Faced with a worsening economic situation in Europe, Internal Market Commissioner Charlie McCreevy sent member states and relevant market actors a document in July listing possible changes to EU capital requirement rules, aimed at reducing risk taken by credit institutions and reaching "maximum harmonisation" among EU nations in a number of areas.
The Commission proposed a range of amendments to the current rules, meant to "remove options and national discretions," according to the text.
On page 31 of the document, the Commission addresses risks posed by mortgages on residential property, and proposes much tighter regulation on mortgage access. It suggests putting a 40% cap on the loan-to-value indicator, which establishes what percentage of the value of a house can be lent by a bank to a buyer.
In practical terms, with these new rules in place, the buyer of a €100,000 flat would be able to obtain a mortgage of up to €40,000 at normal interest rates. If the buyer asks for more, he or she will have to face higher rates, and the credit institution itself will be forced to put aside a higher amount of capital against what will become de officio a higher risk.
Currently, rules on mortgage access vary widely among member states. The directive in force remains vague, and establishes that the lowest level of capital requirements apply for institutions issuing mortgages, as long as "the value of the property exceeds the exposures by a substantial margin". No caps are foreseen.
Member states have interpreted current rules with a large degree of discretion. The 'substantial margin' loan-to-value level varies from 60% (Poland and Germany) to 80% (Belgium, Denmark, UK, Italy, France, Spain), according to data collected by the Committee of European Banking Supervisors (CEBS) in 2008.
According to figures published by the European Mortgage Federation, in 2004 the 'average' loan-to-value applied by UK banks was 87%, while in Spain, Belgium, Denmark and Sweden it was 80%, in Germany 71%, in France 70%, in Italy and Poland 60%, in Greece 57%, and in Hungary 40%.
An official from the European Mortgage Federation told EurActiv that new figures related to the year 2008 would come out by the beginning of November. But "changes in comparison to the 2004 data are limited," he said.
The EU simple average in 2004 was 70%, meaning that for a house worth around €140,000, a buyer could get a mortgage at normal interest rates of up to €102,000. A cap of 40% would bring down this amount considerably. And even a cap-free harmonisation of national provisions would significantly decrease access to credit for many would-be householders in several EU countries.
McCreevy's spokesperson denied yesterday (12 October) that the Commission is thinking of imposing caps on mortgages, but he admitted that "there is a debate on how to harmonise capital requirements". "In any case it is not something which will happen soon, and it will not be dealt with by this commissioner," he said, referring to the imminent end of the current Commission's mandate.
Member states in July had agreed to tighten policies on loans in order to guarantee more stability for the credit market (see 'Background').