Wall Street Journall_Housing Risks Reach Baltics and Balkans (September 10)

10.09.2007

Mortgage Markets are Under Scrutiny following U.S. Woes

Housing and mortgage markets in the Baltic states and the Balkans are coming under increasing scrutiny as lenders see heightened risks after several years of rampant gains.

House prices in those regions have been among the fastest growing in the Europe, rising as much as 70% last year alone. But bankers are now tightening the terms of credit in countries like Latvia and Estonia, while Romanian and Bulgarian would-be buyers and lenders are showing signs of reluctance about how long strong growth can last despite continued strong demand.

House prices in Eastern Europe's transition economies have shot up on the back of expectations that robust wage gains would continue for years. Latvian wages were 33% higher this July than a year earlier, for example, while Romanians in the month were earning about 20% more than last summer.

But prodded by the subprime shakeout in the U.S., banks that have made loans structured on assumptions that prices were destined to rise are now curbing their risk appetite. While widespread defaults are unlikely, a squeeze on domestic demand would hobble the key economic driver of the region's economies and weigh on growth plans aimed at sealing countries' entry into the euro zone.

Unlike the U.S., where banks seek quickly to securitize mortgages and sell them to third parties, most Eastern European mortgages are held by the banks -- most of them subsidiaries of European institutions -- that originated them.

That means risks are centralized, but they are still there. If many borrowers can't repay their loans, bank profits will suffer. Banks could also be vulnerable in the money markets, if their credit ratings take a hit and counterparties decline to deal with them.

As a result, regional banks are starting to curtail their lending to make sure they aren't too exposed to a crash. Swedbank AB and Skandinaviska Enskilda Banken AB, or SEB, the two largest lenders in the Baltics by market share, are slashing their lending this year.

SEB's Latvia unit SEB Unibanka will halve its lending from last year's 50% annual growth rate, says Andris Vilks, the bank's head of research.

Mr. Vilks said his bank is "worried about the customers" to whom it loaned money on the basis of uncertified income -- a widespread practice recently banned in Latvia but that resembled the so-called liar's loans offered by U.S. banks to a small percentage of total borrowers without jobs or assets.

Preliminary evidence does point to mounting risks. In Latvia's capital, Riga, house prices abruptly declined this summer after a 70% rise in 2006 that pushed average prices to €1,600 ($2,200) a square meter and the best Old Town apartments to four times that much.

Write to Christopher Emsden at chris.emsden@dowjones.com and Joel Sherwood at joel.sherwood@dowjones.net
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