ECB says stress in home loans manageable despite high rates, lax checks

By Thomson Reuters May 15, 2024 | 6:52 AM

By Francesco Canepa

FRANKFURT (Reuters) – Stress in the euro zone market for home loans is “manageable” despite higher interest rates stretching borrowers and lax checks by some banks, the European Central Bank said on Wednesday.

Record high interest rates, imposed by the ECB to bring down inflation, have taken a toll on house prices, particularly in countries where there had been boom when rates were low, such as Germany.

The ECB reviewed the mortgage books of 37 euro zone banks, accounting for 40% of the sector’s 3.7 trillion euros ($4.00 trillion) exposure to residential real estate (RRE).

It found deficiencies in how mortgages are originated but still came away with a reassuring message.

“While the review uncovered some challenges in the RRE sector, the overall outlook remains relatively positive,” the ECB said in a newsletter. “Although RRE is under some stress, this appears manageable, and banks are actively engaged in addressing concerns.”

Of the 1.4 trillion euros worth of home loans outstanding as of last June, 412 billion euros were set to have their interest rate re-set – likely much higher – by June 2025, the ECB said.

“This will entail a material risk for borrowers not able to meet higher interest rates,” it added.

The ECB’s review also showed that lenders were still not adequately weighing up risks before granting a mortgage – 16 years after a global financial crisis that started in that market and a decade since the ECB took over bank supervision.

For example, banks in certain countries did not apply limits on the ratio between a loan and the value of the property, or between the cost of servicing a mortgage and the borrower’s income – or that those thresholds could be overruled.

Specifically, 46.5% of mortgages originated in the 12 months to June 2023 had a loan-to-value ratio of more than 80%, and even exceeding the value of the property in 16.5% of the cases.

Banks appeared to be taking more risks just before, or when, rates started rising: between June 2021 and June 2023, the share of mortgages extended to borrowers who spend more than 30% of their income on servicing the loan increased from 47% to nearly 53%.

“The 30% threshold is not risky in itself but it is from that level onwards that deterioration might appear,” the ECB said.

For around 40% of new home loans originated between in the year to June 2022, collateral valuations were not carried out by a valuer. Banks also “seem to struggle” with assessing a borrower’s repayment capacity.

The ECB said banks have been “asked to remediate deficiencies” and the findings will not affect requirements.

“Overall, while there are areas for improvement, the banking sector’s response suggests there is a commitment to mitigating risks and maintaining stability in the RRE landscape,” the ECB said.

($1 = 0.9240 euros)

(Reporting by Francesco Canepa; Editing by Alison Williams)