Opinion of the European Economic and Social Committee on the White paper on the integration of EU mortgage credit markets COM(2007) 807 final
Date: 2008-07-09
Institutions: European Economic and Social Committee
Subjects: ESC opinion, building, domestic market, investment, mortgage, real estate credit

C 27/18

EN

Official Journal of the European Union

3.2.2009

Opinion of the European Economic and Social Committee on the ‘White paper on the integration
of EU mortgage credit markets’

COM(2007) 807 final

(2009/C 27/04)

On 18 December 2007 the European Commission decided to consult the European Economic and Social
Committee, under Article 262 of the Treaty establishing the European Community, on the:

White paper on the integration of EU mortgage credit markets.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the
Committee's work on the subject, adopted its opinion on 11 June 2008. The rapporteur was Mr Grasso.

At its 446th plenary session, held on 9 and 10 July (meeting of 9 July), the European Economic and Social
Committee adopted the following opinion by 123 votes to one with five abstentions.

1. Assessment and recommendations

1.1
Once again the Commission has asked our Committee to
draw up an opinion on the integration of mortgage credit
markets for the purchase of residential and other buildings,
i.e. on the White paper on the integration of EU mortgage
credit markets.

1.2
Usually White Papers are the outcome of a quasi-defini-
tive and structured policy analysis of ‘what to do’. This is not
the present case. Indeed, the Commission has to analyse many
issues that are still uncertain, such as common investment
funds, financial services providers, product tying, etc. In total,
14 aspects are considered.

As a result,

the White Paper does not

1.3
represent a
completed process but, on the contrary, remains open due its
effective and noticeable complexity. Why then has another
opinion been requested, given that
the White Paper adds
nothing new to the Green Paper, and that the EESC has already
adopted an opinion on the Green Paper?

1.4
This is an issue that, over the years, has been repeatedly
tabled for discussion without the Commission finding a way
forward and making a proper decision that overcomes the
cultural, legal, administrative and other barriers, which the EESC
considers
to the Commission's
real obstacles
objectives.

to be

the

The EESC opinion on the Green Paper (1), adopted in
1.5
plenary in December 2005 with only one abstention, remains
entirely relevant.

1.6
The White Paper still paints a highly variegated picture of
the sector due to the cultural, legal, legislative and socio-ethical
specificities that purchasing property, and especially residential
property, has in respective Member States.

Nevertheless,

the EESC, albeit unsure about

1.7
the real
possibility of
integrating and harmonising the EU mortgage
credit market, which presents
and
opinion,
profoundly
15.12.2005 (2)), endorses in principle the Commission's attempt
to establish ‘rules’, whether optional codes of conduct (i.e. best
practice) or binding.

so many specificities

characteristics

different

(Burani

1.8
Nevertheless, the measure may be considered as excessive
if the intention is to reconsider the equally positive opportu-
nities already inherent
the
mortgage credit market today.

in the regulatory automatism of

In the meantime,

the EESC recommends

1.9
the
Commission should take steps to analyse in greater detail areas
(e.g. credit registers, foreclosures, the dissemination of financial
literacy) that do not present undue difficulty, always provided
that this would be worthwhile.

that

1.10
The EESC believes that under the Commission's orienta-
tion, the measure still places undue focus on the possible
short-term benefits of introducing new rules based on some-
what partial
the mortgage credit
market. A short-term approach serves to lower the cost of
financing mortgages without, however, concerning itself with
the effective benefit that EU citizens might derive from existing
financial products and innovations affecting these products.

interpretative schemas of

The EESC maintains (as also stated in the Burani
1.11
opinion) that the framework proposed by the Commission is
not properly aligned with continuous market developments; it is
therefore concerned about the long-term consequences for more
in
vulnerable contracting parties,
need of protection.

those consumers most

i.e.

(1) OJ C 65 of 17.3.2006, rapporteur: Mr Burani.

(2) OJ C 65 of 17.3.2006, p. 113, rapporteur: Mr Burani.

