Putting our houses in order: how the EU bids to create a more stable mortgage market

It is likely to be the biggest investment you will ever make, however the economic crisis has shown that buying property is no longer safe as houses. Easy credit conditions up until 2008 fuelled high-risk lending and borrowing practices throughout the EU, which significantly contributed to the current debt crisis. The Parliament's economic and monetary affairs committee is scheduled to vote on a proposal that aims to make the market more stable in the third week of May.

After the European Commission launched the original proposal, it is now the turn of the Parliament to adopt its report and suggest changes to the Commission's text. Spanish Socialist Antolín Sánchez Presedo, who is responsible for steering the legislation through the Parliament, is the author of the report which contains suggestions for how to better protect borrowers and put Europe's credit industry on a more solid foundation.  

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.

Are there any lending practices that should be forbidden?

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 those risks.

Your report is based on a Commission proposal, but you extended the 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.

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

How do you address concerns that further EU regulation could threaten borrowers in some member states because mortgage markets differ across Europe?

I think that diversity is very good for the European Union. The ideal situation is where products are tailored to the needs of consumers. But the most important thing is to ensure a consistent and reliable market and to avoid an imbalanced mortgage market that can affect financial institutions and thereby also taxpayers and citizens.

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.

However, we are proposing a European Mortgage Key Identifier to promote equal conditions for all profits. We also want to provide a level playing field for creditors at European level and thereby increase the choice for consumers. Increased competition should provide added value to the consumers and it assists competition when the consumer takes advantage of the market.

Your report 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.

There have been around 1000 amendments tabled in the committee. Do you expect the report to run into political difficulties?    

In my opinion there is goodwill to reach a compromise. I hope that we can finally provide an ambitious response to our citizens, because the Parliament must ensure that the mortgage market at European level is more efficient, more dynamic, more consistent and more reliable. We will probably be able to finalize our work next month.  Once the committee adopts its position, we could initiate the process of negotiations [with the Council].