Fitch tightens Norwegian resi loan criteria but cites positives

Fitch has made more conservative some of its criteria for analysing residential loans in Norway, it said on Monday.

The update should lead to higher loss assumptions for residential portfolios, the rating agency said, but is not expected to have a rating impact on existing Norwegian covered bond programmes.

The assumptions factor in the credit strength of the sovereign, the solid performance of residential loans, and low unemployment, said Fitch, but also reflect the risk posed by high and rising household indebtedness and the strong increase in house prices over the past decade.

Fitch made two main changes.

It increased its assumptions in high rating scenarios to reflect the higher risk of default posed by the increase in household debt, which is above 200% of disposable income and, according to Fitch, makes borrowers more vulnerable to external shocks, such as an increase in interest rates or higher levels of unemployment.

The rating agency has also revised upwards its house price decline assumptions for Norway. It said that the average annual house price increase has been at around 10% since 2008, and that valuation ratios are well above their long term average.

“As a result, the house price decline has been set at 50% for a AAA scenario,” it said.

However, Fitch also noted that the assumed probability of default for a standard Norwegian residential loan remains low compared with other European countries.

“This is driven by good historical mortgage loan performance, combined with a positive outlook for the macro-economic environment for Norway,” it said. “It also reflects the low unemployment, favourable interest rates, high levels of affordability and strong social safety nets for Norwegian borrowers.”

Fitch said that the updated assumptions are more conservative and should lead to higher loss assumptions for Norwegian residential portfolios, but that it does not expect the updated criteria to have a rating impact on existing Norwegian covered bond programmes. This is because Norwegian covered bond issuers tend to maintain more overcollateralisation (OC) than the Fitch breakeven OC for the prevailing AAA ratings.

“In addition, cover pool assumed losses are not the main component of the breakeven OC for the ratings, which is rather driven by maturity mismatches and refinancing risk,” it said.