No Country for Young People? 22

Foto: Lauris Nagliņš, LETA
Morten Hansen

 

Legislation concerning insolvency in the field of mortgages has so far been favourable for the banks but this seems to be shifting drastically with a new law that introduces the “throw away the key” principle i.e. introduces non-recourse mortgage loans where a default means that the creditor can seize the property in question but not, as now, other assets of the defaulting person(s). The principle is used in e.g. the United States but not much in Europe. It obviously shifts some risk from borrowers to lenders, which will have an effect on down payments (up) and interest rates (also up).

Whether one wants to protect mainly lenders or borrowers is a political issue but does the proposed law make economic sense? And at this moment? I am not so sure.

The banks, with quite a bit of huffing and puffing, claim that down payments will go up to 40%. I doubt that, see below, but they will definitely go up and this will, as also claimed by the banks, hurt especially the young who typically have only modest savings since they haven’t been in the labour market for so long. Almost no single young person would have the means to afford a 40% down payment, effectively barring them from ownership of flats or houses. But it would be good news for those with some savings, such as older folk, myself included, oligarchs, other rich people and, of course, non-residents. We will have less competition for pieces of real estate and thus face lower prices – but this kind of ownership is hardly what the law is aiming for?

The new law will also reduce activity in the real estate market, which is not what the economy needs at this moment. On a grander scale, having more ownership among young people is a way of broadening the middle class which I thought was an important issue here, for both economic and political reasons. Allow me to be a bit extreme and interpret the new law as suggesting to young people that they should better leave and join the others in Ireland and the UK and elsewhere – again, not what the country is aiming for.

That said, the banks are also whining, aren’t they? A 40% down payment is, to me, of banana republic size. Are the banks so risk averse, so poor at credit evaluation of their customers and so untrusting in their customers’ good faith in honouring their debts that they need such a huge down payment to avoid most risk associated with these non-recourse loans? I do not believe so but if they really go for 40% (or something of that size) banks will not be much involved in mortgage lending in the future.

And this brings me to where I think a proper solution would be. The new law is too drastic and it does create the problems outlined above and it will, in particular, hurt the young and that is just unfair but the old or existing law is also too strongly in favour of the banks’ position with borrowers being in a very dire position in case of default.

Some compromise might be the best solution. And one where a big, healthy, not prohibitively costly but still profitable mortgage market exists. It is very rare on these pages that I recommend anything from my home country (Denmark) but in this case I do.

Morten Hansen is Head of Economics Department at Stockholm School of Economics in Riga

 

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ถาดกระดาษ 14.05.2022. 09.45

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http://24hshoutcast.pl/ 17.04.2020. 01.37

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