Fitch Ratings has published updated criteria assumptions for analysing Norwegian residential mortgage loan pools. The criteria assumptions are used for analysing the risks to Norwegian mortgages when rating Norwegian covered bond programmes. The update does not have a rating impact on the existing covered bonds rated by the agency.
The main criteria change is the update of Fitch's house price decline assumptions following the further decline in oil prices over the last 12 months. The Western county of Rogaland is the most dependent on the oil industry and its capital, Stavanger, has seen house prices declining by 10% from their peak in 2013 after previously showing strong growth.
Fitch reflects the impact of the house price correction and vulnerability to the lower oil price environment in increasing its House Price Decline (HPD) assumptions, revising the 'B' HPD to 25% from 22% in Rogaland and to 15% from 10% for the rest of Norway. Compared to 2015, the agency has decided to align its assumptions for Hordaland another Western county with the rest of the country, because Hordaland is less exposed to the oil industry than Rogaland and showed a trend more similar to the whole country during 2015. The 'AAA' current-to-trough HPD assumption is 62% in Rogaland and 50% for the rest of Norway, reflecting the fact that valuation ratios are well above their long-term average.
The Market Value Decline (MVD) assumptions incorporate the HPD assumptions and a quick sale adjustment (QSA) of 20% to reflect the price discount that properties experience upon repossession. This leads to an MVD of 68.1% in an 'AAA' scenario and 37% in a 'B' scenario for Rogaland and 60% and 32% in the 'AAA' and 'B' scenarios, respectively, for the rest of Norway, including the county of Hordaland.
The foreclosure timing assumptions have been revised compared to last year to reflect longer repossession timings observed in 2015 in a declining house price environment in Rogaland. The agency assumes it will take 20 months in a 'B' rating scenario and 28 months in the 'AAA' scenario between a default on a mortgage loan and the forced sale of the property.
Household indebtedness remains high in Norway (over 200% of disposable income), but its level increased more moderately in 2015. House prices also increased at a slower pace towards the end of 2015. In 2015, the regulator formally set the loan-to-value (LTV) cap at 85% (with 10% exceptions permissible), introduced mandatory amortisation down to 70% LTV, and made a 5pp interest rate stress at origination mandatory. These measures may restrict riskier lending going forward.
Fitch notes that Norwegian borrowers' affordability remains high, aided by decreasing mortgage rates, which fell by 1pp on average to 2.7% in first quarter 2016 (1Q16) from 3.7% a year ago. Norges Bank cut interest rates twice in 2015 and the base rate was cut further to 0.5% in 1Q16. In the short term Fitch does not expect the impact of lower oil prices to increase defaults on residential mortgages, with only a significant protracted decline having a greater impact through higher unemployment. Unemployment, although increasing, remains low at 4.5% in 1Q16 and is expected to average 4.4% over 2016-2017. As a result, no changes have been made to the foreclosure frequency assumptions.
The report entitled 'Criteria Addendum: Norway' should be read together with 'Covered Bonds Rating Criteria', dated March 2016, and 'Covered Bonds Rating Criteria Mortgage Liquidity and Refinancing Stress Addendum', dated September 2015 for a comprehensive understanding of Fitch's approach to rating Norwegian covered bonds.
Additional information is available on www.fitchratings.com
Criteria Addendum: Norway
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879693
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