Background

The green paper is the European Union (EU) Commission’s considered response to the report of the forum group on mortgage credit.The forum group was established by the Commission in March 2003 with the task of considering the barriers to further mortgage market integration, and making proposals to tackle those barriers. The forum group published its report in November 2004 which contained 48 recommendations. The forum group included both industry and consumer representatives. Some of the final recommendations were supported by both sides, but a number were only supported by either industry or consumer representatives. The Commission welcomed the forum group report, but indicated that it would publish a green paper in 2005.

The Commission also commissioned the consultancy London Economics to produce an analysis of the costs and benefits of further integration of the European mortgage market. That report was published in August 2005, and should be read in conjunction with the green paper itself.

The Commission held a public hearing on the green paper and the responses to it in December 2005. A white paper is expected in later summer 2006.

The green paper

The green paper is consultative in tone, and poses questions rather than offering proposals. Nevertheless, it is possible to gain a sense of the Commission’s priorities by considering the issues selected for discussion and the questions asked.

Mortgage market integration

While the green paper does not offer a full definition of market integration, it is clear that, despite representations from the CML and others, the commission is still focusing primarily on integration at the level of consumers borrowing from lenders based in another EU state. Currently such lending amounts to less than 1% of the European mortgage market and most lenders do not expect it to grow quickly. This emphasis by the Commission is disappointing as it inevitably leads to a preoccupation with standardising consumer protection measures and this raises the threat of further substantial changes to the newly established FSA regime in the UK.

The Commission does recognise that lender cross-border activity via mergers, acquisitions and joint ventures does constitute an aspect of integration, but this area receives less emphasis in the green paper. Similarly, there is some focus on the potential for integration of capital markets.

The Commission sees a number of benefits flowing from further integration of the European mortgage market:

• Lower costs for home loans;
• Improved and innovative mortgage products and ancillary products such as equity release and mortgage insurance, with high levels of consumer protection;
• Increased ability to serve sub-prime and other borrowers on the margins of mainstream lending;
• Additional economies of scale; and
• Improved capacity and efficiency of capital funding.

While some of these benefits might arise in other EU states the UK mortgage market is already innovative, highly competitive and well regulated. It is, therefore, important to ascertain what concrete benefits arise from further integration for either UK lenders or consumers.

Consumer protection

In relation to pre-contract information, the commission opines that the european code of conduct is not operating satisfactorily in practice across member states and raises the question of whether the code should be replaced by binding legislation and whether the timing of the issue of such information could be harmonised across Europe.

Mortgage advice is also discussed. The Commission asks for comments on whether the provision of advice by lenders and/or intermediaries should be compulsory.

The Commission also initiates discussion of a standardised APR, more consistency on early repayment charges, interest rate caps, standardisation of mortgage contracts - perhaps via a “26th regime” (a second-tier legal structure standing above national legal jurisdictions and providing an option for the development of trans-national legal constructs) and non-legal means of consumer redress.

Legal and related issues

The Commission invites comment on a number of issues, most of which helpfully relate to the obstacles faced by lenders establishing themselves within other jurisdictions:

• The applicable law principle - which currently defines the choice of legal jurisdiction in cross border transactions;
• Better sharing of data held in credit databases;
• Better recognition for international valuation standards;
• Improvements in and convergence of forced sale procedures;
• Taxation obstacles to external competition raised by individual member states; and
• Better co-operation between land registration authorities across Europe.

Mortgage funding

The Commission invites further discussion of the feasibility and desirability of the Euro mortgage project. In addition, the commission invites further examination of capital funding issues and the potential for further integration. The green paper also looks to the expansion of secondary markets for mortgage funding.

Lack of benefits for the UK

The green paper may offer some potential benefits to certain member states within the EU. For the UK, however, there appears to be little on offer except for the small group of internationally active lenders. The posited benefits from integration are already largely in evidence in the UK mortgage market (though there is potential for expansion of secondary markets), and should the commission eventually decide to embark on a range of consumer protection measures in support of its objectives, then UK lenders could face major disruption and expense through changes to the MCOB framework.The costs of consequent systems and other changes will, ultimately, be passed to consumers who could see the pace of product innovation slowed as lenders wrestle with increased administration and enhanced risks. Though action on some of the legal and related obstacles to lender cross border activity may be welcome in themselves they only form one component in the overall lender analysis preceding a decision to enter a the market in another country.

CML action

Following initial consultation with members, the CML has engaged with the Commission over lender concerns. In addition, the CML has actively engaged with UK stakeholders, including HM Treasury and consumers, to communicate and promote its position. As a member of the European Mortgage Federation (EMF) the CML has used this avenue to influence the commission and the industry in other member states. As and when the need arises, the CML will also engage directly with government and industry in other states to build support for a position that is consistent with the needs of UK lenders and consumers.

Acknowledgement

This article was first published on the web site of the Council of Mortgage Lenders (www.cml.org.uk) it represents the views of UK lenders on the approach to an integrated European market for mortgage lending.