Amortisation plan ‘could ease Swedes’ OC needs’

A proposal by Sweden’s FSA to oblige lenders to suggest mortgage loan amortisation plans to some borrowers could, if implemented, lead to increased paydown rates and eventually a possible decrease in target OC in some Swedish covered bond programmes, according to Standard & Poor’s.

The rating agency noted that the Swedish Financial Supervisory Authority published a proposal on 14 October that would oblige lenders to suggest individual mortgage loan amortisation plans to new mortgage borrowers and those increasing their loan balance through refinancing.

The FSA (Finansinspektionen) has submitted its proposal to the Swedish government and the Swedish Bankers’ Association has expressed its support for the proposal, according to the FSA.

“We believe that amortisation plans can give households a push in the right direction,” said Martin Andersson, director general at Finansinspektionen. “We need to become better at amortisation in Sweden. It is high time to change the trend.”

S&P last Thursday (17 October) highlighted positive potential implications for Swedish covered bonds from the proposal, although it included several caveats in its assessment, notably that implementation of the FSA’s proposal: would require a change in consumer law; that borrowers would not be obliged to adopt a suggested plan and may need an economic incentive to do so; and that it would take some time for amortisation rates to increase as the rules would not apply to existing borrowers.

“Nonetheless, we believe that formal loan paydown guidelines could be a positive step for Sweden’s mortgage market,” said the rating agency. “If borrowers began to adopt plans that increased loan amortisation to a faster pace than we currently assume, this could reduce ALMM risk and target overcollateralisation levels in some programmes.

“Loan amortisation plans could also provide an opportunity for lenders to align their funding maturity profiles with those of their mortgage loan assets for longer periods, which could also reduce asset-liability mismatch risk, in our view.”

According to S&P, most Swedish mortgage loans do not have formal amortisation schedules for the whole legal mortgage term, and loans can remain interest-only for considerable periods.

It said that its cashflow stresses for Swedish covered bond programmes assume that the assets have lower amortisation rates than the rating agency has observed in the market, which can increase asset-liability mismatch (ALMM) risk. Swedish covered bond programmes may therefore have higher target overcollateralisation levels than those seen in some other markets.