Moody's Warns of Increased Risks from Looser Mortgage Rules in Europe
Eased Mortgage Regulations Could Pose Threats to Lenders
Credit rating agency Moody's has issued a warning that recent relaxations in mortgage lending rules across several European countries could lead to increased risks for lenders. These changes, implemented since 2022, aim to bolster housing markets but could have unintended long-term consequences.
Countries and Easing Measures
Six European countries, namely Britain, Switzerland, Netherlands, Norway, Sweden, and Finland, have adjusted their mortgage lending rules to make it easier for borrowers to obtain loans. For instance, Finland and Norway have raised the loan-to-value cap on residential mortgages from 85% to 90%. In Britain, stress test requirements for home loans have been eased, allowing borrowers to qualify for higher loans.
Potential Risks Highlighted by Moody's
Moody's has noted that while these eased measures can support house prices in the short term, they could lead to higher loan defaults and subsequent mortgage losses over time. The increase in loan-to-value ratios means that borrowers have less equity in their homes, making them more vulnerable to financial difficulties. As a result, banks may face larger losses if borrowers default on their loans.
Mitigating Factors
Despite the heightened risks, several factors help mitigate the potential negative impact. Improved lending standards and larger loss-absorbing capital buffers at banks play a crucial role in managing the risks associated with looser mortgage regulations. These measures provide a safety net that can cushion the financial system against potential shocks.
The Broader Implications
Moody's warning underscores the delicate balance between supporting housing markets and ensuring financial stability. While looser mortgage rules can stimulate economic activity by making homeownership more accessible, they also carry inherent risks that must be carefully managed. Policymakers and financial institutions need to weigh the short-term benefits against the long-term consequences to maintain a healthy financial system.
