CRIF, a global company specializing in the development and management of credit reporting, business information and decision support systems, and Efma, the retail financial services community, today published a new study that includes the results of a survey providing insight into the European consumer credit market and estimated impacts of the adoption of the European Commission’s proposal for a directive on credit agreements relating to residential property.
The survey involved questionnaires and direct interviews with managers from major credit-granting institutions, ranging from local to international organizations, and operating in 13 different European countries. 77% of respondents to the survey represented full service banks and 23% represented specialist financial institutions/credit intermediaries.
The study also presents a focus on process and business guidelines put in place by European credit institutions for the management of residential mortgage portfolios in order to deal with current market situation.
In general, the survey data reveals significant fragility in the residential mortgage market, both from a supply and demand perspective, due to the unfavourable economic situation and the substantial erosion of product margins. In terms of market trends observed in 2011, 51% of those interviewed reported a fall in loan demand and volumes equivalent to that of 2010. The mortgage market situation is seen as particularly difficult, with Basel 3 requirements, shortage of liquidity and the uncertain economic situation increasing fragility. In particular, for 54% of participants, the liquidity crisis will be one of the key factors having a negative impact on new lending, and 46% of participants said that capital requirements will negatively affect mortgage supply.
Consequently, expectations for 2012 are not encouraging: only 18% of respondents believe they will see an increase in loan volumes compared with 2011, and 41% expect a decrease (although only 22% of specialized financial institutions/credit intermediaries expect a reduction, compared to 47% for full service banks – see below figure).
In terms of how the mortgage market could evolve following the adoption of the directive, should the currently proposed text – which introduces measures for an efficient and competitive single market, and promotes financial stability – be confirmed, participants perceive that there will certainly be a number of significant impacts.
TheBologna, June 6, 2012 majority of respondents (61%) expect the development of alternative lending channels to be unlikely, as well as changes to the relationship between creditors and insurance companies (46%), improvement in consumer awareness of their borrowing level and ability to compare different credit offers, and improvement in consumer confidence in creditors (50%).
Provisions regarding calculation of the annual percentage rate of charge (APCR) are, on the other hand, considered by lenders to be most effective in improving quality and transparency in the mortgage market, as well as regulation of credit intermediaries and supervision of non-credit institutions, according to over 50% of the respondents. The latter provision is thought to be one of the elements of the proposal that will have the most positive impact on the market because it is believed that the new regulations will bring higher quality of credit disbursed through those channels, however at a cost of lower volumes mediated by credit intermediaries and non-credit institutions.
In terms of property valuation, the proposed directive does not include any significant changes to the current regulations, nonetheless the survey asked participants how they would evaluate provisions if they were introduced in some form of legislation: 48% of respondents felt that significant benefits would be achieved by a provision that member states should ensure that lenders use appraisers who can demonstrate skills and qualifications that comply with national and international valuation standards, therefore clearly shifting the obligations and responsibilities onto the network of appraisers.
Moreover, 74% of respondents believe that being able to use independent sources and certification to verify income, savings and other financial obligations of the customer should be encouraged (see figure below). It is interesting to note that the percentage of respondents that state they are not interested in this belong to banking groups with headquarters based in France.
From the point of view of useful information regarding the assessment of creditworthiness, the vast majority of respondents believe that being able to access certain information on the effective spending capacity of the borrower would have a positive effect on the assessment of whether to grant a mortgage. In particular, this could involve the use of external data that reveals information on borrowing habits, debt management profile, overdrafts and revolving credit utilization, overall borrowing level, propensity for credit shopping, refinancing, and borrowing from more than one bank.
The recent crisis has also prompted lenders to redevelop internal rating systems to improve model efficiency and performance within this new economic scenario, according to 41% of respondents, highlighting further the attention being paid by operators to assessing the compliance of internal ratings with both the legislative requirements and the changing economic context. Furthermore, an additional 28% of those interviewed stated that their organizations have planned this redevelopment over the next 12 months.
Following the Consumer Credit Directive approved in 2008, one of the goals of the current proposal for a directive on residential mortgages is to promote responsible lending practices and to ensure that assessment of customer creditworthiness is carried out in an appropriate manner. In this regard, credit sustainability indicators should not only be limited to the application phase, but would also be beneficial when extended to the portfolio management phase, in order to predict delinquency and to allow financial institutions to intervene proactively.
“The adoption of the proposed directive – the provisions of which are still to be approved – could certainly stimulate uptake of the principles of transparency and sustainability in lending. However, what the current text of the proposal does not address efficiently, and can therefore be considered its weakest point, is the role and importance of the lender-borrower relationship in a mortgage product – particularly given its long maturity period”, said Simone Capecchi, Director of Finance, Corporate Offer for Italy and Western Europe at CRIF.
“This study provides a very revealing insight into current attitudes and activity in the retail financial services sector,” says Patrick Desmarès, Secretary General of Efma. “It is clear that lenders are continuing to be extremely cautious in their approach to the residential mortgage market. They are striving for better quality information to support their lending decisions and examining how they can better judge creditworthiness, not just at the point of a mortgage application but across the client relationship – for all products and its entire term.”
