One of the most welcome surprises provided by the White Paper on European Union mortgage credit markets is that it only runs to 12 pages.
This is impressive considering it is a European Commission White Paper and therefore the end result of consultations and readings in the EU Parliament, taking into account the views of 27 member states.
But you soon realise that it’s not quite the finished article you may have been expecting. For example, its final page lists a timetable for further re-search and consultation.
This has led to several commentators saying it looks more like a Green Paper than the conclusions of a White Paper, so when reading it the possibility of further changes must be kept in mind.
In some respects, this is no bad thing. It could be argued that 12 pages is insufficient to do justice to the future of the European credit market.
The document was published on December 18 last year and summarises ideas on the development of a single European market in residential mortgages. It also presents measures to improve efficiency through appropriate policy initiatives.
The White Paper acknowledges the liquidity crisis but does not attempt to respond directly to the problems it has caused. After all, the paper has a long-term vision and its remit does not include tackling short-term problems.
The EC acknowledges that consumers predominantly shop in their own member states for mortgage credit due to factors including language, cultural preferences and distance. It believes that integration will be supply-driven by providers and distributors through cross-border activity.
The paper identifies four key objectives, which it believes will deliver an efficient and competitive market.
These are facilitating the cross-border supply and funding of mortgage credit, increasing product diversity, improving consumer confidence and facilitating customer mobility.
The EC acknowledges that a number of methods for cross-border mortgage supply are already in place, including regional branches, the internet and brokers.
Cross-border supply can also be fa-cilitated by financial firms securitising portfolios internationally when the market allows it.
The paper states that a wide range of funding is desirable and advocates that funding instruments should be seen as complementary rather than as replacements for traditional finance.
But it goes on to say that EU member states’ differing legal and consumer protection frameworks, infrastructure and legal provisions surrounding mortgage funding pose obstacles to further integration.
When it comes to diversity, the White Paper states that no single country has a complete range of products. It adds that increased product diversity has been identified as crucial by a number of studies as a way of increasing consumption in Europe.
But when considering greater diversity as a way to enable borrowers to access credit, it’s important not to overexpose vulnerable consumers.
As tighter credit criteria in the UK have demonstrated, high risk applicants can be the most vulnerable. The paper acknowledges this but still wishes to explore ways to boost diversity. This is where the UK could take the lead by exporting its knowledge about product development and innovation.
When it comes to consumer confidence, responsible lending is important for borrowers and the welfare of the industry. It’s encouraging that the EC is keen to promote high standards of mortgage advice. The Association of Mortgage Intermediaries has always linked consumer confidence with good advice.
The final objective shows that the EC is keen to encourage switching to boost competition, which contradicts the UK government’s stance on long-term fixed rates.
The White Paper states there are unjustifiable legal and economic barriers to consumer choice, targeting 25-year mortgages with massive early repayment charges. This is a politically sensitive issue.
The EC is also keen to ensure price transparency through the use of pre-contractual information designed to help consumers understand the costs of switching.
To deliver its objectives, the White Paper identifies four focus points – early repayment, responsible lending, pre-contractual information and APRs.
The EC believes early repayment is one of the most significant areas when it comes to market integration.
While this remains a difficult area due to political sensitivities (for example, France has a history of penalising borrowers who repay their mortgages early), the EC is determined to develop a policy position and is currently carrying out work to identify suitable policy options.
When it comes to responsible lending, the White Paper makes encouraging points about independent brokers providing advice to consumers, underpinned by high-level principles.
The EC is undergoing follow-up work in this area, consulting stakeholders about advice standards, exploring the potential for responsible lending and examining access to cross-border credit data. To achieve this, the EC is forming an expert group on credit history to advise on potential improvements to data access.
It is also investigating land registration procedures across member states. Lack of consistency and uncertainty concerning underlying security could be a substantial barrier to such activity. The EC hopes to formulate recommendations in this area during the course of 2008.
It is also concerned about the quality of information available to consumers to allow them to compare products, hence its emphasis on pre-contractual information.
While there is a code of conduct for home loans in Europe, the EC wants to review the European standard information sheet, which is broadly similar to the UK’s Key Facts Illustration.
Let’s hope little will be done to bring the KFI into line with proposed European standards.
Finally, we come to APRs. The methods for calculating these differ throughout Europe but comparisons are vital if cross-border activity is to be encouraged. The EC is considering Consumer Credit Directive calculations as a blueprint.
Although a single European mortgage market seems a long way off, we are engaged with the process for a number of reasons.
Without doubt, the UK has the most sophisticated mortgage market in Europe in terms of product manufacture and distribution models, so even if domestic lenders have little appetite for cross-border lending there is still plenty of scope for exporting knowledge on a consultancy basis or through joint ventures.
The establishment of European offices for brokers or packagers may be a step too far but there’s no reason why the UK’s knowledge and experience can’t be exported in some way.
I’m also pleased to note multiple references to high-level mortgage advice standards scattered throughout the White Paper.
While recognising the importance of the EU’s Mortgage Funding Expert Group and the establishment of sim-ilar groups for credit history and securitisation, I was disappointed to find the White Paper does not suggest setting up a similar group to look at advice.
For this reason AMI recently wrote to Charlie McCreevy, commissioner for the internal market and services at the EC, suggesting he considers setting up such a group.
I’m delighted to report that we have had a response and I’m going to Brussels shortly to discuss the concept further.
So the slim document published before Christmas seems destined to play an important role in developing the European mortgage market and could even generate the biggest opportunities the industry has ever seen. Take another look.
Richard Farr is director of the Association of Mortgage Intermediaries