Mortgage Market Developments

The study showed that:

• The loan-to-value ratio for new loans rose by about ten percent from 2002 through first quarter 2006; during first quarter 2006 it was about 57 percent. At the portfolio level the average loan-to-value ratio as of March 31, 2006, was 48 percent. Levels of loan-to-value ratios vary quite substantially among companies. Some companies had a relatively high average lending ratio, while for others it was significantly lower. Similarly, the increase in the loan-to-value also varied and the rate of increase proved to be much higher in some of the smaller companies than in the larger companies.
• Amortization periods also increased during this period. The average period of amortization for new loans increased by about eleven percent and during first quarter 2006 was about 63 years. The longer period of amortization suggests that companies are slightly more willing to take risks. However, this increase is minor considering that housing prices increased by about 36 percent during the corresponding period.
• Interest rate margins in all lending institutions fell during the analysis period; the average decline was 19 percent. This decline was significantly greater for tenant-owned apartments, which was probably due to discontinuation of the interest surcharge on tenant-owned apartments. Currently, credit losses within institutions are very low and it is highly probable that losses will increase in the future. Assuming that competition for mortgage customers in the future is as high as it is today, individual institutions with inefficient mortgage management might not be able to raise interest rates to the extent necessary to cover the increased credit losses.

The analysis showed that risk accumulation in the mortgage market in general is larger in relation to tenant-owned apartments than in relation to single-family houses. This conclusion is based on the following factors: loan-to-value ratio at the portfolio level was nine percent higher for tenant-owned apartments than for single-family homes, the interest surcharge on tenant-owned apartments was discontinued by several institutions as of 2003, tenant-owners' associations are often pledged and loans for tenant-owned apartments can therefore be said to be doubly vulnerable for the companies, and historically, credit losses have been higher for tenant-owned apartments than for single-family homes.

The study also showed varying differences in interest rate margins among institutions' different regions. At most the difference was about 40 percent and it was most evident between the urban regions and the rest of Sweden. The large differences are probably due to differences in the competitive environment in the various markets. Other factors may be that housing is generally more expensive in the urban regions and higher loan amounts lead to better interest rates.

Finansinspektionen (FI) has previously noted that risk accumulation is present in the Swedish mortgage market. In summary, the conclusions of this analysis support this observation: increased lending ratios, longer amortization periods, and pressure on interest rate margins. At the same time that risk accumulation is relatively strong, FI's assessment is that the average loan-to-value ratio at the portfolio level, which according to the study is about 48 percent, does not in itself constitute a large risk-taking. However, we assume that some customers have a higher lending ratio and others have a lower lending ratio, which means
that risk is significantly higher than the average lending ratio of 48 percent.

Moreover, FI holds the opinion that lending institutions in general have well developed lending programs and good risk management. The stress tests the institutions conduct also show strong resistance to worsened conditions in the mortgage market. Taking into account the above logic, FI's assessment stands that mortgage market developments do not pose a serious risk for stability. However, it is probable that, through their mortgages, certain individual consumers expose themselves to considerable risk.

Read more