficiency.

Regulating lenders is only one part of the debate. How can you help borrowers?

Financial education, good information and professional advice have a critical role to play. And we need sound underwriting practices to have fair and more balanced relationships between the parties.

To give you an example, we look at more flexible contracts and payments that can adapt to the situation of the borrower and allow the early repayment of a loan; we also talk about the possibility of switching lenders; and the possibility of converting foreign currency loans into a loan in your domestic currency to avoid risks that most people simply cannot manage

Your report also demands better access to mortgages for those arbitrarily excluded. How could this work?

I believe products should be tailor-made to take into account the diverse circumstances of consumers. We, for example, consider social benefits should be assessed when evaluating the creditworthiness of consumers. And we have to avoid exclusion caused by inaccurate information and decisions based on automatic credit scores alone.  

The financial system has to serve the needs of families and companies again, the needs of the real economy. To get there we need more flexibility, more inclusion, more stability and much more competition.

The report was presented to the committee 31 August and MEPs will have the opportunity to propose amendments before a vote, expected in early 2012, after which it will go to plenary.