Opinion of the European Central Bank of 20 March 2023 on mortgage holidays (CON/2023/8)

OPINION OF THE EUROPEAN CENTRAL BANK of 20 March 2023 on mortgage holidays (CON/2023/8) Introduction and legal basis

On 7 July 2022 the Polish Parliament adopted the Law on crowdfunding for business ventures and assistance to borrowers (hereinafter the ‘Law’) . The European Central Bank (ECB) has decided to deliver an own initiative opinion on the Law. The ECB’s competence to deliver an opinion is based on the last paragraph of Article 127(4) and Article 282(5) of the Treaty on the Functioning of the European Union since the Law concerns the task of the European System of Central Banks (ESCB) to contribute to the smooth conduct of policies pursued by the competent authorities relating to the stability of the financial system pursuant to Article 127(5) of the Treaty, and the ECB’s tasks concerning the prudential supervision of credit institutions pursuant to Article 127(6) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the Law

1.1 The Law, in addition to implementing and ensuring the application of a number of Union directives and regulations, introduced the concept of ‘mortgage holidays’ to alleviate the burden on borrowers with outstanding mortgage loans following the recent increases in interest rates by Narodowy Bank Polski. According to the explanatory memorandum accompanying the Law, an increasing number of borrowers bear mortgage loan servicing costs in excess of 50 % of their monthly household income. 1.2 The Law gives consumers with outstanding mortgage loans in Polish zloty the right to suspend their mortgage payments for a specific period of time. Loans indexed or denominated in a currency other than zloty are excluded from the mortgage holiday scheme. Under the Law, a borrower may only suspend the repayment of a loan in relation to one contract concluded for the purpose of satisfying his own housing needs. To exercise this right, borrowers must simply submit a request notice to their lender, without any discretion for the lender to grant or not to grant the suspension. The loan period is extended with the period of repayment suspension. During the suspension period, borrowers are not required to pay principal and interest installments, except for insurance charges linked to their respective contracts. 1.3 Borrowers may suspend loan repayments for: (i) two months in each of the periods from 1 August to

30 September 2022 and from 1 October to 31 December 2022 and (ii) one month in each quarter in the period from 1 January to 31 December 2023.

2. Scope of the opinion

This opinion focuses on the impact of the Law on the banking system and financial stability in the euro area. It does not cover the impact of the Law on Poland’s financial stability, its banking system or economy.

3. Impact of the Law on the banking system and financial stability in the euro area

3.1 The Law applies to credit institutions directly supervised by the ECB within the framework of the Single Supervisory Mechanism through their operations in Poland. The Law does not prescribe any specific eligibility criteria to limit the scope of borrowers entitled to request a mortgage holiday, other than that the loan must be denominated in zloty and satisfy the borrower’s housing needs. 3.2 Granting concessions, such as payment holidays, to borrowers facing financial difficulties can support financial stability under certain circumstances by, for example, allowing such borrowers to recover from temporary liquidity shortages, while enabling lenders to maintain client relationships and avoid selling collateral at depressed prices. 3.3 However, widespread and untargeted payment holidays give rise to financial stability concerns. On the one hand, where borrowers are facing debt sustainability problems, payment holidays may delay the recognition and resolution of non-performing debt, which increases its economic cost. On the other hand, if borrowers who are able to make payments benefit from a payment holiday, the negative financial impact will unduly reduce bank profitability and increase uncertainty. Reduced bank profitability in turn implies reduced capacity for banks to retain earnings and thus to increase bank capital needed to absorb losses and back future loan origination. This, together with increased uncertainty, ultimately limits prospective borrowers’ access to credit, including mortgage loans, and could therefore lead to adverse feedback loops between the banking sector and the real economy. In addition, large losses resulting from payment holidays may threaten banks’ solvency. 3.4 In such circumstances, uncertainties arising from the impact of the Law on credit institutions may potentially decrease the franchise value. Subsequently it may increase the difficulty to attract investors for potential equity raising or bonds’ issuances to meet capital requirements and minimum requirements for own funds and eligible liabilities. Had banks known in advance that such a change to the legislation affecting their contractual agreements with borrowers would be made, they could (and most likely would) have protected themselves by charging higher mortgage interest rates or, in the extreme, not lending at all. This means that the legislation is not only allowing mortgage borrowers a payment holiday but that they may in fact receive a financial transfer from their lenders. 3.5 The fact that the Law does not prescribe any specific eligibility criteria, other than that the loan must be denominated in zloty and satisfy the borrower’s housing needs, also raises concerns with respect to the purpose of the Law. In this respect, the ECB refers to its previous statements on this point expressed in a number of opinions on draft laws dealing with the issue of restructuring foreign

