Foto: Lauris Nagliņš, LETA
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?