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1.12
The EESC welcomes the fact that a link has been estab-
lished between the current mortgage credit rules and the need
for consumer protection. These are laudable intentions worthy
of encouragement provided that they are designed to foster
greater financial literacy on the subject of mortgage credit. The
Commission's intention to take steps to strengthen transpar-
ency rules in order to enhance consumer protection is there-
fore to be commended.

However, at the same time,

1.13
imposing, at all costs,
general rules for assessing the risk presented by prospective
and uncertain
borrowers may prove
undertaking.

a difficult

to be

The EESC believes that consumers must be protected
1.14
during mortgage negotiations but that borrowers must not lose
sight of their responsibilities vis-à-vis the lender.

2. Gist of the Commission document

the

On 18 December 2007,

2.1
assessment
{SEC(2007) 1683} accompanying the White Paper on the Inte-
gration of EU Mortgage Credit Markets was published. Three
annexes were appended to the document: i) mortgage market
impact assessment on specific
characteristics ii) process iii)
issues.

impact

out in that opinion. In this opinion, the EESC will focus on two
new points raised by the Commission:

— giving its own opinion on the intended measures proposed
impact assessments

by the Commission in the light of
carried out in relation to the White Paper (3); and

— drafting proposals, as requested by the Commission when it
concludes that ‘a comprehensive monitoring and evaluation
programme can only be developed once detailed proposals
have been made’ (4).

3. EESC comments on the White Paper

3.1
The White Paper raises numerous issues to be solved, on
which the EESC has been asked to give an opinion. These can
be brought under eleven thematic headings:

1) choice of required product;

2) early repayment;

3) product mixes;

4) credit registers;

5) real estate valuations;

6) real estate enforcement measures/forced sales procedures;

7) national registers;

8) applicable law;

9) rules on variations in interest rates, and so-called usurious

Although {SEC(2007) 1684} constitutes an excellent
2.2
summary of the documents, in the interest of brevity, there are
a few key points worth emphasising in the document in respect
of which a new EESC opinion has been requested:

interest rates;

10) mortgage credit financing;

11) non-banking and service institutions.

— a highly fragmented picture is painted due to the cultural
and legislative specificities and — above all — the socio-
ethical value that home ownership has in respective Member
States;

— all the sensitive aspects of the issue, including economic
and financial considerations, are reaffirmed, given the real
estate market's
to
mention the contribution that mortgage investments make
to the banking sector's profitability; and

importance for EU economies, not

— emphasis is placed on how in the current fragmented situa-
tion, use could also be made of a new legislative proposal
to promote greater market integration.

2.3
Thus, the Commission document takes up the points
already studied in the earlier Green Paper on mortgage credit. It
could not have been otherwise since the new document is about
the integration of EU mortgage credit markets and the relevant
impact assessments previously mentioned.

3.2 Comments on specific points in the impact assessment

3.2.1
Pre-contractual information. In order to reduce infor-
mation imbalances during the pre-contractual stage, the EESC
considers it important to circulate and disseminate information
and raise awareness on specific mortgage credit issues. This
should not incur further costs for citizens.

3.2.1.1
Increasing information and disseminating financial
literacy are prerequisites for the efficient assessment of the cost-
benefit ratio of a risk situation. Indeed, the best way to prevent
contracting parties from assuming undue risk is to provide
them with effective knowledge of these very risks.

3.2.1.2
The EESC believes that it is important to stress that
the rules and binding provisions should cover methods for
circulating information and provision of possible penalties for
breaching them. Nevertheless, the EESC believes that imposing a
sic et
simpliciter obligation on one contracting party would
merely have the effect of inciting that party to try to offset this
obligation by shifting the burden onto the other party.

2.4
Nevertheless, the EESC adopted an opinion on the Green
Paper on 15 December 2005 (rapporteur: Mr Burani), and to all
intents and purposes, the EESC's position on the subject is set

(3) See Annex II of the White Paper, the disclaimer on page 5 of the

EN version.

