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EU mortgage regulation : a bridge too far for harmonisation?

Harmonisation – outside of music, a term many of us have only encountered in respect to the European Union. In many areas of life in the EU, harmonisation to improve and provide consistent conditions across the 27 member states is laudable and broadly welcome.

In respect of the snappily named “Directive on credit agreements relating to residential property”, what would appear on the face of it to be just more harmonisation could have negative and unintended consequences on the already fragile UK mortgage market.

Yet again the European Parliament’s Economic and Monetary Affairs committee has delayed its vote on 819 amendments on the directive now due on May 14.

From the UK perspective, the FSA and the UK market are already ahead of the curve on many of the principles and proposals inherent in the directive.

However UK lenders, trade associations and even the Treasury recognise that of the dozen or so contentious proposals, two are of particular concern.

Firstly the Directive plans to regulate Buy to Let (BTL) mortgages (unless they are commercial loans). The case for regulation is based on the notion that BTL loans have been riskier than lending to owner occupiers. However, this does not appear to be supported by the evidence and in fact BTL loans have outperformed residential loans in respect of arrears and possessions for 9 of the last 12 years.

The Treasury rightly argues that affordability in this instance is based on rental income and Buy to Let is not the same as a residential house purchase transaction. The proposal would change the way landlords are assessed by lenders and the creditworthiness assessment will be difficult to apply to Buy to Let applications. This vibrant rental property market could be badly damaged by the proposals.

The second concern is the insistence on a standard illustration document across the EU, that being the European Standardised Information Sheet (ESIS). This proposal appears to be based on the notion that consumers are going to shop around any of the 27 member states for the best mortgage deal. Not only is this highly unlikely for UK – or any EU – consumers, but the ESIS is not as comprehensive as the Key Facts Illustration which is now widely understood. The costs to lenders and re-education of consumers would run into millions.

The vote by the Economic and monetary affairs committee on over 800 proposed changes to the original proposals has been delayed a third time and is now expected to take place on the 24th April at the earliest. When that vote is completed the amended bill will then have to be negotiated with the European Council and the European Commission, probably hitting our desks just as lenders complete their MMR implementations. Could well be a bridge too far for harmonisation.

This is one of the times when the EU should embrace the diversity of our countries and cultures and recognise that broad brush principles are fine across the 27 member states, but they should leave the detail to national regulators.

What is your view?

Is EU harmonisation always good?

Or should it only be broad principles to allow national legislation and regulation to manage the local market?

EU Mortgage Regulation

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