Proposed mortgage rules positive for Norwegian covered, says Moody’s

Tighter mortgage underwriting standards proposed by Norway’s FSA are credit positive for Norwegian covered bonds and banks, Moody’s said yesterday (Monday), highlighting a cap on loan-to-income ratio limits and lower LTV ratios.

On Thursday, the Norwegian FSA (Finanstilsynet) proposed a tightening of residential mortgage lending regulations in the country to dampen house price growth and credit growth, in response to an enquiry from the Ministry of Finance.

The measures proposed by Finanstilsynet are:

• The removal of banks’ opportunity to waive regulatory requirements on debt servicing ability, loan-to-value ratio (LTV) and amortisation of debt – including the reduction or complete elimination of banks’ ability to deviate by 10% from the maximum LTV requirement,
• That the current requirement on the borrower’s debt-servicing ability be supplemented by a provision limiting the borrower’s overall loan to five times gross annual income,
• That the maximum LTV ratio for home equity credit lines be lowered from 70% to 60%; and,
• A requirement on amortisation of repayment loans to apply to all loans with a loan-to-value ratio above 60%, compared with 70% under the current regulations.

In a sector comment published yesterday, Moody’s said the proposed measures would reduce borrowers’ ability to take on excessive debt amid still-increasing house prices, particularly in urban areas around Oslo.

The rating agency noted that Norway has experienced strong house price growth since 2008 and said that despite house price contraction in oil-reliant areas such as Stavanger, prices in Oslo have increased more than 12% per year to the end of June, while banks and mortgage companies’ residential mortgage lending grew nationally by around 6% over the same period.

Moody’s said the proposals are credit positive for Norwegian banks and covered bonds, as they would strengthen the credit quality of mortgage loans on banks’ balance sheets and in covered bond cover pools.

“Although Norwegian banks and covered bonds performed strongly even after the decline in oil prices, a mortgage market cool-down would reduce the risk of asset price bubbles and excessive lending to vulnerable households,” said Jane Soldera, vice president and senior credit officer at Moody’s.

“In the present low interest rate environment, loan affordability is good, but large loans can easily become burdensome if interest rates rise. Lower LTV ratios decrease the loan’s probability of default and increase recoveries of loans that do default.”

Finanstilsynet proposes that the measures be put into effect as of 1 January 2017.

Photo: Norwegian FSA