European Mortgage Rule Changes Raise Default Risks

By Iain Withers
LONDON (Reuters) – The roll-out of looser mortgage rules across several European countries has heightened the risk of loan defaults, negatively impacting lenders’ credit profiles over time, according to Moody’s.

Bank regulators in six European countries, notably Britain, Switzerland, Netherlands, Norway, Sweden, and Finland—which feature some of the highest household debt levels—have eased mortgage lending limits since 2022, as per Moody’s report shared with Reuters.

Recent Actions

• Finland & Norway: Increased loan-to-value cap on residential mortgages from 85% to 90%.
• Britain: Eased stress test requirements on home loans and is considering further relaxations in response to government pro-growth urges.

Implications

Moody’s report indicates that although the easing of lending rules is modest and supports short-term house prices, it could lead to greater risks of defaults and losses over time.

> “It therefore increases long-term risks to mortgage loan performance and is credit negative for mortgage lenders, mortgage-covered bonds, and certain residential mortgage-backed securities,” the report states.

Historical Context

The easing of mortgage regulations follows more than a decade of tightened rules post the 2007-09 global financial crisis, which saw soaring loan default rates threaten the stability of some banks.

While European banks have recently reaped strong profits owing to high-interest rates and low loan default losses, Moody’s acknowledges the heightened risks from relaxed lending rules are somewhat offset by better lending standards and increased loss-absorbing capital buffers at banks.

Conclusion

Moody’s notes that relaxed lending rules do not automatically translate to increased mortgage lending, as banks continue to set their own underwriting criteria and risk appetites.