Homeowners can hand back the keys

Homeowners who cannot repay their mortgages could just hand back the keys, US-style, under EU legislation voted for by members of the European Parliament.

The lenders would also have to take steps to get the best possible price for any homes they repossess and sell on the market, to make sure borrowers were not left with huge, outstanding debt.

But the conditions under how this would operate will be set by the government, which will be under a lot of pressure from banks to ensure borrowers do not just walk away from their debts.

It would be a huge relief, however, for the thousands of Irish homeowners in negative equity whose mortgages are worth much more than the homes they borrowed for, but would place massive pressure on banks struggling under mounting bad debt.

Handing back the keys and much of the new rules were negotiated by the Irish Government when it held the EU presidency earlier this year. However, a government spokesperson said the new rules would not change the situation here, but would help ensure the arrears situation does not happen again.

A European Parliament spokesperson said member states would have a lot of flexibility in how they applied the legislation. For instance, handing back the keys will have to be agreed between the lender and borrower but governments will be able to make this obligatory if they wish.

Under the rules, every borrower will have to be given a standardised information sheet, explaining exactly the conditions of their mortgage. Almost 60% of borrowers admit to not understanding how their mortgage works. This will allow borrowers to better compare mortgage deals and should help with cross-border borrowing, too.

Lenders will be forced to properly assess the ability of the borrower to repay the mortgage — in Britain almost half of lenders did not verify the income of those they lent to, while 70% of mortgage applications overestimate their income and understate their commitments.

Staff assessing a customer’s credit worthiness will be banned from being paid a bonus based on how many loans they approve or reject. Lenders and intermediaries will have to be registered, authorised and supervised by national authorities, must be insured, trained and have a clean police record.

Property assessments will have to be carried out by a professional and independent evaluator. Anybody claiming to offer independent advice must represent a number of lenders while borrowers will have the right to repay mortgages early without suffering penalties.

The new laws will apply to home mortgages only and to those with an office or some land attached. It was broadly welcomed by BEUC, the EU-wide consumer body, but its director general, Monique Goyens, warned that large loopholes remain: “We urge governments to go beyond the baseline provisions. When people’s homes are at stake they cannot afford to be sold a bad deal.”

MEPs insisted they want to be assured by governments that they will fully implement the new rules, and discussions on this will take place over the next few weeks.