Fitch Ratings Sees Mitigants to Residential Mortgage Risks from Coronavirus Pandemic

(The following statement was released by the rating agency) Related Fitch Ratings Content: Unique Features of Residential Mortgage Markets Compendium (https://www.fitchratings.com/site/re/10133658) Fitch Ratings-London/Paris/Madrid-08 September 2020: Residential mortgage loans in countries where we rate covered bonds have less-risky features than in the years leading to the global financial crisis despite heightened risks from the pandemic, Fitch Ratings says. In particular, the average mortgage repayment relative to income is lower. Factors contributing to this include lower interest rates and a growth in wages over the years, making residential property financing more affordable than in 2008 despite the increase in home prices in most countries. Regulation of mortgage markets has also improved, as borrowers are subject to stricter affordability testing and loans with riskier attributes (high loan-to-values (LTVs), interest-only, long maturities) are less prevalent. Nevertheless, the full impact of the pandemic is still to be seen, as the unemployment shocks across most countries have yet to materialise. Mortgage interest rate types for residential property vary from mostly floating rate (Norway and southern Europe) to mostly fixed rates for life (France), with most other countries having interest rate fixing periods of two to 10 years. There has been increasing fixed-rate loan origination, particularly in Italy, Portugal and Spain, although still low in terms of total outstanding. Borrowers in Denmark, the Netherlands and the UK are fixing their rates for longer, reducing the risk of payment shock. Household debt and house price dynamics vary across countries. Households are highly indebted in countries where mortgage financing can help reduce tax or be used to leverage on pension assets. This has contributed to increased home prices in some jurisdictions. In southern Europe, households are traditionally less indebted and home price increases have been tempered by lower demand for mortgages. Mortgage regulation has tightened since the financial crisis. Riskier mortgage attributes have declined in use (high LTVs, interest-only or long maturities, introducing proof of income requirement) and regulators have introduced limits on borrower indebtedness, such as loan-to-income limits and interest rate stresses at origination to avoid excessive leverage made possible by the progressive drop in interest rates. This has been particularly relevant in countries where the mortgage market is very large and critical to financial stability, such as those in Scandinavia. In southern Europe, macroprudential measures have recently been implemented but mortgage regulation has had less of an impact as there was limited demand for new mortgages after the financial crisis due to low wage growth. Total mortgage outstanding is barely increasing in Italy and is below its peak in Portugal and Spain. These countries are characterised by low household indebtedness and high outright home ownership. The report published today entitled "Unique Features of Residential Mortgage Markets Compendium" closes the series launched in mid-2019, which covers the unique features of residential mortgage markets in 14 of the jurisdictions where Fitch rates covered bonds. The report is available by clicking on the link above. A video on this topic is also available under this link. Contact: Carmen Munoz Senior Director +34 93 323 8408 Fitch Ratings, S.A.U. Av. 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