Latvians tried to force banks to help borrowers: experts see communist methods

At the end of September, the Budget and Finance (Taxation) Committee of the Latvian Parliament instructed the Ministry of Finance to prepare a draft law on the protection of recipients of real estate loans.

After the European Central Bank (ECB) increased its base interest rates for the tenth time in a row, and 6 months later, After Euribor exceeded 4%, Latvian politicians want to force banks operating in their countries to halve their margin share in the total cost of loans for two years.

Usually, the margins of commercial banks when issuing housing loans reach about 2 percent, the remaining part of the loan price is made up of the Euribor interbank interest rate of the chosen term.

The Latvian parliamentarians behind the new law believe that commercial banks should show more solidarity towards borrowers, especially since their profits are already increasing due to the rise in Euribor. It is estimated that commercial banks will contribute 140 million lei to the Latvian budget this year. euros more than last year.

No aid, but populism

Representatives of Latvian commercial banks call the politicians’ proposals irresponsible and warn that they could significantly reduce credit volumes in general. Lithuanian experts also claim that with such ideas, assistance to mortgage holders is just a simulation.

“I think it’s populism. How can they interfere in private affairs and impose margin cuts? I can’t even imagine what that should look like technically, given the free market and all the European directives. No one can tell a company how much they can charge for their services, because that would be a kind of communism.” Delphi says Marius Jansonas, president of the Finance and Credit Management Association.

He believes that states should reach out to borrowers themselves and develop the necessary tools to do so, rather than requiring the private sector to do so. As an example, the interviewer cites special funds operating in some Scandinavian countries that help residents in temporary financial difficulty.

“If a person does not pay their installments for three consecutive months, it is natural for the bank to terminate the credit contract with them. Then the family faces many problems and if the bailiff sells the property at half price, “the person remains not only without housing, but also in debt. The consequences are serious, which is why States should have an interest not to terminate such credit agreements,” explains Mr. Janson.

He says that in Scandinavia, residents who have lost their jobs, faced health or other problems can apply for special funds that cover loan repayments for a few months, and then that money must be returned.

“Unfortunately, there is currently no assistance mechanism in Lithuania, the person has to get out of this situation on their own,” says the president of the Association of Finance and Credit Management.

Warns of less competition

Lithuanian Banks Association (LBA) Delphi In the submitted comment, it is stated that the desire of politicians to further regulate banks is not new, but that the Latvian proposals would be detrimental to the economy of the entire country.

“We negatively assess the proposals of Latvian politicians. Government regulation of prices in the private sector is harmful: it would reduce competition in the loan market and there is the possibility of a sharp decline in new loans before the proposals are valid, which would have a negative impact on the economy as a whole.

Although politicians often put ideas for increased banking regulation on their agenda, it is important to keep in mind that this sector is already extremely heavily regulated by central banks. Additional constraints and restrictions are not intended to increase banking competition; on the contrary, they would only reduce it. Such a decision would also have a negative impact on the attractiveness of Latvia in the eyes of foreign investors,” notes LBA.

The association also points out that if banks compensated the European Central Bank’s decision to increase base interest rates with their interest income, this would negatively affect the ECB’s desire to reduce inflation: “The Latvia’s proposed decision would fundamentally contradict the ECB’s action plan to reduce inflation. “.

Can burst the NT bubble

The Bank of Lithuania also emphasizes that “exceptional circumstances in the banking sector of Lithuania, as well as in Latvia, have arisen due to excess liquidity, which increased especially after the fiscal and monetary response to the COVID-19 pandemic. COVID-19, and at the same time, the rapid shift in monetary policy stance towards the Eurozone.

“This situation generates economic rent for banks, which manifests itself mainly in state budgetary losses and slow growth in interest rates on deposits – even though interest rates on term deposits have increased , interest rates on current account funds remain close to zero. Consequently, in the opinion of the Bank of Lithuania, trying to return part of the economic rent to one group of society is- i.e. to home loan holders, may prove unfair compared to other groups in society,” the Bank said. of Lithuania in its The Postedia commentary.

