Last week, the Government announced that it had reached an agreement with the banks to relieve foreclosed households ahead of interest rate hikes. While such a headline may initially seem like bad news, as interest rates are barely rising and we are already seeing “bailouts” for those who have borrowed beyond their means, if you do a little research on the specific measures, you will see that they are not. so bad.
Whenever there are reliefs for groups that have engaged in excessive risk behavior, the impression is given that wrong behaviors are being encouraged and therefore not a good idea. But on this occasion there are several factors that make the measurements correct.
What the Government agreed with the bank
The first thing is to review what was agreed. it's basically a modification of the Code of Good Practiceswhose adhesion by banks is voluntary, but mandatory compliance once they have decided to join.
These modifications are two: one for the most vulnerable families (with incomes below three times the IPREM, 25,200 euros per year) and families with a slightly lower vulnerability (incomes below three and a half times the IPREM, 29,400 euros).
The most vulnerable families have a grace period of two years, a reduced interest rate in these years and extending the mortgage term to seven years. It is estimated that 300 thousand families can take advantage of this measure.
Households meeting the second income criterion can benefit from some improvements if the mortgage payment exceeds 30% of income and the payment has increased by at least 20%. In this case they can freeze your quota for 12 monthshave a reduced interest rate for that period and extend the term to seven years.
In addition, the expenses for changing the mortgage from variable to fixed rate will be reduced and it will also be they will reduce commissions for early repayment. An interesting topic because it can make a big difference.
Good for those affected, good for the banks, no public money
The first positive news is clear: these measures are a relief for vulnerable families whose mortgages are going up. Regardless of having been reckless in not predicting an increase in rates that all experts announced (because the mortgages most affected by increases in installments are actually those signed in the last five years, due to the French amortization system), the truth is that generally This type of family has less information.
If history tells us that the great specialists are capable of underestimating the risks of the markets (just look at the behavior of Banks around the world just before the Great Recession) let's say no more people with low income.
On the other hand, the measure benefits banks, who prefer to have a slightly lower income in the short term than having to maintain houses that they do not know how to sell properly and is not their main business. Banks, therefore, also benefit from these measures, which are also clear and awake.
And, finally, there is a third great advantage: there is no mention of putting public money to relieve families. They are simply relief measures in which the government mediated between many affected but not connected families and the bank.
Are they perverse incentives?
The main criticism that can be made of this measure, therefore, is that it can encourage incorrect behavior, that is, they are perverse incentives. Anyone thinking of taking out a mortgage now, rather than taking out a fixed rate mortgage as has been recommended for years, will take a variable rate and if they come bad you'll know there's a rescue.
However, if the measures are studied carefully, it is realized that yes, they are a relief in the short term, but the cost is being paid by the mortgagee (along with the banks for a certain period at lower rates). Grace periods or payment freezes imply that the principal increases, which means that when the house payment ends more than initially agreed will have been paid.
Extending the mortgage term to 7 years has the same effect: the payments are lower, but at the end of the mortgage's life, more will have been paid. It is therefore a temporary relief, but one that does not imply a “ransom” per se. Therefore, no one should consider these mechanisms if they are not considered strictly necessary to save the family economy. They are not, in my view, perverse incentives.