17 March 2012

Presenting Truth in Its Best Light: Learn from Finansinspektionen

In the beginning of the week, on 13 March 2012, the Swedish Financial Supervisory Authority, Finansinspektionen (FI), came out with a press release that sounds like good news in struggling Europe: The [Swedish] mortgage cap is working; loan-to-value ratios in Sweden fell for the first time since 2002, the first year comparable data was available. Interestingly, based on the very same data provided in the attached detailed analysis report, one could come up with much more disturbing conclusion and send out a press release that has quite a different undertone.

Some background:
[Read also my earlier article: Swedish Time Bomb Still Ticking …]

* Swedish mortgage market has been under close watch by some observers since 2009, when the house prices in Sweden “miraculously” rebounded from the slight backdrop in 2008 (following the rapid growth from 1995 to 2007), and thereafter continued to rise rapidly in 2009-2010. This, of course, led to increasing indebtedness of the households.

* In order to stop this development, FI introduced new general guidelines on the loan-to-value ratios of properties (the so-called mortgage cap) with effect from 1 October 2010. These general guidelines meant that new loans must not exceed 85% of the property’s market value.

* In September 2011, IMF warned Sweden about the risks of household indebtedness and disorderly correction of house prices to the country’s financial stability. In February 2012, in its first Alert Mechanism Report, the European Commission found that (among several other European countries) the macroeconomic situation in Sweden needs to be investigated further. The Commission highlighted: “Increasing household indebtedness, which is now at high levels despite recent slower credit growth. This reflects very strong increases in house prices over the last fifteen years which have started to stabilise only recently.”

* Ever since (at least since 2009), the Swedish authorities including Riksbank and FI, have conducted several in-depth analyses of the Swedish mortgage market. The considered 13 March 2012 report by FI is one of those the primary focus of which is on the effectiveness of the introduced mortgage cap. For the general public, such exercises have always resulted in a calming or even encouraging press release.

The alternative press release

First I suggest you to read the original press release by FI. Now consider the following alternative press release that is based on the very same data plus some additional information published earlier on the Riksbank’s website. Quoted text has remained unchanged compared to the original.

Fasten the seat belt

In Finansinspektionen’s follow-up of the mortgage cap it was found that even though the ceiling introduced in 2010 has had a negligible positive effect on loan-to-value ratios for the mortgage stock, this may have come on the expense of increased share of unsecured loans. About 65 per cent of new mortgage loans do not amortise, i.e. are not being repaid by the borrowers (up from 59 per cent in 2009). If the property prices in Sweden were to fall by a justified 20 per cent, one third of the households would plunge into negative equity.

“On 1 October 2010, FI introduced a limit on the loan-to-value ratios of homes, a so-called mortgage cap. During the late autumn of 2011, FI conducted a comprehensive survey to follow up how banks and households adapted to the new regulation.”

The survey indicated that approximately 9% of new loans can be considered as “overrides” of the guidelines, i.e. the share of new loans at a loan-to-value ratio greater than 85% is still at 9%; in addition, around 14% of the new loans have a loan-to-value ratio exactly 85%. Furthermore, most (although not all) banks offer unsecured loans for the proportion of the loan-to-value ratio that exceeds 85%. The proportion of unsecured loans has rather increased than decreased since the introduction of the mortgage cap.

The share of new mortgages that are unamortised has increased by 6% since 2009; the principals of 65% of the new mortgages granted in 2011 are not being paid back. The actual repayment period for the new mortgages has prolonged to almost 70 years (up from 66 years in 2009), which implies that a borrower most probably dies because of old age before having been able to repay his/her housing loans.

It follows that many of the housing loans are granted against the property, not the borrower’s actual willingness or ability to repay them. Furthermore, the stress test conducted during the survey indicated that if house prices were to fall 20% (a very reasonable assumption given the current estimated overvaluation of the property prices), one third of the households would find their loan-to-value ratios exceed 100%.

“FI’s survey was based on data gathered from the banks regarding lending as well as a detailed sample of granted loans between 26 Sept and 6 Oct 2011. In addition, FI asked the banks a number of qualitative questions regarding their experiences with the mortgage cap.”

That would be pretty chocking to read from the website of the Swedish Financial Supervisory Authority right now, wouldn’t it?

Of course, this alternative press release is not balanced either. It is intentionally biased towards focusing on negative aspects in as much as the original communication is biased towards focusing on positive developments. Yet it provides a good illustration of how the most respected institutions can get you wrong if you do not read the “small text”. One could learn from them about presenting the truth in its best light.

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