McCreevy invests in bricks and mortar

By Stewart Fleming

Date: 17/02/05

The European Commission will attempt next week to add impetus to creating a single market for home loans across the Union, even though the European Central Bank (ECB) is increasingly worried about house price inflation.

The Commission will hold a first meeting of a group of national experts to examine how to encourage a single market for mortgage lending across the EU.

In the past month Internal Market Commissioner Charlie McCreevy has been signalling the high priority he attaches to the project. "We must not shrink from the challenge of creating a true single market for home loans," he said. "An efficient single market could mean cheaper and better loans for all Europeans," added the Irishman.

The Commission said that in the EU-15, home loans worth €4 trillion (40% of gross domestic product) were outstanding at the end of 2002. Reforming the home loans market would speed up the development of a deeper EU market in securitised bonds based on residential mortgages. This, in turn, would bring wholesale capital markets and the retail mortgage market closer together.

The Kok Report on the Lisbon Strategy, published in November of last year, highlighted reform of the residential mortgage market as a way of "extending home ownership, boosting consumption, and [encouraging] labour mobility". But the complexity of the different national home loan markets and the wider implications of reform raise fundamental issues for policymakers.

The ECB is already signalling its concern about house price inflation in several eurozone economies. On the one hand reforming home loan markets, making it easier for example to refinance mortgages or take out additional loans secured against recent increases in house prices, might help to stimulate sluggish consumer spending. It might also help to stabilise eurozone economies when they are faced with a cyclical economic downturn - the model offered by the more flexible home loan markets in the US and in the UK.

But asset price bubbles, whether in financial markets or the housing market, pose special problems for the ECB and its monetary policy. If they are allowed to get out of control, they can have a destabilising influence on the economy. But deciding when this danger point is reached and then doing something about it is extremely difficult.

Worries that a "housing market bust" could wreck the US and British economic upswings, have been high on the list of economic policymakers' concerns for at least two years.

McCreevy faces additional challenges. Financial sector lobbyists such as the European Mortgage Federation are arguing that new EU directives are unnecessary to realise the objective of creating a single market for home loans. On this view the Commission should use its competition policy, infringement procedures against individual states and benchmarking of best practices to bring about change.

McCreevy indicated last June that he sympathised with the industry view that with the virtual completion of the Financial Services Action Plan, further EU legislation should be avoided where possible. He took this position in relation to mortgage market reform too.

This approach fits with the complexity of markets. France and Belgium have highly regulated residential mortgage sectors. But most EU states do not have personal bankruptcy laws, which adds another layer of complexity to the single market objective. In the new member states, which do not have a long tradition of private ownership, regulation is minimal. "Eastern Europe is like the Wild West," says one lobbyist.

But to deliver ambitious reforms without EU legislation will require active support by member states who will have to be willing to confront interest groups with sometimes unpalatable choices.

Experts who drafted the Commission's Forum Group on Mortgage Credit report noted divisions on issues related to consumer protection. These mirror the longstanding conflicts between the Commission's DG Internal market and DG Health and Consumer Protection departments on financial market reforms. The final report of the forum group in December put forward 48 recommendations on how to boost the integration of the EU home loans market making it clear how difficult it would be to find a 'one policy fits all' approach.

• Stewart Fleming is a Brussels-based freelance journalist

Article reports on an attempt of the European Commission to add impetus to creating a single market for home loans across the Union, even though the European Central Bank (ECB) was increasingly worried about house price inflation.

The Commission planned to hold a first meeting of a group of national experts to examine how to encourage a single market for mortgage lending across the EU.

European Commission: DG Internal Market: Free movement of services: Financial Services: Retail financial services: Home Loans http://ec.europa.eu/comm/internal_market/finservices-retail/home-loans/index_en.htm

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