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Mortgage White Paper - Summary
Introduction
The White Paper on EU Mortgage Credit Markets was published on 18th December 2007. The document summarises the review of the degree of integration of a single market in residential mortgages in Europe, and presents measures to improve efficiency through ‘appropriate policy initiatives’. The document acknowledges recent and continuing market conditions, but does not seek to respond directly to these issues.
The Commission acknowledges that consumers predominantly shop locally for mortgage credit, due to many factors, but including language, cultural preferences and distance. Therefore, the Commission believes that integration will be essentially supply-driven through cross border activity.
AFB members should be aware that within Europe the differentiation for regulation tends to be focused on ‘secured’ and ‘unsecured’, whilst in the UK we are more used to ‘first charge FSA regulated’ and ‘other OFT regulated’ lending. Because of the comparative unique nature of our market, it is more likely that second charge lending could be caught under mortgage regulation stemming from Europe.
Objectives
The Commission identifies four key objectives which they believe will achieve an efficient and competitive market. They are:
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Facilitating cross-border supply and funding of mortgage credit
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Increasing product diversity
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Improving consumer confidence
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Facilitating customer mobility
1. Supply and Funding
The Commission acknowledges that there are already a number of methods of cross-border supply, either through local presence (branches), direct via the internet or through local intermediaries (brokers), and also that cross-border exposure can be achieved by financial firms securitising portfolios internationally. They also believe that a wide range of funding is desirable, and that funding instruments should be viewed as complementary rather than substitutable.
However, the paper states that the Commission feels that differing legal and consumer protection frameworks, fragmented infrastructures particularly relating to access to credit data, and lack of legal frameworks for mortgage funding pose disproportionate obstacles to integration.
2. Product Diversity
The Commission feels that no one country has a ‘complete’ range of products, in terms of either range or borrowers served.
The Commission states that increased product diversity has been identified as crucial by a number of studies, as a method of increasing European consumption. However, when considering improved product diversity as a way of ‘enabling new borrowers to access credit’ it is important not to over expose the vulnerable. As the tightening of criteria in the UK has demonstrated, those higher-risk applicants can also be most vulnerable. The Commission also acknowledges this, but still wishes to explore methods of increasing diversity.
3. Consumer Confidence
The Commission states that lending responsibly is crucial for consumers, and the welfare of the industry. Of possible relevance to intermediaries is that the Commission is keen to ‘promote high-level mortgage advice standards’.
4. Customer Mobility
Europe is keen to encourage ‘switching’ as a positive influence on competition, which is contradictory to the UK Government’s stance on longer-term fixed rates. The Commission believes that there are unjustifiable legal and economic barriers. This is addressed at some member states where twenty-five year mortgages with penal early repayment charges for the term exist and is a highly politically sensitive issue.
The Commission is also keen to ensure price transparency, through clear pre-contractual information, as a method of encouraging consumers to understand the costs of switching.
Commission Focus
The Commission has selected four main focus points for its work. These are:
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Early Repayment
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Responsible Lending
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Pre-contractual Information
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APR
1. Early Repayment
Europe believes early repayment is one of the most significant areas of policy for market integration. Whilst this remains a difficult area, due to political sensitivity, the Commission is determined to develop a policy position. It is therefore carrying out work in 2008 to identify suitable policy options, and assess these with cost-benefit analysis.
2. Responsible Lending
The White Paper makes encouraging comments about ‘independent advisers’ providing advice to consumers, underpinned with ‘high level advice principles’ as the basis for advice.
As follow up work in this area the Commission is consulting with stakeholders about the design of the high-level advice standards, explore the potential for increasing responsible lending and examine access to cross-border credit data.
To achieve this, the Commission is forming an expert group on Credit Histories to advise on potential improvements to credit data access.
They are also investigating the land registration procedures across member states. Lack of consistency and uncertainty over underlying security could be a notable barrier to cross border activity. The Commission hopes to formulate a ‘Recommendation’ on this area during 2008.
3. Pre-contractual Information
The Commission remains concerned about the quality of information available to consumers to compare mortgage products. Whilst there is a ‘Code of Conduct on Home Loans’ in Europe, the Commission wants to review the European Standard Information Sheet (ESIS) which is broadly similar to the UK’s KFI documents.
4. APR
The other area of comparable information is the Annual Percentage Rate of Charge (APRC). The calculation methods for this differ within Europe and comparability is important for cross-border activity. The Commission considers using the basis of the Consumer Credit Directive (CCD) APRC terms for the mortgage market.