The European Mortgage Credit Directive is intended to provide better protection for bank customers against poor advice. The law which came into force on 21 March to implement the Directive in Germany has however triggered considerable uncertainty. A majority of banks who participated in the Bank Lending Survey already announced in January that they were tightening their guidelines for private mortgage loans. In the April survey – shortly after the rules were adopted – the proportion of banks planning to operate on a more restrictive basis had risen to more than 34 per cent. This is the highest level since the survey began 14 years ago.
Under the new rules, a mortgage loan customer is only regarded as credit worthy if they are likely to be able to repay the loan in full. When monitoring creditworthiness, the bank may not rely mainly on the property value or an expected increase in value. This sounds sensible. However, in practice there are problems. For example, it is becoming harder for older borrowers with low incomes to obtain loans to renovate their properties in an age-appropriate way. The same applies if the customer is wealthy because he or she owns property, and is willing to accept a possible decrease in value. There is a general lack of clear guidelines for the banks, as to when a borrower is credit worthy. This is prompting institutions to act more cautiously. Finally, miscalculating creditworthiness not only gives rise to a regulatory risk but may also result in the customers affected simply cancelling their loans without notice.
New private mortgage loan business has grown strongly in recent years as a result of low interest rates. At its peak, the annual growth rate exceeded 50 per cent. Relatively high volumes of new business can also be expected initially after the adoption of the new rules. We expect the very dynamic property business in recent times to slow down slightly, but not significantly. This is supported by the very strong growth in demand. The banks have also previously monitored loans carefully. This is reflected in what is a very low proportion of “non-performing” loans at German banks by European standards.
The problem is that, when assessing creditworthiness, collateral is becoming less important than the probability of repayment. This is creating uncertainty, and is prompting banks to act more restrictively. It is to be feared that more customers will fall through the net of credit assessments. This is a problem, not only for customers – despite the provision of collateral – but also for the banks: their business growth will be hampered, even if this is currently still being masked by a dynamic mortgage loan market. Against the background of a profit situation which is becoming increasingly difficult as a result of low interest rates, many banks will face a dilemma in the medium term: they cannot really afford a decline in the hitherto flourishing mortgage loan business, but if they do not adopt a restrictive enough approach to assessing creditworthiness, they will amass unmanageable legal risks.