Bankers beware

Oct 22, 2009

Dear TBT,

The article in the October 15 - 21 (TBT 676) issue quotes Mr. Mats Odell, the Minister of the Swedish Financial Markets, as stating that the proposal to limit homeowners' liability on mortgage loans to the real estate only "would be a signal [for banks] not to be active in Latvia."

California has had such a law for decades. It has not limited bank lending. In fact, I would suggest that banks are (or at least, ought to be) more careful in deciding how to lend money if they know that they are limited to the value of the real estate securing the loan rather than the borrower's car and future salary and other assets. It is of course unfair to the banks to change the rules in the middle of the game. Yet I wonder to what extent banks lent money because they were counting on the borrower's other assets. Let the banks show that such analysis was factored into their lending criteria in a meaningful way and they will certainly earn my sympathy. If, on the other hand, their internal documentation of most loans relies almost exclusively on assumptions about the value of the real estate which later proved to be incorrect, then they are not quite blameless for the mess in which they find themselves.

It would be useful for the banks to investigate whether California law used to resemble Latvia's (or Sweden's) and, if so, whether they made the change retroactive as Latvia is now proposing to do.

Richard N. Golden
Baltic Capital Management BV

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