S&P positive as Swedish amortisation plan finally approved

Revived plans to introduce compulsory amortisation requirements for new mortgage loans in Sweden could enhance Swedish covered bonds’ credit quality, according to Standard & Poor’s.

After an agreement between the government and the Swedish FSA (Finansinspektionen, or FI) earlier this month, S&P expects the delayed introduction of mandatory mortgage loan amortisation in Sweden will commence in the spring of 2016, the rating agency said on Wednesday.

FI’s original proposals to address growth in household indebtedness were put forward in March but rejected by the Swedish parliament in April over uncertainty as to whether the regulator had the authority to enforce such a mandate.

FI had proposed that it would require mortgages originated from August to be amortised down to a LTV of 50%. It also proposed that mortgages with a loan-to-value ratio over 70% should be repaid down by a minimum of 2% of the original loan each year, while loans with a LTV below 70% should be repaid by a minimum of 1% annually until the LTV has reached 50%.

S&P said it expects FI to introduce similar measures after receiving the government’s go-ahead.

The rating agency said it believes such measures would reduce credit risk in covered bonds, as increasing the amount of principal repaid reduces a mortgage loan’s time to maturity and, by extension, the asset-liability mismatch in cover pools. This, it said, could lead to lower refinancing costs for covered bond issuers.

Noting that, in S&P’s view, Swedish house prices are overvalued by roughly 22% against long term price-to-income ratios, the rating agency added that it believes its ratings on Swedish covered bond programmes would likely remain unchanged if house prices fell by up to 30%

“We believe that requiring the amortisation of mortgage loans with LTVs exceeding certain limits will strengthen cover pools’ ability to absorb potential corrections in the housing market, thereby improving the credit quality of covered bonds,” S&P said. “The extent to which covered bonds will benefit depends on the final terms of the requirement when it is introduced, which we expect will not take place before 2016.”

On Thursday of last week (10 September) FI acting director general Martin Noréus said it is positive that there is now political unity on giving the regulator the scope to introduce the requirement, with the Riksbank and the Swedish National Debt Office giving their support.

“Our assessment is that the risks linked to the high household indebtedness are not alarming at present,” he said. “But the trend is worrying.

“In a few years’ time, rising house prices and low interest rates may push up credit growth and the percentage of households with relatively high debts even further, aggravating the situation.”

Citing Swedish household sector debt ratio of almost 175%, Noréus said the purpose of the requirement was to equip households with a better resilience to shocks by ensuring those households with the highest LTV ratios reduce them.

“The longer this takes to implement, the greater the risk that much tougher measures will be needed than the introduction of an amortisation requirement,” he said.