The most often heard sayings in finance are, “Banks only hand out umbrellas when the sun shines”, and “Banks don’t lend to those who need finance, but do to those who don’t need it.”
The exceptions to these two rules are housing loans, and they occur because banks have your home and your future wages as security. It is a bit of no brainer for banks and a very profitable one. Today’s headline (FT 22.6.2021) in the Financial Times is what happens when banks do things like this!
In fact, it is so profitable that it has become one of the most important source of strong and steady profits fro banks. The business is almost risk-free for them because the security can be readily enforced in the courts when necessary, without heavy costs for the banks, but rather harshly as far as the householder is concerned.
Banks profits increased nicely when the authorities suddenly allowed the banks to stop permitting negative Euribor interest rates as the reference rate for housing loans! In one fell swoop banks were allowed to pocket a non-market profit that more than doubled their interest income on housing loans. We have almost no long term fixed-rate loans here, most of the loans are based on Euribor rates. This decision occurred at a time when the rightwing parties, the Conservative and Centre Party, were in the government. Nordea “owns” the Conservative Party and the Center Party is the proud “owner” of the Cooperative group of banks the OPGroup!
The banks have even taken advantage of the financial crisis by telling the home borrowers that they could stop making loan repayments of their loans for a few years so long as they pay the interest on these loans. This was a wicked contract with the devil. Borrowers should never have stopped making regular repayments because interest rates were, and still are, at record low levels – such periods are the best times for making loan repayments. Not repaying the loans increases the banks’ income, and puts the borrowers at risk when interest rates rise.
The CEO of the cooperative bank, OP Group, here in Finland was particular active here by making grand pronouncements about such a generous bank policy.
Finnish government officials are also concerned about the growth in private debt and the high cost of housing in Helsinki. However the banks’ lobby hard against debt ceilings and the construction companies, 5 of whom have a stranglehold on the market of new apartments, also fight hard to keep prices high for their new and badly built concrete slabs. It is amazing to see that that older well-designed, fully renovated apartments right next to these concrete wonders, are some 30% cheaper! The banks are naturally financing these companies with short-term construction loans.
Another banking treat for unsuspecting new apartment buyers is that the banks are also providing finance to companies that own the land on which some of the apartments are built. The residents in these apartments then have a choice of paying a land rent when they buy the apartment in addition to the normal maintenance fees, or they can buy a share of the land that is attributed to their apartment. Naturally the annual rent increases with inflation and ends up being a nasty extra cost for residents and a nice profit for the banks and the very passive rental companies!
You will hardly ever hear or read any criticism of these practices in the media because people in glass house don’t throw stones. This is a very small market place…