Letters

Hazards of European Fannie Mae

The Financial Times

November 29, 2003

Sir, Rob Thomas of the European Mortgage Finance Agency Project argues for a European Fannie Mae guaranteed by the EU to underwrite long-term fixed-rate mortgages common to all EU countries ("EU mortgage reform can widen access to long-term fixes", November 22).

He acknowledges that differences in market structures between countries will long prevail. He cites the differences in property law between England and Scotland that persist after 300 years of union. However, this example misleads. In England and Scotland lenders can get their hands on the collateral in the case of default at reasonable cost and with little delay. The default risk is also broadly similar, though Scottish house prices have historically been somewhat less volatile than those south of the border.

In Italy, mortgage lenders typically take six years, and with success far from guaranteed, to access the housing collateral in the case of default. This is the main reason the Italian mortgage stock to gross domestic product ratio is a tiny fraction of the UK's.

While on a much smaller scale of dysfunction than Italy, the process is also slower in France.

One can expect that mortgage default risk in the new accession countries will also be higher than in the more mature markets. Further, the very establishment of a European Fannie Mae on the terms proposed would be likely to lead to considerable overshooting of house prices in many European economies, raising default risk beyond historical levels.

The EU guarantee would in effect subsidise banks in countries with underdeveloped mortgage markets and encourage risky lending, exposing EU taxpayers to what could be very serious long-term risks.

Rob Thomas should direct his efforts elsewhere and persuade the European Commission and national governments to reform property law and legal and other institutions such as land registries, so that housing collateral can function effectively across the EU.

Furthermore, the poor data on mortgage markets, including lack of data on default rates and accurate house price indices, in many European countries are great impediments to transparent pricing of risk. The situation is crying out for reform.