PARIS, October 22, 2007 --Reporting on the "bad surprises of adjustable rate mortgages," Le Figaro acknowledges that French banks have been "creative" about making loans. Historically only 10-12% of French borrowers choose the adjustable rate loans. Most banks banned adjustable rates which only represent 7-8% in 2007. But, writes Le Figaro, some French banks hawked the loans on the basis of "capping" monthly payments by promising to extend the length of the loan. "'If no solution is rapidly found, we will be forced to sell our house' complains Mrs. R.

In July 2006, she and her husband (27 and 30 years old) borrowed EU 226,700 at an adjustable rate over 30 years. The contract stipulated that if interest rates rose, the duration of the loan could be extended, with the growth in monthly payments being 'capped' at 4.9%. In one year, the interest rate on the loan went from 3.4% to 5.7%!

As planned, the duration of the loan was increased by six years. But monthly payments shot up by 11%. "'Since that is never enough to cover the interest, the outstanding capital increases each month,' explained Mrs. R."

The Association of French Bank Users (AFUB) has gotten 250 complaints in 10 days and half of them about Credit Foncier. While Credit Foncier insists that it makes terms of the loan clear at signing, Figaro points out, that these variable rate credits are indexed to the short-term rates, such as Euribor, which have shot up in the last 18 months; Euribor went up to 4.64% in three months. "This is what translates into some bad surprises for borrowers," says Figaro. In some cases, 25-year loans are extended to as much as 35 years. But these stretch-outs are often still not enough to cover runaway rates. With banks reluctant to stretch the risk out that far, they are asking clients to re-write the contract for higher monthly payments.