This spring Finanstilsynet established guidelines for sound lending practice with regard to loans for residential purposes. The main requirements centre on a thorough process, above all when appraising a borrower’s ability to pay and in applying the rule that a mortgage loan should in general not exceed 90 per cent of property valuation. This autumn the authority has investigated how far the largest banks have revised their home mortgage loan policies in light of the new guidelines. The guidelines were framed against the background of the problems created by high housing debt as a cause of the financial crisis.
“The results of the survey indicate that the banks have adjusted to the new guidelines in a satisfactory manner,” says Finanstilsynet’s Director General, Bjørn Skogstad Aamo, in a commentary.
The guidelines are designed both to protect the individual borrower and to promote financial stability. The banks have made changes in several areas. Some banks have tightened their requirements on the lending process and defined more closely their criteria on debt-servicing ability and loan-to-value ratio. Some have underlined the need for formal additional collateral or a special affordability assessment and introduced compulsory instalment payments for high loan-to-value mortgages. Further, some have revised their guidelines on the information to be provided about the consequences of interest rate increases and introduced a requirement that any departure from in-house guidelines must be decided at management level.
Half of the banks had prepared reports to their board or management on their follow up of Finanstilsynet’s guidelines. The remainder will do so as from the third quarter of 2010. The reports show inadequate compliance with the banks’ own guidelines. Our annual survey of home mortgage loans, to which the banks are required to respond by 19 November, takes the new guidelines into account. Based on the results of this survey, to be published in next year’s Financial Market in Norway: Risk Outlook, (March 2011), the authority will check banks’ compliance with the guidelines at on-site inspections early next year.
A chief cause of the financial crisis in the US was very strong growth in lending for housing purposes and a substantial rise in house prices which laid the basis for further growth in home mortgage loans. Households with poor debt servicing ability accounted for a significant portion of this borrowing. In Norway bank lending to households accounts for about 60 per cent of overall lending to the (non-financial) private sector. About 90 per cent of these loans are secured by dwellings. Norwegian banks accordingly have substantial indirect exposure to the housing market. Since the great majority of loans carry floating interest rates, interest rate increases immediately impact on households. House prices in Norway have risen of late and, viewed in relation to the trend in households’ disposable income, are high in historical terms. Norwegian households also carry a high debt burden.