Fast repossessions may help housing market

European housing markets need to see more repossessions in 2010 to bring limp credit markets back to life, or months of mortgage scarcity could morph into years of stunted house prices, fewer sales and more costly home loans.

Europe has largely escaped the wave of foreclosures that has dogged the United States, but experts say lenders could hasten an end to Europe's housing hangover if they called time on their most troubled mortgages to free up funds for stronger borrowers.

"Many banks have already posted losses on their books well below the prices they could sell assets for today" said Stuart Law, chief executive of property investment boutique Assetz.

"They should be able to turn a good profit when they do decide to start churning their portfolios" he said.

The U.S. housing market is taking baby steps towards a recovery after years of plunging prices but only after lenders ordered millions of foreclosure filings against indebted homeowners.

A similarly vast wave of foreclosures would hurt Europe's recovery, experts say, but a smaller burst of sales may aid price discovery and lift credit flows between borrower and bank.

"We share the opinion that average house prices have not moved sufficiently to remove the froth from the market but that doesn't mean another bubble is in the making, it just means prices could move downwards for a very long period of time" said Moody's Investor Service economist Nitesh Shah.

"This kind of gentle correction could be aided by a slow trickle of repossessions which could promote transactions without destabilising the system - subject to sufficient buyer demand to purchase these assets from the banks" Shah added. 

DELAY AND PRAY

Government-backed lenders, who were bailed out at the height of the credit crisis, have been slower to repossess homes from the indebted taxpayers who bankrolled their rescues, but experts say this "delay and pray" strategy is not a long-term option.

The European Central Bank has been the key source of support for liquidity-strapped banks since the crisis, accepting various types of securities, including risky and structured credit, as collateral to pump liquidity back into lenders.

However, Francesco Papadia, ECB's Director General of Market Operations, warned in June the ECB could not be a crutch for the market indefinitely, citing fears it had weakened incentives to lend in efforts to shore up ailing banks.

Other experts said banks could only protect struggling homeowners because lower financing costs had reduced mortgage repayments, and interest rate rises could spur repossessions, said Liam Bailey, head of residential research at Knight Frank.

"We have to get out of this ultra-low interest rate environment at some stage, if that happens in the next 18 months, the dip in repossessions is likely to reverse," he said.

Moody's Shah said banks needed to source new funds so they could both lend and stockpile capital at the same time, or they could worsen the credit logjam they aspire to fix.

"Ironically, the fact that banks have made credit supply much tighter than a few years ago means they are struggling to shift the properties they themselves are trying to sell."

Poor mortgage availability has cut house sales in Spain, Britain and Ireland, but new lending has also plunged in France and Poland, European Mortgage Federation data shows.