Moody’s cites Norway mortgage relaxation threat

Nov 7th, 2013

The new Norwegian government followed up on a pre-election pledge to ease mortgage standards by asking the country’s FSA to examine lending practices on Tuesday of last week (29 October), and Moody’s said on Monday that any loosening would be credit negative for Norwegian banks and covered bonds.

According to Moody’s, the ministry of finance asked the Norwegian Financial Services Authority (Finanstilsynet) to examine current mortgage lending practices and their effect on the Norwegian housing market.

Norwegian ministry of finance

Norwegian ministry of finance

“Any loosening of mortgage standards that reverses the tightening of lending guidelines since 2010 is credit negative because it would likely increase already-high household indebtedness, raise the threat of banks writing higher risk mortgages, and spur inflation of an already-buoyant housing market,” said Moody’s.

“A recurring theme throughout the ministry’s letter is its desire for flexibility, citing instances when customers with strong credit have had their mortgage applications rejected because they lack the requisite deposit,” added the rating agency. “Because Norwegian regulators have previously been pro-active in encouraging financial stability and preventing an overheated residential lending market, we consider measures that further stimulate high-leverage borrowing as being negative.”

Moody’s noted that household debt reached an unadjusted all-time high in June of 210%, according to Statistics Norway, relative to a euro area debt/income average of just under 100% at end-2012, according to the latest Eurostat data available.

“In addition, greater flexibility to write loans with higher loan-to-value (LTV) ratios would be negative for Norwegian banks because it would create further inflationary pressures on a housing market that the International Monetary Fund recently said was overvalued by up to 40%,” said the rating agency. “The continued build-up of risk through ever increasing house prices is negative for all banks because it increases the possibility of an eventual house price correction.”

The current FSA-recommended LTV cap is 85% in Norway. Moody’s assumes a 40% house price decline for a stress scenario when determining covered bond ratings and it said that while this would already imply that an 85% LTV mortgage would not be fully repaid by selling the property and would leave borrowers with remaining debt, an increase in the LTV cap would expose banks to further losses on non-performing loans.

Moody’s noted that the impact on Norwegian covered bonds is cushioned by the seniority of collateral claims backing the bonds, a limit restricting loan leverage to 75% of the property’s value at debt origination, and legal protection that obliges the issuer to ensure the 75% LTV is never exceeded for the life of the covered bonds.


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