FI amortisation plan ‘strongest so far’, but prospects queried

Swedish FSA proposals that new mortgage loans be amortised down to 50% of a property’s value according to a specified schedule would be credit positive for banks and covered bonds, according to Moody’s, but an industry representative suggested that implementation will be difficult.

The Swedish FSA (Finansinspektionen, or FI), announced the proposals on Tuesday of last week (11 November).

The regulator noted that Swedish households have larger buffers than prior to the introduction of a mortgage cap in 2010, and that almost all new mortgage holders with LTVs of more than 75% make repayments and very few households take out loans above the mortgage cap. However, the regulator said that new borrowers with a lower LTV often choose to postpone amortisation.

“This is worrying as international experience indicates that households with an LTV of more than 40%-50% are inclined to cut back on other consumption when economic conditions change,” said the FSA. “What concerns FI is thus the negative effects on the Swedish economy (the ‘macroeconomic risks’) that may arise if something unforeseen were to happen to households or in the wider world. This may exacerbate economic downturns and reduce economic growth.

“For this reason, FI wants new mortgage holders to repay more than they currently do. This will increase their resilience to shocks and reduce the risk of a negative effect on the Swedish economy if something unforeseen happens in Sweden or abroad.”

The regulator proposed that new mortgage loans, which are typically capped at 85% LTVs, be amortised at 2% of the loan per year until the LTV falls to 70%, when amortisation would be 1% per year until the LTV falls to 50%.

“Banks and covered bonds will benefit from the amortisation requirement because it will improve the quality of asset portfolios,” Moody’s said on Monday. “Indeed, our default expectation for a loan with a 50% LTV is just about half of our default expectation for a loan with a 70% LTV, reflecting the increased risk of high LTV loans.”

The regulator’s move comes after the Swedish Bankers’ Association on 7 October put forward similar recommendations, which in turn were just the latest in a series of moves from Sweden’s authorities and banks to tackle the issue. Moody’s described the Swedish FSA’s announcement as “the strongest measure so far” in detailing the speed at which new mortgage borrowers should amortise.

The Swedish Bankers’ Association proposal had been withdrawn ahead of the Swedish FSA’s, after the Swedish Competition Authority raised questions over such an agreement between mortgage lenders.

Jonny Sylvén, head of the Association of Swedish Covered Bond Issuers (ASCB) secretariat within the Swedish Bankers Association, said that the proposed regulation is a “second best” versus the industry body’s recommendations and may prove difficult to implement.

“A lot of people will not be able to handle amortisation if, for example, they become unemployed two years into their mortgage,” he said. “The banks – as they did before the 1990s crisis – have the flexibility to allow the borrower to stop amortising and then restart when they are able to again.

“Writing something like this into a regulation will be difficult.”

However, he said that action is necessary.

“It will further strenghten the culture that has been established so far for households with higher LTVs and the increase in amortisation that we have seen through the amortisation plans” said Sylvén. “It is one more small step, but no-one wants a big step because it will be negative for the housing market.”