Housing Standards 2004/2005
Financing Housing and Refurbishing Housing Estates

4. The Effectiveness of the System of Financing Owner-Occupied Housing in the Czech Republic

4.3 Mortgage Loans in the Czech Republic - A Qualitative Analysis

• In the sphere of financing Czech mortgage loan providers are not experiencing a lack of resources or a need for additional financial tools that could enable them to obtain additional cheap sources. In order to make mortgage loans less expensive it would help to reduce the yield required by investors into mortgage debenture bonds. According to the comments of some representatives of mortgage banks, Czech investors do not yet appreciate the higher security of the mortgage debenture bond (although the quantitative analysis did not confirm this analysis).
• Czech mortgage loan providers, unlike the situation in countries with advanced mortgage loan markets, do not offer practically any advantages targeting so-called first-time buyers (i.e. people who are acquiring their first owner-occupied housing). The solvency criteria are applied more or less across the board to all applicants, and the banks are trying to make loans accessible only by means of added security (a co-applicant), the supply of a broad range of interest rate fixings, and various promotional activities in the form of discounts on the fee for a setting up a loan. This fact makes loans less accessible, especially to young people, who, as the Postoje k bydlení 2001 survey shows, constitute the main body of potential clients for mortgage loan providers. The complexity of the market (the supply of products) and the effective assessment of risk (the projection of some of the client's "weaknesses" into the risk premium when the interest rate in being set) are weak, and therefore for many potential clients loans continue to remain out reach.
• The Czech mortgage loan market lacks a broader spectrum of products (a flexible mortgage rate, reverse mortgage, etc.) combined with a more elaborate supply of consultancy services on the part of specialised institutions, which could explain to clients the principles involved in various products, their advantages and disadvantages, and would help them to obtain the loan best suited to their needs. The existing alternatives to the traditional model of mortgage loan with a fixed annuity payment are not adequately marketed to the public. In this direction it is evident that specialised mortgage banks in the Czech Republic provide a bigger range of products, payment options, and generally a more individualised approach to clients compared to general banks.
• The risk of a fall in prices in the real estate market is generally underestimated, which is projected into the methods used to value collateral real estate, methods that are not convincing or transparent, which are usually restricted only to real estate serving as collateral for mortgage loans of a high nominal value, or for foreclosure in the case of problem loans. Banks evidently rely on a relatively conservative initial valuation of real estate and thus far the relatively low value of average LTV.
• Penalties for the early redemption of classic (targeted) mortgage loans are intolerably high, and under the circumstances of rising interest rates very hard to defend. These sanctions complicate and raise the cost of re-financing existing mortgage loans in the case of a sale of real estate subject to secure interest, and they act to reduce the competition between financial institutions offering mortgage loans (the client is bound to one bank throughout the entire term of payment on the loan) and motivate clients to engage in riskier behaviour (clients are "pressed" into fixed rates for the short term so as to avoid entirely forfeiting the option of early mortgage redemption).
• The competition between banks at present is focused mainly on obtaining new clients, while competition over clients transferring between individual banks is practically insignificant. This results in high transaction costs for clients in connection with the move to transfer from one bank to another (the need to again assess the client's solvency, to estimate the price of real estate, fees connected with setting up a loan, etc.).
• Existing bank clients are left in a position of insecurity about how the new interest rate will be set after the agreed fixed-rate term is over. In this sphere there is room both for the use of methods to provide the client with greater security and for more competition between banks (in the form of easing the transition from another bank, firmly establishing rules relating to how new interest rates are set in contracts or in business terms, etc.).
• Representatives of banks providing mortgage loans do not in general view building savings banks as direct competition. Although occasionally it was mentioned that state support for building savings puts the banks into a slightly more disadvantaged position, but it was by no means seen as a fundamental problem that the mortgage loan providers were interested in dealing with immediately. It may of course also be because many banks providing mortgage loans are members of financial groups that also contain building savings banks (a model similar to the German system of market-based financing for owner-occupied housing). Competition within these powerful financial groups can be limited by the specific internal rules of the particular financial group. Naturally this concentrate can produce a certain degree of inefficiency, but that particular point was not examined in the scope of this project.
• What increases the risk for banks providing mortgage loans, and therefore also increases the costs of mortgage loans, is, according to the respondents in the survey, inefficiency and the slow pace of the courts in connection with security interest transactions, the inefficient and slow pace of work of the real estate register (insecurity relating to recording the security interest in the real estate register and the possibility to issue mortgage debenture bonds for a mortgage loan that has been granted only after confirmation that the security interest has been recorded in the register, i.e. often only after several months).
• <<< back
• main
• next >>>

---

Optimized for Internet Explorer 4.0 or higher.
©SEB