(4) See Annex II of the White Paper, point 8.

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3.2.2
Codes of conduct. The EESC believes that incentives
should be created to encourage adherence to the voluntary code
of conduct.

pan-European credit
register could also serve to heighten
competition between mortgage lenders across Europe. In any
case, cross-border access to the registers of all Member States
should be facilitated by simplifying information procedures.

3.2.2.1
the risk they may be undertaking, and of
obtaining favourable financing conditions.

This would give borrowers a clearer understanding of
their chances of

3.2.2.2
The measure that springs to mind could involve
making it compulsory for borrowers to answer a list of standard
self-assessment queries on their medium to long term
ability to meet the financial commitment.

Cost rate. The EESC believes that it is appropriate for
3.2.3
lending institutions to disclose the total cost of the loan and
provide a cost breakdown of its various components, including
the fiscal variable.

3.2.4
Consultancy. The EESC believes that consultancy services
strictly linked to mortgage credit should be enhanced via inde-
pendent pricing mechanisms, albeit set out in the calculation of
the total cost of the transaction.

3.2.5 Early repayment

3.2.5.1
Applicability. With regard to the issue of early repay-
ment, a distinction should be made between (i) total or partial
early repayment of the mortgage and (ii) early terminations
relating to opportunities for negotiating more favourable condi-
tions of cost with other financial institutions.

— In the first case, the EESC considers it important always to
allow early repayment, including early partial repayment.

— In the second case, however,

it considers that
to another

the loan
financial

transferred

contract
institution.

should be

3.2.5.2
Cost. With regard to the issue of early repayment,
the EESC believes that costs should be calculated according to
the appropriate mathematical formulae and must, under law, be
relations. Costs should only be
spelt out
charged to the client in case of voluntary repayment of the
credit. In case of contract termination, costs should be
charged to the successor financial institution.

in contractual

Product tying.

In order to be valid, product

3.2.6
tying
should depend above all on the ability to demonstrate the effec-
tive utility of tying the product. The EESC believes that this
issue could be solved by obliging lenders to present cost-benefit
calculations and giving borrowers a reasonable period of time
to decide whether to accept the proposal, possibly even after
the loan contract has been signed.

3.2.8
Property valuation. The basic premise is that property
valuation is more complex than generic financial valuation.
Indeed the specific nature of real property (notably, that it is
immovable) determines its usefulness, and moreover, other
external factors relating to its location influence its valuation.
These factors include:

— morphology,

— transport services,

— population density, etc.

For this reason, it is pure idealism to believe that all these valua-
tion factors can be summed up in a single formula.

3.2.8.1
Criteria for property valuations. The EESC therefore
emphasises the complexity involved in real estate valuations
arising from the abovementioned factors and does not consider
it useful to define a specific blanket formula for property valua-
tions. A better alternative would be to develop local best prac-
tice and strengthen the obligation for valuations to be carried
out by operators accredited by the competent professional asso-
ciations in their sector, who would also assume responsibility
for the fairness of a given proposal.

Property risk valuations. The EESC is also of the
3.2.8.2
opinion that property valuation should be accompanied by a
volatility assessment vis-à-vis the identified value,
in order to
provide a more accurate evaluation of the guarantee offered by
the property. The EESC also recommends applying instruments
already in use by financial market operators and, for the most
part, already established under other EU provisions such as, for
instance, value-at-risk (5).

3.2.9
Foreclosures. If mortgage credit is split into an asset-
backed loan and a personal loan, then we also need to distin-
guish between the financial beneficiary of the property and the
owner providing formal guarantees.

3.2.10
Applicable law. The EESC believes that opportunities
for profitable arbitrage between the different advantages offered
laws of individual EU countries would
by the civil and fiscal
serve as a driver for otherwise unachievable market integration.

