The European Banking Authority published this week a common sense set of good practices to ensure responsible mortgage lending as well a useful guide to address borrowers in difficulties. This move is to be highly commended. Yet it comes too late.
Extensive damage has been inflicted in the past when the residential bonanza lured banking institutions into dubious practices, a reckless conduct bound to backfire. The current recession is rapidly eroding borrowers’ capacity to meet their commitments, a nasty prospect when most balance sheets are overloaded with these assets.
When home property is at risk consumers undertake formidable efforts to avoid losing it. Yet, unemployment or severe income cuts force many people to delay or cease payments. They become utterly unable to face the debts they entered at a time when outlook and prospects looked so promising and rosy. Their hopes have faded away shattered by an unrelenting crisis.
Banks are to blame for conducting a loose prudential policy. They failed to assess borrowers’ ability to face unexpected drops in their long run income, focusing only on their current status. They brushed away any prudent appraisal of the real value supporting the loans, betting on an endless rise in property prices. They enticed consumers to live beyond their means on cheap credit.
Now it seems too late to unwind such a perverse circle. For all the merit EBA is entitled to in publishing these good practices, it cannot redress an appalling record that will weigh for many years on credit institutions. Yet, its set of advices prove especially useful in dealing with mortgage takers falling into difficulties. An extremely stressing situation to be dealt with by creditors with due care and a responsive approach.
Banks should enforce the sooner the better these EBA guidelines’ good practices if only to avoid transforming their credit portfolio into real estate heavily undervalued and lacking any profit performance.