What was the point of the remedial action to the Mortgage Credit Directive?

In March 2016, the EU Directive on Residential Property Loans, the Act Implementing the Mortgage Credit Directive (WIKR) was implemented in Germany as well. Since then, residential mortgages may no longer be granted exclusively on the basis of the value of property to be mortgaged. There is a greater focus instead on the borrower’s ability to meet repayment obligations. While this seems plausible, it restricts lending to certain borrower groups, such as young families with income that is temporarily too low or older people because of the limited life expectancy. This was especially the case because the planned exception in the EU directive, whereby mortgages for new builds or renovations would continue to be granted on the basis on the value of the property, was not implemented in Germany. This resulted in a discernible slowdown in mortgage lending.

However, the sharp criticism of the implementation of the directive was not only based on this aspect but also on the legal uncertainty associated with the introduction of the WIKR. This could lead to credit applications being rejected to avoid, for example, possible liability risks in the future. Further criticism was levelled at the recent obligation to carry out creditworthiness checks for follow-on mortgages and therefore the inadmissible equity release credit agreements (reverse mortgages) that allow home owners to convert a part of the equity tied up in the property into additional current revenue without having to sell their home. Another drawback is that banks no longer offer mortgages in foreign currency because they entail a higher foreign exchange risk under WIKR.

The federal government presented a corresponding draft bill in December 2016, which was agreed by the Bundestag at the end of March 2017 and passed by the Bundesrat on 12 May. It includes two key improvements in particular:

1) The exemption, whereby the property value from construction measures or renovations may also be taken into account in the creditworthiness checks, shall now apply in Germany too.

2) Equity release credit agreements do not fall within the WIKR rules.

How can the resolved changes be assessed? One key improvement is the facilitation of mortgage lending to young families and older people, who will find it easier again to build their own homes or carry out renovation measures to make their homes suitable for the elderly. Another positive feature is the exclusion of the equity release credit agreements, as home-owners will not be forced to sell their homes in order to release a part of the value for living expenses. Nonetheless, some young families will no doubt still find it difficult to buy an existing property, as the construction and renovation exceptions do not apply here. However, this is also stipulated in the EU directive. Very little has happened besides with regard to generating more legal certainty. However, the new WIKR rules specifically authorise the Federal Ministries for Finance and for Justice to draw up guidelines pertaining to this. Similarly, provisions on the creditworthiness assessment for follow-on mortgages or debt restructuring have yet to be resolved. In this respect, it remains to be seen if the desired clarity can be achieved on these two points. On the other hand, the restrictions on foreign currency loans are likely to remain in place. Although only a small number of customers are impacted, it continues to pose a problem for them.

If the criticisms can be largely resolved, we would be more or less back to the status on residential property finance prior to the introduction of the WIKR. However, this raises the question as to the point of the entire – in part self-inflicted – effort. Few would disagree that residential mortgage lending worked well in Germany even before the WIKR was implemented in March 2016.

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