Home Loan Crisis To Save or to Build

Germany's home loan banks are in turmoil, their balance sheets stretched in today’s era of low interest rates. Now customers are taking them to court after the banks tried to terminate 200,000 high-interest building loan contracts.
A Wüstenrot advertisement from the year 1954 reading "Germany's biggest building loan society."

Jürgen Schmidt was shocked when he opened a letter from his home loan bank, Wüstenrot, in January 2015. The letter stated that the bank was terminating his building loan contract with immediate effect, because the contract had been mature for more than 10 years.

For Mr. Schmidt, whose contract began in 1988, the termination came as a complete surprise. "It was only in 2013 that I inquired with Wüstenrot as to whether I could continue to save, and they said yes," says the 46-year-old, calling the bank's decision to terminate his contract an "outrage."

Mr. Schmidt, who lives in the western German state of Hesse, quickly decided that the bank's action was unacceptable. He is now suing Wüstenrot.

He is not alone. German home loan banks have already terminated more than 200,000 building loan contracts across the country – and the number of inquiries is only likely to increase.

It’s all part of a new hard-ball effort by cash-strapped home loan banks in Germany, one of the country's biggest financial segments. German savers have concluded close to 30 million building loan contracts, with a total volume of €860 billion.

Many of these home loan banks are facing an existential crisis, unable to pay high interest on the home-loan deposits.

The conflict is the result of ultra-low interest rates across Europe, put in place by the European Central Bank to keep the euro-zone’s economy afloat and encourage consumers and businesses to take out loans.

But what if consumers choose to save their money instead of take out a loan?

Under Germany’s home-loan system, consumers agree to save a specific amount over a set period of time – often 10 years – after which they agree to take out a loan from the bank and use the saved-up money as a down payment. In the meantime, they’re paid interest on the deposits they make into the home-loan account each month.

The trouble comes when consumers don’t take out the loan as promised. That leaves home loan banks paying high interest rates on deposits for contracts that were set up 10 years ago or more – often as much as 4 per cent a year.

We are talking about home loan contracts that may be 22 or 23 years old, on average. They were never intended for such lengthy savings periods. Spokesman, Association of Private Home Loan Banks

Home loan banks have decided to take action. From their perspective, the failure to act on the deal is a sign that their customers apparently no longer wish to accept a loan from them. They began targeting any contracts that reached maturity at least 10 years ago.

"As a result, building loan contracts with higher interest rates – well beyond maturity – are being used purely as a financial investment," said Wüstenrot, explaining its decision in the case of Mr. Schmidt. According to the bank, such use defeats the purpose of the contract.

Mr. Schmidt disagrees. He insists that he still intends to redeem the building loan contract, and that he has simply not been able to build a house yet. Mr. Schmidt and others argue there was never a condition stipulating that he had to take out a loan in a fixed period of time.

Niels Nauhauser is familiar with many similar cases. This year hundreds of savers with building loan contracts have submitted complaints about terminations by their home loan banks to Mr. Nauhauser, a consumer advocate in the southwestern state of Baden-Württemberg. He has already received 1,600 inquiries, almost four times as many as in all of 2014, so many, in fact, that he can hardly keep up with the responses.

Home loan banks aren’t about to let up, however. Their very existence may depend on it, as they simply can’t afford to continue paying the high interest rates on deposits.

"The terminations will most certainly continue," says a spokesman for the Federal Association of State Home Loan Banks, noting that all the contracts targeted are ones that exceed the 10-year limit.

The cases range from long-term contracts, with total agreed savings of several tens of thousands of euros and terms exceeding 40 years in some cases, to contracts that have only recently passed the 10-year maturity date but with balances of hundreds of thousands of euros.

Under some of the contracts, customers were promised returns on their deposits of up to 4 percent. But in light of low market returns, home loan banks are having trouble earning the funds in the capital market that they need to live up to their obligations. To escape the interest-rate squeeze, they are terminating contracts with high interest rates.

Once the cancellation period has expired, they transfer the savings balances to customers' bank accounts or send them a check. But like Jürgen Schmidt, many savers with building loan contracts are unwilling to accept this solution, and thousands have filed complaints with arbitration boards.

The ombudsman for the Association of Private Home Loan Banks, who represents Schwäbisch Hall, Wüstenrot and BHW, among others, has received 2,900 complaints since the beginning of the year. Half of them relate to terminations of building loan contracts.

Hundreds of customers have bypassed the ombudsman and taken the termination letters directly to an attorney.

But apparently not a single case is currently in arbitration. "The ombudsmen believe that the arbitration process cannot take place," says an official with the Association of German Public Banks, which manages arbitration for the state-backed home loan bank LBS.

The reason there are no arbitration proceedings: The official noted that the cases involve a fundamental legal issue on which no high court has ever issued a ruling.

In other words, to establish a reliable legal basis, a ruling by a higher regional court is needed, preferably even a decision by the country’s highest court, the Federal Supreme Court (BGH).

Experts estimate that if that court were to decide in favor of consumers, home loan banks could quickly incur many millions in losses.

But it will be some time before such a verdict is reached. "We will not see a decision by the BGH before 2016," says Markus Feck, a legal expert on banking with the consumer assistance office in the western state of North Rhine-Westphalia.

Like many of his counterparts in other states, he has no doubt that a court ruling will have to come eventually, especially as the number of complaints is increasing by the day. A regional court in the southwestern city of Heilbronn has already elevated the importance of the matter, scheduled the first of the cases to be heard by the entire court rather than first evaluated by single judge, partly because of the "anticipated large number of future cases," says a spokesman.

Frankfurt attorney Klaus Hünlein says he has already filed 400 complaints, and that about a dozen new complaints are being added each week. About half of these cases are pending before the Hanover Regional Court and involve Postbank subsidiary BHW and LBS Nord. The Stuttgart Regional Court estimates that it has already received at least 40 complaints.

"The purpose of saving for a building loan is not fulfilled upon allocation. This only occurs when the agreed savings amount has been reached or when the saver takes advantage of the building loan," says attorney Mr. Hünlein. This, he argues, is why the banks should not be allowed to terminate the contracts. "In addition, the home loan banks have the option of reserving the right of termination in the terms of the building loan contract, but they did not consider this necessary."

Even 10 years after maturity, many savers depend on their ability to take advantage of a building loan. "The customer has an open-ended option on the loan," says Tobias Pielsticker of the law firm Witt Rechtsanwälte. "Most of our clients say that they want to use the money for renovations or refurbishments."

 

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The home loan banks feel that they are in the right. They argue that obtaining a building loan is clearly no longer a customer's primary purpose when a contract reached maturity 10 years ago, and point out that saving for a building loan is saving intended for a specific purpose.

"We are talking about contracts that may be 22 or 23 years old, on average," says the spokesman for the Association of Private Home Loan Banks. "They were never intended for such lengthy savings periods."

The legal controversy revolves around whether the home loan banks used deposit interest rates to attract customers. If this is found to be the case, it will benefit savers. In advertising its variable rates, LBS stated: "If you are among the yield-oriented savers interested in a good, long-term financial investment, you should take a closer look at our Vario 3, or high interest rate." Customers who choose this option would earn 4 percent interest on their savings.

There is currently no consistent, nationwide case law on the issue. So far, there are six known decisions issued by regional courts, and in each case the court ruled in favor of the home loan banks. Two local courts have ruled in favor of the savers.

Some of the plaintiffs have filed appeals, and the first cases were already brought before higher regional courts in Celle, Koblenz and Cologne. A case before the Stuttgart Regional Court was settled out of court.

"In my experience, the home loan banks will want to avoid the possibility of the court ruling in favor of the plaintiffs, and upon the court's recommendation, they will agree to a settlement," says attorney Patrick Zagni, who achieved the Stuttgart settlement for his client.

In Jürgen Schmidt's case, local judges in Ludwigsburg ruled that Wüstenrot could not invoke a right of termination. The verdict is not legally binding yet, and Wüstenrot is considering filing an appeal.

Mr. Schmidt, who is determined to keep fighting, says: "I will take this as far as possible, no matter how much it costs."

 

Elisabeth Atzler, Matthias Streit and Reiner Reichel are editors at Handelsblatt in Düsseldorf. To contact the authors: [email protected], [email protected] and [email protected]