currency mortgage loans . In particular, the ECB has noted that the application of certain targeted eligibility criteria, such as linking the right to restructure to the borrower’s actual income position, may be more appropriate. Additionally, governments are equipped with better tools to support the economy other than the mandatory restructuring of loans within the banking system, such as directly supporting distressed borrowers or compensating banks for losses caused by a moratoria in the public interest. 3.6 In this context of increased interest rates, the ECB refers to recent legislation adopted in other Member States that also aims to help borrowers meet their obligations under loan agreements linked, primarily, to residential properties. In particular, the legislation adopted in Spain provides for a code of good practices for vulnerable debtors at risk that credit institutions can voluntarily sign up to for a duration of 24 months. Pursuant to the code of good practices, borrowers may: (i) extend the duration of their loan repayment schedule up to a maximum of seven years; and (ii) convert their variable interest rate loans into fixed interest rate loans. However, eligibility for the mortgage loan restructuring measures is subject to a number of criteria, including that: (i) the purchase price of the debtor’s primary residence does not exceed EUR 300,000; (ii) the annual income of the debtor’s family unit does not exceed approximately EUR 30,000 (or higher in certain limited circumstances); (iii) the mortgage burden multiplied by at least 1.2 in the four years prior to the entry into force of this legislation; and (iv) the mortgage payments exceed 30 % of the net income of the debtor’s family unit . 3.7 Similarly, legislation has recently been adopted in Italy that also gives borrowers the right to (i) extend the repayment schedule for a maximum period of five years (provided that the remaining duration of the loan at the time of restructuring does not exceed 25 years) and (ii) restructure their variable interest rate residential mortgage loans into fixed rate loans. This right, however, is also subject to a number of conditions, which include a maximum income threshold (EUR 35,000) and a capped loan amount (EUR 200,000).

3.8 Portugal has adopted similar legislation as well. According to this legislation, credit institutions that provide residential mortgage credit are required to implement certain procedures when they detect that borrowers with mortgage loans with outstanding amounts of up to EUR 300,000 are facing financial difficulties due to the rise of interest rates. The regime will be in place until 31 December 2023. More specifically, signs of deterioration in the financial capacity of the borrower are detected when customers’ debt service-to-income (DSTI) ratio reaches 36 %, as long as certain specific conditions are fulfilled (designated as a ‘significant worsening DSTI ratio’), or when customers’ DSTI simply reaches 50 % (designated as a ‘significant DSTI ratio’). If a credit institution finds a ‘significant worsening DSTI ratio’ or a ‘significant DSTI ratio’, or is warned by the customer about facts that indicate a deterioration of the customer’s creditworthiness and the credit institution concludes that the borrower has the financial capacity to avoid default, it must propose changes to one or more elements of the credit agreement, including an extension of the repayment period, the application of a grace period for the repayment of the principal and/or payments of interest, the deferral of a part of the capital to an instalment at a future date, and/or the reduction of the interest rate applicable to the credit agreement for a defined time period. Credit institutions may not charge fees or increase the interest rate on the credit agreement because of the renegotiating of the terms of the credit agreement. Credit institutions must monitor their borrowers’ credit agreements permanently and systematically by taking, at least once a month, the necessary actions to identify any signs of payment difficulties . 3.9 Finally, similar legislation was also recently adopted in Romania. While the purpose of the legislation is not the restructuring of outstanding residential mortgage loans, it does aim to reduce borrowers’ burdens, including those resulting from residential mortgage loans. Under the legislation, borrowers may request the suspension of payments representing capital instalments, interest and commissions for up to nine months. Creditors must accept such requests if, among others, in respect of natural persons: (i) the borrower is solvent on the date of the suspension request and there are no pending foreclosure procedures; (ii) compared to the similar period of 2021, there is a minimum 25 % increase in average general monthly expenses in the last three months prior to the suspension request, as a result of the price increase in the context of the current crisis; and (iii) there are no pending debt restructuring plans agreed with the creditor in the three months prior to the legislation’s entry into force. The legislation also applies to borrowers that are legal entities, providing for a separate set of eligibility criteria. In particular, such eligibility criteria include: (i) a declaration that, compared to the similar period of 2021, in the last three months prior to the suspension request, there was a decrease of at least 25 % of the average of the monthly results; (ii) a declaration that the borrower will neither

distribute nor pay dividends during the suspension period and will not grant or repay credits to shareholders or associates, as the case may be (with the exception of public enterprises); (iii) the borrower is not registered with the Centrala Incidentelor de Plăţi (Payment Incidents Registry) with respect to any payment incidents related to promissory notes or checks, in the last six months prior to the date of the request; (iv) the borrower is solvent on the date of the suspension request and there are no pending foreclosure procedures; (v) its net assets’ level is not below half of the share capital’s level according to the annual financial statements submitted and registered with the tax authorities by 31 December 2021; and (vi) at the time of the request, there are no debt restructuring plans agreed with the creditor in the three months prior to the legislation’s entry into force. 3.10 The Polish authorities are therefore invited to consider targeted eligibility criteria for the application of future mortgage payments holidays to limit uncertainty and risks to financial stability. 3.11 The impact of payment holidays on banks’ profitability is further exacerbated by a scheme under which the repayment period is extended in accordance with the number of deferred instalments. Under these circumstances, the present value of the loan has decreased due to the nonremuneration of the mortgage loan for the suspended period. 3.12 Several systemically important euro area banks hold significant Polish mortgage loan exposures. Therefore, general and extended mortgage payment holidays as provided for in the Law raise financial stability concerns in the euro area.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 20 March 2023.

[signed]

The President of the ECB

Christine LAGARDE