The situation in the housing market, banks' compliance with guidelines for prudent mortgage lending practice and the home loan survey of August 2011 are the background against which Finanstilsynet is now considering tightening the guidelines for prudent lending practice in respect of residential mortgages.
House prices and household debt have a significant bearing on financial stability. Sober practice as regards residential lending practice can dampen the build-up of risk in the household sector, which is the background for Finanstilsynet's guidelines for prudent residential mortgage lending practice, published in spring 2010.
- The vigorous growth in house prices and household debt heightens the risk of financial instability. Finanstilsynet's home loan survey for 2011 shows that the proportion of residential mortgages with a high loan-to-value ratio is on the increase, and a round of inspections of mortgage lending practice at a selection of banks shows that credit assessments need to improve, says Finanstilsynet's Director General, Morten Baltzersen.
Changed guidelines
Finanstilsynet recommends lowering the level of what is considered a prudent loan-to-value ratio from 90 to 85 per cent of the property's market value; this ratio covers all loans secured on the property. In addition, banks will need to make allowance for an interest rate increase of 5 percentage points when assessing a borrower's debt-servicing ability. A somewhat larger safety margin is incorporated in order to cope with a setback in the real economy.
In the case of loan-to-value ratios above 85 per cent, additional collateral must be posted or a special prudential assessment must be made. The recommendation also entails that a bank's board of directors should establish criteria for prudential assessments and take action on any deviation from the guidelines. In the case of loans in excess of 70 per cent of property value, instalment payments should be required as from the first due date.
Tightening of equity release facilities is also recommended by lowering the normal loan-to-value ratio from 75 to 70 per cent of the property's market value.
Household finances increasingly vulnerable
In recent years household finances have been subject to rising debt burdens, high loan-to-value ratios on residential properties and greater use of interest-only mortgages, all of which heighten vulnerability in the event of an economic setback.
Household debt growth has largely shadowed the trend in house prices several years. Both indebtedness and house prices are now at a very high level. This outcome is largely driven by borrowers' positive expectations with regard to their personal finances and their belief in a continued rise in house prices.
- It is worrying that debt has grown most among groups with the highest debt relative to income. An interest rate hike or loss of working income will have major consequences for these groups.
- The trend in house prices and household debt is key to financial stability. A more sober residential mortgage lending practice can help to dampen the risk posed by a subsequent economic setback, says Finanstilsynet's Director General, Morten Baltzersen.
Finanstilsynet will conduct a round of consultations on the above recommendations with Finance Norway, the consumer organisations and Norges Bank.