3.2.10.1
For this reason, the EESC is broadly in favour of
legislation unchanged and
leaving existing Member State
allowing contracting parties to choose the one that cuts the
loan transaction's overall costs, as already set out in the Rome
Convention (6).

3.2.7
Credit registers. The EESC agrees on the need for a
pan-European register, access to which would be regulated by
specific privacy laws. Indeed, the EESC believes that setting up a

(5) See the Markets in Financial Instruments Directive (MiFID), i.e. Directive
2004/39/EC, which was adopted on 21 April 2004, and which was
published in the Official Journal and came into force on 30 April 2004.

(6) See COM(2005) 650 of 15 December 2005.

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interest

Usurious

rates. The EESC reiterates

3.2.11
its
previously expressed views on this issue, especially with regard
to the extreme difficulty involved in defining a usurious level of
interest correctly by applying a regulatory framework set up for
consumer credit. Nevertheless, it should be stressed that infor-
mation remains the best defence against usury. The EESC there-
fore advocates setting up communication instruments on a vast
scale to provide information about the risk premium bands
applied to different categories of borrower risk.

Refinancing mortgage credit. The EESC believes that
3.2.12
the White Paper's approach, which seeks
to differentiate
between refinancing rules on the basis of the subjective nature
(distinguishing between banking and
of
non-banking institutions) is far too easy to circumvent.

the intermediaries

3.2.12.1
Non-banking and service institutions. Mortgage
lending should always be carried out by regulated and moni-
tored banking institutions. Promotion and support from inter-
mediaries (e.g. consultancies) are acceptable if provided by quali-
fied institutions even if they are non-credit institutions.

4. EESC proposals to be developed

The recent sub-prime mortgage crisis in the United
4.1
States has
revealed how the volatility of property prices
combined with poor client-risk assessment practices with
respect to non-payment of instalments that are out of propor-
tion with the actual value of the mortgaged property itself, can
generate a financial crisis serious enough to destabilise the
entire system. For this reason, any EU action should draw on
this experience as well as on the comments made under the
previous point.

to complement

the ones that already exist

Introducing a twenty-eighth system for regulating mort-
4.2
gage credit
in
EU Member States, as suggested in the White Paper, could
contribute to the integration of the EU mortgage credit market
by increasing choice for
the contracting parties without,
however, creating the conditions for destabilising the financial
system revealed by the sub-prime mortgage crisis.

Brussels, 9 July 2008.

It is common for real estate purchase choices, especially
4.3
where homes are concerned,
to be influenced in part by
emotional (i.e. subjective) factors that have nothing to do with a
proper and rational assessment of a property's value (i.e. objec-
tive factors). Thus, the effectiveness of any measures proposed
by the Commission on mortgage credit cannot be separated
from the reference context (objective as well as subjective).

It would therefore be interesting to develop a proposal,
4.4
which the EESC could analyse further, and which would consist
in adopting an interpretative schema for mortgage credit that
subdivides each loan transaction into a portfolio of two passive
components:

— firstly, an asset-backed loan, the value of which is based on
the market price and possible property value fluctuations;
and

— secondly, a prospective loan (personal

loan), the value of
which is based on the borrower's economic/financial capa-
city and prospects.

Adopting a twin-mortgage system could have a number

4.5
of advantages to be verified during further analysis, including:

— simplifying the risk assessment of the rational aspect of the
transaction (asset-backed loan) vis-à-vis the risks associated
with the mortgagee's solvency (prospective personal loan);

— the possibility of establishing transparent prices that reflect
the various risk levels represented by the two components
of
the loan transaction (objective asset-backed loan and
subjective personal loan); and

— reducing the adverse impact on the financial system in the
event of mortgage defaults by an excessive number of
borrowers, contrary to the impact recently experienced by
the financial market
the sub-prime mortgage credit
crisis).

(i.e.

4.6
The EESC hopes that the Commission will bring this
process to a conclusion as soon as possible, showing greater
determination and creating conditions whereby the separation
of the institutional aspects could be the basis for launching a
twenty-eighth system.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS