Proposed law to limit mortgage liabilities could benefit Latvia in the future

RIGA - Sweden’s Financial Supervisory Authority said there is no need to worry that a proposed Latvian law that would put a limit on a mortgage holder’s liability will become reality, reports LETA. It was earlier reported by Bloomberg that if a law that limits the debt holder’s liability to the value of the collateral - the property - is passed in Latvia, Swedish banks would see a maximum increase in loan losses of a couple of billion Swedish kronor, though this would only have a small impact on their operations.

With the word ‘crisis’ on everyone’s tongues for over a year now, Sweden’s banks should be well-prepared for the worst.
Latvia could carry out a controlled devaluation and still reestablish market confidence in its economy, said Swedbank’s Chief Financial Officer Erkki Raasuke in October. He said that “An uncontrolled devaluation was likely to have a devastating effect, while a devaluation of the lats within limits set by the ERM2 currency grid would be easier to handle. If we believe Latvia really can carry out its reforms and eventually decides to devalue all at the same time, it could be limited to within the confines of the ERM2 framework, if they devalue by 15 percent.”
Raasuke reiterated the point taken by the Swedish banks that devaluation would lead to more pain in the short term, though the total losses would still end up roughly the same as if Latvia kept its peg on the euro. “As far as Swedbank is concerned, I think this would initially trigger some of the larger credit losses, but we estimate that the outcome in total would be at the same level.”

Looking past a devaluation, he added that “We will also see a faster recovery afterward and that the risk appetite returns” attracting foreign investors again.
Nonetheless, considering that the current economic crisis is still enveloping Latvia and the problems borrowers are facing are surging, Prime Minister Valdis Dombrovskis (New Era) has asked the State Chancellery’s legal department to prepare amendments to the Civil Process Law, along with other legal regulations, in order to establish a system providing that collateral is to be the only guarantee possible on mortgage or housing loans. The prime minister’s press secretary, Liga Krapane, said that the prime minister’s intention is to limit the obligations of individual borrowers who are buying their primary residence.
If the legislation were to be passed, the obligations from the property owner could not go higher than the value of the collateral, so that in case the borrower fails to make the mortgage payments and the collateral is taken away by the bank, the lenders could not continue to go after the owner’s other assets for the difference.

Pressure on Latvia’s homeowners in making their regular monthly payments is easing, however slightly. Because of the drop in the Euribor interest rate, a large portion of borrowers now are paying about 30 percent less in their monthly installments than before, reports the representative of the Association of Latvian Commercial Banks and head of private client lending department at Swedbank Dzintars Kalnins. He notes that most borrowers are able to deal with their debt commitments.
“People are concerned about higher bills because of the heating season, but it has to be taken into account that as a result of the fall in Euribor rates, the sum to be paid in monthly installments has shrunk by 30 percent, and actually surpasses the average drop in household income.”

Reflecting on the proposal made by Dombrovskis, Kalnins underlined that such legal provisions must not be introduced retroactively.
Dombrovskis expects that the proposed changes to the mortgage lending system will prompt banks to examine loan applications more carefully, as well as decrease the risk of a new real estate bubble, and should contribute to a recovery of the Latvian economy.

Additionally, he has requested for the inclusion of regulations stipulating that borrowers and their family members could not be evicted from their primary home, without prior agreement, and to resettle the family to another living place. The obligation would be for banks to offer dwellings to the families that are forced to leave their previous house or apartment. A further request is to batch information on a borrower’s legal obligations towards loan providers and the borrower’s protection mechanisms in Sweden before going ahead with the bill.
Banking experts say that such a system could be beneficial and bring positive effects, however, the new legislation could not be applied to loans for which agreements have already been signed.