Banks get tough

As the uncertainty on international financial markets continues, banks in Poland are tightening their mortgage lending procedures in order to prevent a situation similar to the sub-prime crisis in the US. But new regulations meant to protect the banking sector and mortgage-takers may yet prove bitter medicine for the residential market as a whole

Increasingly easy access to mortgages was one of the driving forces behind the rapid growth of the Polish residential market in 2006 and 2007 as the leading lending institutions in Poland, eager to capitalize on strong demand for housing, competed to offer the best lending conditions and the cheapest product. Lending periods were ever longer and it became common for mortgages to exceed the value of the property being purchased, a trend that continued even after housing prices stabilized last year.
According to the National Bank of Poland, the total value of private mortgage debt in Poland amounted to approximately zł. 136 billion at the end of July of this year.
In the face of an international financial crisis, however, the lending spree has come to an end. In October, the Polish Financial Supervision Authority (KNF) called on banks to revise their lending policies and tailor them to the new financial situation, thereby avoiding a mass of defaults which could lead to a collapse of the mortgage market.
"According to the KNF, the lack of objectivity and conservatism, in both the assessment of creditworthiness and the acceptance of mortgage applications, may lead to over-exposure to risk. Hence, keeping the safety of the banking sector and clients in mind, the KNF is calling on banks to make the necessary analyses and take action in this regard," the banking regulator said in a communique.

Stringent requirements
Accordingly, a number of banks have already introduced new mortgage lending regulations, including higher margins, stricter creditworthiness assessment criteria and increases in the amount required for down payments. Bank Millennium is a notable example of this - the bank now requires 35- and 20-percent down payments for mortgages denominated in Swiss francs and Polish zloty, respectively. The bank has also set its maximum lending period at 35 years.
"The current lack of trust in financial markets does not fill one with optimism. In response to the present situation, banks are restricting mortgage lending: The measures that they are using, as well as the dynamics of the changing market, lead people who are planning to take a mortgage loan to analyze the various offers more carefully before making a final decision," said Mikołaj Młochowski, a financial advisor at redNet Finance.
According to redNet Finance's data, the average monthly installment for a zł.350,000 mortgage loan taken for 30 years and denominated in Swiss francs has increased by almost zt.300 over the last two months.

Unfair practices?
Financial consultancy Expander noted in a recent report that the introduction of new lending regulations had, in some cases, changed the rules of the game for some clients whose mortgage applications were already being processed. "In extreme cases, the new rules were applied even to clients who had previously received a [positive] credit decision, which may translate into a tangible loss [for them]," the report stated, explaining that a loss could occur in a situation when a client had already made an advance payment on an apartment but then proved unable to obtain the rest of the necessary funds from a bank.
Although unfair, such practices are generally legal. "A bank usually issues pre-approved credit or a credit decision at the beginning of the mortgage-granting procedure, on the basis of which the client can expect the signing of a [mortgage] contract. In practice, however, the pre-approved credit or credit decision often includes a declaration which clearly states that the bank is not obliged to sign the contract and may refuse to grant the mortgage," said Monika Wojciechowska-Szac, a legal advisor and partner at the Wojciechowska & Kotarba legal firm.

An exaggerated reaction
What will the new mortgage-lending regulations mean for the Polish housing market in practice? In the opinion of many developers and market experts, apartment sales will decrease further. According to recent research by CB Richard Ellis and Murator Expo, 18 percent of potential apartment buyers would want to fully finance the purchase of real estate with a mortgage loan, while 26 percent would take loans that covered from 80-99 percent of the property's value.
"The tightening of lending [policies] will mean that those people will simply not be able to buy their own apartments," said Mikołaj Martynuska, head of the residential real estate department at CB Richard Ellis Polska.
According to Grażyna Młynarczyk, marketing and sales director at developer Espais Polska, the new regulations are headed in the right direction, but they go too far. While every initiative aimed at improving the security of real estate transactions is important and necessary, the law should not prevent the majority of those interested in purchasing an apartment from doing so, she stressed. Requirements envisioning 30 percent down payments are far too harsh; setting the down payment level at between 10 and 20 percent would be a better solution, she suggested.
"When introducing new regulations one cannot forget that if there is a sharp decrease in housing demand, which is largely dependent on access to mortgage loans, it may have far-reaching consequences for the whole construction industry," said Młynarczyk.
Radosław Sieroń, president of the board of Mermaid Properties, agreed. According to him, down payments should amount to 15-20 percent of the property's value at most. "The decisions recently made by some banks are, in my opinion, exaggerated. I am afraid that steps to safeguard financial liquidity may lead to a recession in the real estate market," Sieroń told Lokale Immobilia.

Projects on ice
Will restricted access to mortgage loans - and the subsequent fall in demand for housing - lead to a decrease in apartment prices? Not likely, developers claim. It's more likely that they'll move to curtail supply, putting some planned projects on hold.
"I don't foresee a drastic decrease in the price of new apartments, partly because of the fact that the proportion of [new] completed units in the market is still relatively low," said Ewa Perkowska, a commercial director at Budimex Nieruchomości. She added that there were already instances of developers postponing the completion of new investments in anticipation of another period of prosperity in the market.
Espais' Młynarczyk said that supply of new residential units would soon drop, as developers are also having difficulty securing financing for their projects. Moreover, the stock of apartments purchased by speculators in the past is gradually being depleted. "Taking these factors into consideration, we are of the opinion that a decrease in apartment prices is not to be expected in the near future," said Młynarczyk.
Mermaid Properties' Sieroń, for his part, expects that the new lending regulations and the subsequent inability of many people to purchase their own apartments will lead to an increase in demand for rented accommodation, as well as an increase in renting costs. "We are considering establishing a fund that would buy apartments from developers for renting purposes," he said.



Adam Zdrodowski