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Think before EU speak


“What were they thinking?” cried the European ABS market this week as the full impact of what originally seemed like an innocuous ban on an already illegal mortgage product became clear.

Forbidding the inclusion of any loan in a securitization where a borrower was made aware that the lender “might not” have checked some of the information is provided to them, could disqualify many legacy mortgages in Europe from securitizations and halt Europe’s attempts to reinvigorate the market.

A number of performing self-certified loans are already in RMBS portfolios across Europe and the vague language of the proposed ban on their use in securitizations could catch a number of other products in its wake.

In buy-to-let mortgages, lenders often prioritise rental income over salary making self-certification of the borrower's income a moot point. But under a literal interpretation of Europe’s self-cert ban, the morgage would be disqualified from any securitization after 2019.

That’s not to say anything of the vast number of non-performing loans which Europe wants off bank balance sheets, where the new rule could prevent any from being securitized.  

The rule is a harsh enough measure by itself because it could disqualify so many loans. European authorities may have unintentionally cut the legs off the market they claim they are trying to help.

Precise language is vital in regulation and the vague nature of the European proposals brings to mind an old adage with a new twist.

Sticks and stones may break my bones, but words can hurt a market.