Proposed Finnish LTV cap ‘good news’ for covered

A Finnish Ministry of Finance working group has proposed allowing the country’s financial supervisory authority to cap LTV ratios, a move that an official at a Finnish issuer and analysts said would be positive for covered bond investors.

The Ministry of Finance on Tuesday published a report by a working group on macroprudential regulation and supervision of the financial market, with the maximum loan-to-value (LTV) ratio proposal coming on top of suggestions on provisions for capital buffers.

“For the Financial Supervisory Authority, the working group additionally proposes the right to limit the amount of housing, real estate and securities-backed credit in situations in which the housing, real estate or securities to be acquired are given as collateral,” stated the release.

The tightest maximum LTV ratio, according to the working group, would be 80% with respect to housing and real estate loans, and 60% for securities-backed lending. Decisions on the lending cap would be made by the board of the financial supervisory authority (Fiva), it said, and the working group would request opinions on its proposals from the Ministry of Finance, the Ministry of Social Affairs & Health, and the central bank.

The Finnish FSA has already introduced guidelines that recommend banks stick to a 90% LTV cap.

A covered bond analyst noted that Finland would not be the first jurisdiction to move to cap housing lending, after similar moves by Norway and Sweden in 2010. The Norwegian financial supervisory authority in March 2010 issued guidelines for prudent residential mortgage lending, they said, calling for lending to stick to a maximum LTV ratio of 90%, and in September 2011 considered further tightening the limit to 85%. This is the level at which Swedish regulators capped LTVs in October 2010 after a period when LTVs on new lending had risen, noted the analysts.

Timo Ruotsalainen, managing director at Aktia Real Estate Mortgage Bank, said that the working group’s proposal did not come as a surprise given that the financial supervisory authority had already introduced the 90% LTV guideline and is treading a similar path to that followed by regulators in other Nordic countries.

Capping LTV ratios at 80%, and doing so via a directive rather than guidelines, would pose challenges for borrowers, in particular in the Helsinki region, said Ruotsalainen, which could dampen growth of banks’ mortgage portfolios.

“But from an issuer perspective it’s good news because it provides additional safety for our investors,” he told The Covered Bond Report. “We don’t have a housing bubble in Finland, but the 90s was a problem so on that basis it’s understandable the local FSA would want to take precautionary measures.”

Housing loans and commercial mortgages up to LTV limits of 70% and 60%, respectively, can be included in Finnish covered bonds, although Ruotsalainen noted that the limit increases to 85% for housing loans backed by a state guarantee, which would seem at odds with any move to cap LTVs at 80%.

Finnish covered bond spreads would likely benefit from any introduction of an LTV cap on housing loans in the country, said the covered bond analyst, as it would limit the risk in new loan production and could also reduce supply, adding to their scarcity value.