From the European Mortgage Federation’s (EMF) study on non-performing loans in the EU on Thursday:
Available information from participating countries suggests that indicators of NPLs– arrears, doubtful loans, and repossessions – largely differ in definitions across the individual markets surveyed in the study, so that an agreed definition at an EU level is not possible to attain.
Which makes us wonder if a lack of homogeneity on non-performing-loan definitions across Europe could eventually become a sticking point — especially if, as the FT notes on Thursday, the ECB is really beginning to question its egalitarian approach to collateral thus far. This of course includes mortgage-backed paper from across the European spectrum.
But first, a little more from the survey on just how varied Europe’s NPL definitions are.
According to the EMF, in Belgium, Denmark, Ireland, Poland, Spain and Sweden, mortgage loans are considered in arrears if the borrower fails to make a payment after three months — there is not always a further ‘doubtful loan’ classification. In France and Italy, meanwhile, loans are considered ‘doubtful’ after six months.
There also appear to be differences when it comes to the enforcement of real estate collateral across European member states and what actually constitutes national arrears ratios.
For example, some arrears ratios represent the number of mortgage loans in default as a percentage of the total number of mortgage loans outstanding, while others look at the value of the missed payments over the total value of outstanding residential lending in the market, according to the EMF.
What’s also interesting is that some countries collect national arrears and doubtful data, and others don’t at all – ahem, Germany, whose page on the survey looks particularly sparse versus others.
And then there’s Spain. Here, the definition of a doubtful loan is determined by the Bank of Spain’s own measure, which happens to be the same as other countries’ concept of arrears, i.e. ‘past due more than three months’ and when losses – but not quite a default – are expected. This, the EMF, says means:
…credit institutions will always try to use all the tools at their disposal – debt-restructuring, repurchase of a house, Dation in payment, etc. – to enable the debtor to remain in his/her home and also to avoid judicial foreclosure, which remains very much a last resort given that it is always the most dramatic and expensive alternative for both borrowers and lenders.
Which is good news for Spain, because it suggests the metric might be unfairly skewing the severity of non-performing loans in the country.
In the UK, meanwhile, the EMF emphasizes how forbearance — much more emphatically exercised in the British Isles versus other European countries — has a likely dampening effect on figures because:
Mortgage arrears in the UK relate to any payments on a mortgage loan which are contractually due but not paid. Contractually deferred interest does not constitute arrears.
Especially since UK mortgage contracts are often compiled with payment-holiday type options built in.
Overall, the EMF concludes that while the downturn has had an obvious effect on lifting NPLs and repossessions across European member states, its effects haven’t been as great as in previous downturns. This, it says, is down largely to low interest-rate policies this time round. And hence it concludes:
As the macroeconomic downturn takes hold, developments in interest rates and unemployment rates can play a key role in triggering a further increase in arrears and repossessions. Nevertheless, a continued low interest rate environment would largely offset the continued increases in unemployment rates, thereby mitigating against further increases in arrears and repossessions; moreover, upward pressure on arrears and repossessions in the current economic environment is being softened by a number of other important factors, including: greater forbearance as evidenced by lenders’ “coping strategies” to avoid foreclosing on borrowers, and government programmes aimed at keeping borrowers in their homes.
Not exactly a vote in favour of central bank tightening.
You can read the whole survey in the usual place.
Related links:
Spanish banking crises, then and now - FT Alphaville
Good banks, bad banks – FT Alphaville
Banks’ coverage ratio capers cont. – FT Alphaville