Home Alone Low Interest Rates Hobble Mortgage Banks

The European Central Bank's low interest policies are not only hurting insurance companies and pension funds. Now, Germany's home loan banks are paying the price.
Out on a limb.

Home loan banks in Germany are finding themselves under increasing pressure to deliver on contracts signed by customers before the European Central Bank changed interest rates to a record low.

The customers in question benefit from interest rates of up to 4 percent, compared to new customers, who only receive 0.25 percent.

“Low interest is eating into our assets bit by bit,” said Andreas J. Zehnder, president of the German association of home loan banks. This puts pressure on the banks' revenues. They are barely making any profit on their investments anymore, but have to pay long-term customers according to pre-crisis conditions.

“Customers who have high-interest loans would prefer to keep their contracts running instead of cashing in,” Mr. Zehnder said.

Home loan banks help individuals to save for homes and work like building societies in the U.K. or savings and loan associations in the United States.

In Germany 30.2 million people are currently investing money in mortgages to build, buy or modernize houses or apartments. They sign up for special accounts in a tradition known as “Bausparen” or contractual savings for housing, which can run up to 20 years. According to the German Association of Home Loan Banks, 13,000 new contracts are signed every day.

This is a problem that you cannot solve by sitting around. Elke König, President, German Federal Financial Supervisory Authority

Lately, the business has been struggling with the ECB’s low interest policies. The only way out is to lower costs and cancel long-term contracts.

“This is a problem that you cannot solve by sitting around,” BaFin’s president, Elke König, said. According to inside sources, her office is trying to convince home loan banks to cancel old contracts that became too expensive. A BaFin spokesperson denied this.

"It is simply false that BaFin is pushing home loan banks to systematically terminate contracts of expensive customers," Sven Gebauer of BaFin said.

Neverthless, some institutions in Germany have already started to terminate long-term contracts that matured more than 10 years ago and are encouraging these customers to collect their accumulated capital. Three weeks ago, the Landesbausparkasse (LBS) in Bavaria, cancelled 26,000 contracts from customers that still benefit from a 3.5 percent or higher interest on their money.

LBS Hessen-Thüringen ended 4,500 old contracts, arguing that customers keep them running because of high interest on their savings, and this is against the original purpose of the contracts, which was to save for a home.

The closures triggered a wave of appeals from customers, as the banks are acting in a grey area, with no clear law to guide their actions.

BaFin allegedly wants to persuade the finance minister to change the law in a way that would facilitate terminating old contracts and to extend that authority to its own office, so it could intervene.

"There is a discussion with the finance ministry about a possible amendment to the home-loan law," Mr. Gebauer said. "But I cannot comment on the content of that exchange."

Finance minister, Wolfgang Schäuble of the ruling Christian Democrats, Chancellor Angela Merkel’s party, has rejected these plans so far.  The mortgage business in Germany could suffer image damage with such a move, a ministry spokesperson said.

At the same time, these banks will have to reorganize their institutions to avoid any Lehman-like disaster in Germany in the future, according to BaFin. Mortgage banks will face stress tests, just like regular banks have in recent months. The goal is to find out what effect the ongoing low interest will really have on German home loan banks.

The test results will be published by the end of January next year.


This article first appeared in WirstschaftsWoche. Christian Ramthun is the deputy editor in chief of the magazine's Berlin bureau. To contact the author: [email protected].