The market watchdog also points out that such regulation, in which new housing loans are largely supported in the form of margin reductions, would only encourage demand secured by loans, which could contribute to even stronger price growth and a deterioration in long-term affordability. Institutions such as the Organization for Economic Co-operation and Development (OECD) take a negative view of lending incentives.

“In addition, historical examples show that extensive stimulus measures, especially through new loans, often lead to bubbles in the real estate market.” In the opinion of the Bank of Lithuania, any measures to stimulate the purchase (demand) of housing must be very well thought out and coordinated with flexibility of supply,” says the Bank of Lithuania.

Furthermore, it is emphasized that the increased profitability of commercial banks in a high interest rate environment allows lenders to offer more attractive property credit lines: “We can see the results of this in practice – from 2020. By mid-2010, margins on housing loans in Lithuania had already decreased by an average of 0.6 percentage points to 1.8%. in August this year. »

What are other countries doing?

Latvia is not the first country to look for ways to help home loan recipients under pressure from rising interest rates. Some initiatives were also launched within the Lithuanian Seimas, but they did not receive the green light. Last week, Parliament rejected the opposition’s proposal to apply personal income tax relief to mortgage interest.

At that time, Poland launched a program where the state would simply offset the majority of the loan price for first-time buyers under the age of 45 for 10 years. During this period, residents will only have to pay a fixed amount of 2 percent. amount of interest.

Spain has adopted a law which provides that families with an annual income of up to 25,000 EUR, and housing loan repayments exceed half of the income, will be able to use the right to pay lower interest for five years, without incurring late payment interest and other consequences. The difference would be paid at the end of the grace period.

Similar measures are also in place in Portugal, Greece and Hungary. For example, a support program has been launched in Greece, which will allow young families to benefit from state-subsidized loans with a fixed interest rate of 1%. with interest, if not more than 120 m² are purchased. mr. housing in the region, costing up to 150,000 euros.

Moreover, in some countries, commercial banks have started to reduce their margins independently, without instructions from political leaders. For example, all Greek banks reduced their margins by 0.2 percent; in Latvia and Estonia, Swedbank will not apply a margin to new borrowers for two years.

A vacation credit can be requested

The Bank of Lithuania recommends residents who encounter financial difficulties when repaying a housing loan to first apply in writing to the creditor, who, after assessing the specific situation, can offer different ways of restructuring the credit .

Associative photo

One of the options included in the law is the deferral of credit repayments for 3 months – the so-called credit holiday. It is possible to ask the creditor to defer payment of installments for up to 3 months, when the ratio of all obligations and the borrower’s income is greater than 40%. and in these cases.

It is also possible to request credited leave if the credit beneficiary or their spouse has become unemployed or has lost at least a third of their income due to the breakdown of the marriage, the death of the spouse or the fact that the credit beneficiary was declared unemployable or partially. unemployable.

“During the credit holiday, only the interest income will have to be borne, unless a different installment payment is agreed with the creditor. Lenders evaluate each case individually in order to be able to offer other restructuring methods which could prove useful in the event of financial difficulties. For example, offering to extend the repayment period of the loan and reduce the amount of the payment, but without suspending the repayment of the loan for several months, etc.

The consumer should evaluate the methods of restructuring the housing loan offered by the lender and choose the one that would be optimal in the situation and would make it easier to overcome financial difficulties,” explains the Bank of Lithuania.

According to the financial markets regulator, consumers should also consider refinancing an existing loan when the market offers a lower interest rate than the existing credit contract. When choosing refinancing, it is necessary to calculate whether this step will allow savings, that is to say whether the amount of the price to be paid for the new credit (interest and other costs linked to the conclusion of the contract), refinancing and other possible costs will be lower than the remaining price of the credit to be paid according to the credit contract in force.

Source: The Delfi

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