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Datio in solutum

25 September 2015
Richard Kemmish

To finish my collection of posts on social housing (for now) I’d like to turn the question around. Ask not what covered bonds can do to help social housing, ask what social housing can do to help covered bonds.

One of the under reported parts of the Mortgage Credit Directive allows European banks to offer mortgages with datio in solutum clauses. That is, if the borrower is in arrears and those arrears are greater than the equity in the property, they can simply hand the property back to the mortgage lender and walk away without personal liability for the rest of the debt.

This is the norm in many of the states in America and was cited by many, perhaps unfairly, as a contributory factor to the housing crisis. I would not for a moment suggest that such clauses would precipitate a similar crisis in Europe, our loan-to-value ratios are more responsible, we use other measures of affordability when granting mortgages, the risk weights of mortgages are higher and the difference between the build value and market value of properties is far greater in most cases. And of course we have covered bonds, with their inherent conservatism, whilst America has, ahem, other capital markets ways to fund mortgages.

But undoubtedly the introduction of datio in solutum in Europe would increase the riskiness of the assets that back our bonds. The fact that the directive made it voluntary for mortgage lenders suggests to me that no one will actually introduce it in practice, why would they?  Which makes it rather odd that the possibility is even contemplated in the directive.

What has this got to do with social housing? The pressure for this clause – initially it was proposed that it should be compulsory – came from those countries that do not provide an adequate social housing safety net which (coincidentally?) often happen to be those countries where house prices have declined the most (no, not coincidence, they decreased the most because they increased the most. They increased the most because of a different view of the contribution of the house to social status. But that is a digression).

If the housing debt is full recourse to the borrower and there is no or inadequate social housing provision in society then the implications are far more serious for borrowers in arrears. And this feeds, ultimately, to political pressure. British readers may be familiar with the seminal impact of the play ‘Cathy Come Home’ on British housing policy in the 1960s.
Datio in solutum can be seen as an alternative to relaxing personal bankruptcy laws, which also happened in countries with the highest house price declines and poor social housing.

As the European Court of Human Rights has recognised in some landmark recent rulings, either you have emergency and adequate alternative housing provisions or creditors have a weaker ability to enforce on the security backing the loan. The ultimate extension of which is datio in solutum. 

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