Norway Financial Regulator Tightens Mortgage Loan Requirements

Norway’s financial regulator is tightening requirements on models used by banks to calculate risks on mortgage loans as record consumer debt levels pose an increased danger to Scandinavia’s richest nation.

The tightening of the models will increase risk weights for mortgages to 20 percent to 25 percent, from about 10 percent to 15 percent, the Oslo-based Financial Supervisory Authority said today in a statement.

“Mortgage risk weights have fallen in recent years while higher house prices and higher household indebtedness have increased the risk present in the mortgage market,” the regulator said.

Norway’s housing market, which Nobel laureate Robert Shiller already in 2012 said was in a bubble, has been inflated by a period of record-low interest rates that fueled a borrowing spree and left Norwegians with more debt than ever before. Households owe about twice their disposable incomes, a level the central bank and the regulator have warned is unsustainable.

The regulator at the start of the year boosted the so-called loss-given-default floor to 20 percent from 10 percent to make banks set aside more capital on mortgage loans.

The effect of today’s proposal “is greatest for banks that have previously estimated the lowest default probabilities or had the highest concentration of the best risk classes,” the regulator said. The effect of tightening will depend on the loan-to-value ratio, it said.

Banks will be required to adapt their models by the end of the year. The FSA said its Danish counterpart will impose the requirements to its mortgage banks operating in Norway, while Sweden’s regulator has made similar cutbacks in Pillar 2 requirements for its banks.

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