RIGA — Latvia’s bankers, both public and private, have taken to the airwaves and newsprint to assail a proposal by the head of government to shield homeowners who have defaulted on the mortgages.
The legislation, which is in an embryonic stage, would essentially limit banks to collecting only the collateral on a defaulted mortgage loan, and not the full value of the loan. If the proposal were adopted and passed into law – and quite possibly retroactively – it would amount to enormous losses for Latvia’s banking sector.
“Changes shouldn’t be made retroactively, otherwise we can expect international litigation, which Latvia will lose,” Valdis Siksnis, head of the local branch of Nordea, told Latvian Radio Friday. “What’s more, investors would see that Latvia is a country that changes the rules in the middle of the game.”
Uldis Rutkaste, deputy head of the Bank of Latvia’s monetary policy department, was less diplomatic. “If the government adopts this, it will shoot itself in the foot,” he told the Bizness & Baltija paper in an interview published Friday.
“We need to look a bit into the future. Who will credit us? Would someone lend you money after you returned them only half the sum and asked them to forget the rest?” Rutkaste said. He said it was important to protect borrowers somehow, but that the solution had to be found by finding a compromise between all participating parties.
Earlier this week Prime Minister Valdis Dombrovskis ordered the government’s legal experts to draft legislation that would prevent banks from collecting the full value of a defaulted mortgage. According to his vision, the law would limit banks to the amount of collateral. Considering how sharply real estate prices have fallen in Latvia, this would essentially mean banks would only get half the value of the loan in cases when it repossessed a person’s home. Such a bill would easily pass in the Saeima, and a spokesperson for Dombrovskis has said it would take about a month to draft, adopt and pass the legislation. The prime minister’s spokeswoman Liga Krapane has stressed that the legislation is just an idea at this stage.
Regardless, Swedish officials blasted it, with Financial Markets Minister Mats Odell saying such a bill “would be of great harm to Latvia and its people not only in the long run but also in a direct way.”
Sweden would be hit the hardest if the bill ever saw the light of day, since two of its banks — Swedbank, SEB and Nordea — are heavily exposed to Latvia’s mortgage market. Analysts have interpreted Dombrovskis’ sudden call for homeowner protection as brinkmanship in talks with international lenders, including Sweden, who in recent days have harshly criticized Latvia for failing to fulfill its promises and cut next year’s budget deficit by 500 million lats (€700 million euros).
