Posted on 11 December 2013 by
MEPs yesterday passed the EU Mortgage Directive, which has been about 10 years in the making and addresses a non existent problem as far as the UK is concerned.
The concept is based on the EU principle of harmonising everything – in this case of mortgage regulation – in all 28 member states. However, one size doesn’t fit all in the mortgage market anymore than it does with the Euro! For example well over 50% of mortgages in the UK are arranged by a broker, whereas in some member states brokers are almost non existent.
This is a key reason why the EU has found it so difficult to get agreement on this Directive and the end result is a compromise which probably no country is happy with. This was entirely predictable because the property markets in the various countries are so different and ought to have been clear before this tortuous process started, even to EU bureaucrats. But one more step towards the ultimate aim of a federal state is all that matters!
The rationale of the Directive is that competition will increase because consumers will be able to obtain a mortgage from any lender in the EU, but in practice other barriers will prevent this from happening. In any case lenders who wish to lend in other EU states can already do so quite satisfactorily by setting up a subsidiary or branch in that country.
One of the reasons few lenders offer mortgages on properties across borders is that the legal processes and credit reference agency information are different in every single member state and unless and until these differences are harmonised cross border lending is generally not viable.
Some EU member states don’t have even one credit reference agency and even though some agencies operate in several EU member states, in every single case the information the same agency provides to lenders is in a different format. Therefore, even if the credit reference agency a lender uses provides credit information in another EU member state that lender’s computer in, say, its UK operation, could not read the information from a different country without major reprogramming.
The other major impediment to cross border lending, ignoring minor details like whether lenders actually have enough capital to expand lending beyond their current jurisdictions, is the legal process of registering title. This also is different in every single EU member state and hence another reason lenders won’t rush into offering mortgages beyond their current boundaries.
Despite the union between England and Scotland having been in place for over 300 years many smaller English and Welsh lenders still do not lend in Scotland. This is not because they don’t like the Scots or the Scottish property market. It is because the Scottish legal process is different and they have taken a commercial decision that it is not financially viable to incur the additional costs of setting up an alternative legal process for the amount of extra business that would be generated.
Thus the EU is putting the cart a long way before the horse! It has indicated it will assess the effectiveness of its Mortgage Directive after 5 years. If it does this honestly (some hopes) it will be embarrassed by the results, but no doubt will still manage to put a positive spin on them. I have no hesitation in predicting that any increase in cross border lending, which is the Directive’s prime objective, will be negligible.
When producing the MMR the FSA worked closely with the EU, both to provide it with advice because UK mortgage regulation is more stringent than in any other EU country, and to incorporate anticipated EU requirements in the MMR.
Some aspects of the EU Directive requirements which are particularly relevant to the UK are:
Looking ahead there are some potentially interesting political scenarios, depending on the results of certain referenda. I will outline these in my next blog post.
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