Nordic Banks Doubling Down Payments Spur Law’s Defeat

Latvia’s Parliament learned a lesson last month about control of the country’s mortgage market: Nordic banks sometimes call the shots.

Lawmakers passed a law in September to revive lending, allowing new borrowers who lose their homes in bankruptcy to escape paying their remaining loan balances. Banks responded by doubling down payment requirements to as high as 40 percent. That prompted politicians who feared that lending would dry up to rescind the mandatory measure in February.

“The communication from the banks was that they were going to cease giving loans,” said Arnis Sauka, an assistant professor of business at the Stockholm School of Economics in Riga, the capital. “It was easier for them to make this threat, to push on the parliament and to use their lobbying power” than deal with the new law.

Nordic banks including Swedbank AB, SEB AB and Nordea AB dominate lending in the Baltic Republic, making about 57 percent of all loans in the third quarter. The non-resource law was meant to boost demand for mortgages as homeowners continue to struggle to recover from the 2008 housing crash. The three lenders said they increased down payments for business reasons -- not to force Parliament to overturn the measure.

“We reject that charge,” said Martins Panke, a spokesman for SEB’s Latvian unit. “We have made our decisions independently and objectively evaluated the consequences these changes have brought to the mortgage lending sector.”

Mortgage lending grew almost 10-fold between 2004 and 2008 when regulations were lax, fueling soaring home prices. After the collapse of the market and a bailout from the European Union and International Monetary Fund, Latvia’s recovery has slowed.

Lending Falls

Latvia, which has a population of about 2 million, depends on exports of wood products, machinery and the transit of commodities between eastern and western Europe. The economy, which has been hurt by the currency collapse in Russia, grew at an annual rate of 2.1 percent in the fourth quarter, its slowest pace since the beginning of 2011. The economy will expand 2 percent this year, the central bank estimates, compared with 11.6 percent in 2006 prior to the housing crash.

Lending has plunged since the boom years, central bank Governor Ilmars Rimsevics said in an interview on public TV on Feb. 24.

“Commercial banks lent in a month about 400 million euros, and at the moment that kind of money from the commercial banks is not poured into the Latvian economy in a year,” he said. “This is not a normal situation.”

Low Demand

Total mortgage loans fell to 4.7 billion euros ($5.3 billion) in January, down 5.6 percent from the year earlier and 35 percent below the 2007 peak, according to central bank data.

Latvia’s “creditless recovery” has been unusually long compared with other countries, Shekhar Aiyar, the IMF’s mission chief to Latvia, said on March 2.

With 10.2 percent unemployment in Latvia, bankers say a lack of demand accounts for much of the decline in mortgage lending.

“I think it’s mostly due to low demand,” said Baiba Tetina, head of retail lending at the Riga-based Citadele Banka AS. While clients with good credit are rarely turned down for mortgages, many applicants are unsuccessful because they have too much debt or large short-term loans, she said.

The government has increased credit standards to prevent another housing bubble. It created a credit registry to track lending, required borrowers to apply for loans using only legally declared income and set a minimum 10 percent down payment for home loans.

Shifting Risk

On Sept. 25, lawmakers by a large majority passed the mortgage measure, which applied only to new loans, to boost demand. At a time when many Latvians homeowners are underwater, would-be borrowers are reluctant to enter the market. About a third of Swedbank’s mortgages in Latvia are underwater, with the loan balance exceeding the value of the home, the bank’s Estonian unit said in December.

The non-recourse law reduced the risk to borrowers by letting them walk away from their mortgage debt in a bankruptcy.

“If the risk is shifted to the bank, then the demand for loans would be bigger,” said Alf Vanags, the director of the Baltic International Centre for Economic Policy Studies.

The Latvian Association of Commercial Banks voiced opposition to the non-recourse proposal, saying it would compel banks to lift down payments for mortgages to cover their risk. In October, SEB doubled its required deposit to an average of 30 percent, said Panke, the spokesman.

Down Payments Jump

“The legal changes were originally meant to go into force on January 1, yet the effect on the real estate market, the rental market and mortgage lending was immediate,” said Panke.

One month later, Swedbank’s Latvian unit also doubled its requirement to between 30 percent and 40 percent, said Ainars Balcers, head of consumer lending at the unit.

“That’s a higher risk for the lender, which in most cases also means a larger down payment and higher interest rates,” said Balcers.

Nordea followed suit, raising down payments from a minimum 15 percent to 30 percent in mid-November, said Rasmuss Petersons, the credit department director for the bank’s Latvian unit.

Lawmakers, facing the threat of a massive retrenchment in lending, on Feb. 19 overturned the provision making non-recourse loans mandatory. Under the amended law, banks must offer non-recourse loans as a choice to consumers, but the high cost of these mortgages will make them unappealing, said Andrejs Elksnins, an opposition lawmaker with the Harmony party.

Very Suspicious

After lawmakers retreated, Janis Abolins, a board member of the Latvian Borrowers Association, submitted a complaint to the Competition Council, a government agency. Abolins accused lenders of improperly colluding to overturn the law.

“It can’t be that suddenly at one moment almost all the banks raise the down payments, that is very suspicious,” said Abolins.

The Competition Council is evaluating the complaint, spokeswoman Inita Kabanova said in an e-mail on Feb. 20, without providing more details. The banks said they deny any wrongdoing.

“Credit conditions are dictated by the market, competition and legal rules,” said Balcers. “By contrast, the wish of some politicians to build political capital with populist statements is a long and persistent phenomenon.”

Vjaceslavs Dombrovskis, a member of Parliament with the Unity party, echoes the banker’s view. He said the September law, which passed less than two weeks before parliamentary elections, was politically motived and an ill-conceived policy.

Political Motive

Lawmakers “did something that they thought was popular before the election, without thinking about the real consequences of the actions,” said Dombrovskis, who was the economy minister at the time of the vote. “This shields the gullible from taking on the risks that they do not understand. But it does not allow those that are good risks to get better deals.”

Banks like SEB and Nordea said they may participate in a government program to guarantee down payments. The program, which lawmakers also created in September, uses guarantees to lower down payments to as little as 5 percent of the purchase price from 15 percent or more, depending on the number of children in the buyer’s family and the cost of home, said Tetina of Citadele, which participates in the program. The program, which is starting small, may provide guarantees to as many as 600 families.

SEB is also working to ensure down payments are ready to fall to 15 percent on March 1, according to Panke

“We are waiting for the banks to carry out their social duty to increase lending,” said Economy Minister Dana Reizniece-Ozola on public TV. The parliament is trusting banks to give out more loans by changing the law and the government will check to see if “banks’ attitude has improved,” she said.

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