Romania’s Senate endorsed on February 29 a controversial bill on mortgage loans, under which individual borrowers’ liability will be limited to the collateral. The bill still has to be approved by Romania’s lower house of parliament, the Chamber of Deputies, which will be able to amend the text.

Under the bill, mortgage holders would be able to give collateralised property back to banks in exchange for final termination of their contracts with no further penalty. It is based on the principle of datio in solutum or “giving in payment” where a debt is discharged using an asset rather than money. Both commercial banks and Romania’s central bank have fiercely criticised the bill which they say will damage the mortgage lending market.

The original bill was endorsed by lawmakers last autumn before being returned to the parliament by President Klaus Iohannis. Since then, senators have restricted the application of the bill to mortgages for the borrower’s main home, and it does not apply to individuals buying investment properties. The final decision on the form of the law will, however, be taken at a later moment by the Chamber of Deputies.

Under amendments approved by senators, it will also apply only to loans below €150,000 at the time they were extended by the bank. The later limitation, requested by the central bank as part of a broader set of restrictive amendments, was accepted by senators on the day of the final vote.

The bill will apply to properties purchased under the state-guaranteed Prima Casa (First Home) programme, where the state guarantees mortgages for first time buyers. Bankers claim the the bill will make it impossible for the programme to continue.

Bankers say the bill will force them to demand higher deposits from borrowers, which would make it harder for young families to buy their own homes. They say they will not afford financing a share of total property larger than 65%-70%. The bill also violates the principle of non-retroactivity, banks claim.

However, regarding the effects of the bill in the future, banks will have to better evaluate the risks before extending a mortgage loan as a result of the bill – if endorsed in the current form. Regarding the effects of the bill on existing loans, the fairness is debatable – but only customers under major financial constraints would use it since most would have already paid a large sum of money for their property.

Tighter access to mortgage loans would prevent excessive rise of property prices, thus preventing the main risk faced by banks in regard to the new bill – namely the risk of a sudden collapse of property prices that would encourage debtors make use of the bill.

Financing ratios of 60%-65% of the property’s price, with the remaining 30%-35% to be saved by the debtor before the contract, is indeed a strong constraint for the real estate and mortgage loans markets. But the free market, if functional, should in principle encourage banks to increase the ratio of property’s value financed under the loan to the level where it would give access to enough customers while keeping the risks under control. The rating of the customers will become more important.