EU to protect home-buyers against risk

(BRUSSELS) - Europe on Thursday moved to protect home-buyers by setting new rules for mortgages aimed at avoiding a replay of the US sub-prime crisis which sparked the 2008 global financial collapse.

Proposals outlined by the European Commission aim to ensure that consumers purchasing property or taking out loans secured by their homes "are adequately protected against risk," a statement said.

During the boom years, lenders and mortgage intermediaries "engaged in irresponsible practices (and) ... consumers were not warned of the consequences of their decisions," said EU financial services commissioner Michel Barnier.

The US sub-prime market often saw mortgages given out without any scrutiny to buyers who did not have the means to repay them and who in many cases had no idea of what a commitment they were taking on.

At the same time, with credit so easy to get, buyers became speculative investors, taking on a property only to sell it shortly afterwards for a quick profit as prices seemed to go only one way -- up.

It could not last, as some warned at the time, and the financial merry-go-round juddered to a halt in mid-2007 as house prices tumbled.

First the US banks and then many of their peers in Europe got into serious trouble, having to be bailed out by governments at huge cost to the taxpayer as falling prices and an economic slowdown left hapless mortgage holder unable to repay their loans.

If the problem was less serious overall in Europe, some countries such as Britain, Ireland and Spain saw huge speculative property bubbles burst with disastrous consequences for the wider economy.

To ward off a repeat of the irresponsible lending practices, the new EU proposals set strict rules for banks and mortgage companies to improve information available to home-buyers.

Ads that could create false expectations on the availability or cost of credit will be banned, while lenders will be required to provide mortgage conditions on a "European Standardised Information Sheet," or ESIS, enabling easier comparison of mortgages from different providers.

Lenders also will be forced to assess the consumer's ability to pay.

In 2007 to 2008 in Britain, 45 percent of mortgages were granted without the consumer's income being verified.

The Commission believes the measures will greatly reduce the number of people who default on mortgages, with 1.2-1.9 billion euros of bad debts avoided each year.

In 2008, the EU mortage market was equal to some 50 percent of EU economic output and accounted for around 70 percent of household debt.

The new moves also represent a first step towards a single market for property credit, with the creation of a "passport" for companies cleared under new pan-EU regulatory regimes to sell products to the bloc's half-billion consumers.

Currently, the larger part of EU mortgage lending is still done by companies with traditional client bases in their home states.

The passport was a contentious issue behind new rules negotiated over two years to allow the lucrative hedge fund industry, whose main EU base is the City of London, to come under continental EU regulation.

EU states and the European Parliament will have to agree to any legal changes.

Creating a fair single market 
for mortgage credit - guide