The loosening of mortgage rules in several European countries poses a risk of loan defaults and negatively impacts lenders' credit profiles in the long run, stated Moody's credit ratings agency on Tuesday.
Bank regulators in six European countries with high household debt levels—Britain, Switzerland, Netherlands, Norway, Sweden, and Finland—have eased lending restrictions on mortgages since 2022, according to a report by Moody's shared with Reuters.
Notable actions include Finland and Norway raising the loan-to-value cap on residential mortgages from 85% to 90%, while Britain has relaxed stress test requirements for home loans, aligned with the government's pro-growth policies.
While acknowledging the short-term benefits such changes bring to house prices, Moody's report emphasized the increased risk of defaults and mortgage losses over time due to these relaxed rules.
Moody's warned that such measures represent a credit negative for mortgage lenders, mortgage covered bonds, and certain residential mortgage-backed securities in the long term, despite no immediate credit rating adjustments.
This shift comes after a decade of stricter regulations post the 2007-9 global financial crisis when high loan default rates had imperiled some banks. However, with recent profits soaring due to higher interest rates and low loan default losses, European banks are better equipped to handle the risks posed by the new lending environment.
Moody's also noted that despite the relaxed rules, banks will maintain their own stringent underwriting criteria and risk evaluations, thereby potentially safeguarding against a surge in mortgage lending.