Sweden’s FSA to Investigate Homeowners’ Reluctance to Amortize

Sweden’s financial regulator and the central bank will investigate the economic risks stemming from households’ failure to pay down mortgage loans as a next step in trying to address imbalances in the housing market.

Only 40 percent of Swedes with mortgages that have a loan-to-value ratio of below 75 percent amortize, or pay down their loans, Sweden’s Financial Supervisory Authority said in a report today. On loans with an LTV of more than 75 percent, 90 percent of borrowers amortize, the FSA said.

“An important task, therefore, will be to follow up on the potential long-term risks of the weak willingness to amortize loans that have a loan-to-value ratio below 75 percent,” the agency said. The Council for Cooperation on Macroprudential Policy has therefore decided to appoint a group between the FSA and the Riksbank that will “for example analyze the long-term effects of the households’ indebtedness,” it said.

The regulator last year proposed tripling the risk weights banks apply to their mortgage assets to 15 percent and has capped lending at 85 percent of a property’s value since October 2010, as the Nordic region’s largest economy tries to avoid a repeat of the nation’s 1990s real estate and banking crises. The FSA would consider further measures to cool Sweden’s credit growth if it spirals out of control, it has said.

Mortgage Cap

While the mortgage cap has helped slow borrowing growth from more than 10 percent between 2004 and 2008, it still expanded 4.5 percent in January and December. That’s too fast a pace, according to Finance Minister Anders Borg, who argues credit growth shouldn’t exceed 3 percent to 4 percent.

Still, the mortgage cap “continues to have a positive effect,” the FSA said today. The “trend of steadily rising loan-to-value ratios has been broken, and the households’ loan-to-value ratio for new loans is still around 70 per cent,” it said. The average loan-to value ratio for new mortgages stood at 68.8 percent at end of September last year, down from 68.9 percent at end of 2011 and a peak of 71 percent at end of 2010.

As the euro area grapples with austerity and recession, Swedes have seen their property prices climb about 25 percent since 2006. Private debt burdens in the largest Nordic economy rose to a record 173 percent of disposable incomes last year, the central bank estimates. That exceeds the 135 percent peak at the height of Sweden’s banking crisis two decades ago. Back then, the state nationalized two of the country’s biggest banks after bad loans wiped out their equity.

House Prices

A report today showed house prices were unchanged in the three months through February from the previous three-month period, the statistics agency said. They climbed 3 percent from a year earlier.

Sweden’s largest lenders already also face stricter capital requirements than those targeted elsewhere. Nordea Bank AB, Swedbank AB, Svenska Handelsbanken AB and SEB AB must set aside at least 10 percent core Tier 1 capital of their risk-weighted assets this year. The requirement rises to 12 percent in 2015. The Basel Committee, which is chaired by Swedish central bank Governor Stefan Ingves, sets a 7 percent minimum, from 2019.

Sweden’s biggest banks, whose combined assets are four times the country’s gross domestic product, already have capital buffers that exceed national rules, an achievement rewarded by investors. Swedbank shares have gained 25 percent this year. The smallest share increase of the four was at Handelsbanken, whose stock rose 19 percent in the period. The 40-member Bloomberg index of European financial companies advanced 6 percent.