Tuesday, October 07, 2008

Another Promise Not Kept


According to Le Salon Beige, quoting from a post by Anne Kling, Nicolas Sarkozy made the following comments in 2007, when he was campaigning for the presidency:

On mortgage credits:

"French households today have fewer debts than any other nation of Europe. Now, an economy that does not have sufficient debts is an economy that does not believe in the future, that has doubts about its abilities, that is afraid of tomorrow. For this reason I hope to develop mortgage credits for families and to ensure that the State intervenes to guarantee access to credit for sick people. I propose that those whose salaries are modest be permitted to guarantee their loan through the value of their home. (Note: I believe we call this "equity". I'm surprised that the French do not use this method.) We must reform mortgage credits. If mortgages were easier to obtain, banks would focus less on the ability of the person to pay back his loan and more on the value of the property mortgaged. This would benefit directly all those whose revenues fluctuate, such as temporary employees and a great number of independent workers."

There you have the precise description of the subprime process that led to the crisis we all know. Fortunately this promise was not kept...

From this short article we learn that mortgages are not as common in France as they are here. Does this mean that the French pay off the price of their home when they buy it? Or does it mean that they tend to rent rather than buy?

French readers may find the comments interesting. I have to admit I found them a bit confusing. One reader insists that the two systems are completely different because in France a notary public would inform the buyer of the pitfalls, while in the "Anglo-Saxon" method anything goes, and in case of trouble you go to court and a judge decides the matter.

I don't agree. When I bought my house, I was very well informed about everything. Furthermore, before buying I bought a book for potential home buyers explaining the dangers. I also took a course in basic real estate designed especially for those considering buying a house. I knew that my mortgage was "prime", that the interest was fixed, that it was a 30-year mortgage, etc...

What I did NOT know was how hard it would be to find good and reasonable contractors. It is the contractors who maintain your house and make sure it's safe. Unless you happen to be your own electrician or a bricklayer... Friends warned me about the hardships of maintenance, but you have to live through it to believe it.

The photo of Sarkozy looking like a man at the end of his rope is from Le Salon Beige. Obviously a fake, (and a very realistic one), it can be enlarged at the LSB site.

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3 Comments:

At October 08, 2008 2:34 AM, Anonymous Anonymous said...

What people cannot do is use the equity in their home by re-mortgaging the house to use the equity to purchase cars, flat screens, holidays etc., which is what you can do in the UK and USA and is part of the problem.

Also you have to put up a very large deposit, for example I put up 20%.

The cost of buying a house with the Notary fees and what I would call stamp duty is very high and has always been so and of course we should not forget capital gains in terms of second properties, however if you have owned the property for 17 years or more you pay no capital gain.

Also the agents fees are huge!!!

I had the impression from Sarkozys speach at the time that he wanted to enable re-mortgaging to release such demand into the economy.

 
At October 10, 2008 12:58 AM, Blogger tiberge said...

@ anonymous

Sorry about the delay in acknowledging your comment.

What you say is very interesting. If I understand correctly, you do have equity, but any loan you receive when you refinance must be used to pay off the mortgage. Is that correct? Are you saying that the bank that grants you the loan verifies that the money is used only to pay off the mortgage? Every time I have refinanced, the bank has given me a big loan (bigger often than I asked for), and I am free to do with it as I please. But I have learned the horrible dangers of acutually spending this money - you have to pay it back! And it takes forever, so eventually you have to re-finance again. In my case the bank that gives me the loan is also the bank that holds the mortgage, so I get money from one part of the bank and pay it back to another part.

Here we're supposed to make a deposit of at least 5%, but I gave 20% and avoided the cost of mortgage insurance.

As for the notary, it sounds like the same situation we have here when we hire a real estate lawyer. The lawyer may answer our questions and help us avoid pitfalls, but we may have to pay him one or two thousand dollars. In general here, it is not necessary to hire a lawyer, because so much information is available from other sources.

Sarkozy may have wanted to make the French system resemble ours, but this is not a good idea. I feel the French are better off without debts. So this really is a promise that you're glad he didn't keep.

 
At October 10, 2008 3:23 AM, Anonymous Anonymous said...

You can only get the loan to pay for the property, nothing else.

As far as I understand it you cannot remortgage easily because you have to go through a transaction, you cannot just refinance like you can in the UK or USA.

You are unable to borrow against the equity in your house directly.

The high deposit is normally required for new borrowers however if you already have assets then it becomes quite easy...

However there was a bubble in France caused by LMNP's and Law Roubiax. The first is a buy to let scheme where people had been lent 100% mortgages paid back over 30 years. Normally studio appartments or rooms to let like having a share in a hotel on a per room basis, I have to say that there has been some corruption around those.

The second is a special tax scheme where wealthy individuals buy a house to rent to lower income families and they get a tax credit as well as the rent. In 9 years the tax element ends and you sell it.

In terms of the benefit, there are a lot of people like me who are asset rich, but cash poor.

It is like anything, if allowed to excess then it causes boom busts and of course ant politician will do it because in his term he wants the boom, but the issue of France is that due to taxation and wages that have stayed static due to globalisation the lower middle class are turning into a subset of the lower class and that is the issue on demand.

By the way, I must say I appreciate your blog on France. I have given up on the French papers, almost as far left as Obama!!!

 

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