The Swiss Financial Market Supervisory Authority FINMA has approved the new minimum re-quirements for mortgage financing drawn up by the Swiss Bankers Association (SBA) as a minimum regulatory standard. The new self-regulatory regime, which enters into force from 1 July 2012, for the first time lays down minimum requirements concerning down-payments by borrowers and introduces compulsory amortisation. The recognition comes in the context of the measures presented today by the Federal Council concerning the implementation of Basel III, “too big to fail” and reduction of the risks in the mortgage market, which FINMA expressly welcomes.
FINMA has for a long time been pointing out the risks that could build up as a result of rapid growth in mortgages for residential property. There is no sign of a weakening in the strong demand for mortgage financing, not least due to the exceptionally low level of interest rates. In the course of its supervisory activities and direct inspections, FINMA has also noted that many banks are stretching their own lending criteria to the limit, as regards both financial sustainability for the borrower and the loan-to-value ratio applied to the property, and are also making increased use of exceptions to policy. This is creating a new segment of borrowers who would not be able to acquire residential property under different market conditions. In particular, there is a risk that rising interest rates would leave such borrowers unable to service their loans, ultimately raising the possibility of defaults and falling property prices. When a real-estate bubble bursts, the implications for a country’s financial stability can be extremely serious.
Guidelines on minimum down-payments and amortisation
The SBA guidelines set out basic requirements concerning minimum down-payments by borrowers and contain clear rules on amortisation that must be taken into account during financial sustainability analyses. Given that this is a self-regulatory regime imposed by the banks themselves, FINMA ex-pects it to be widely accepted by them and implemented swiftly and conscientiously.
Minimum down-payments from own funds:
In future, borrowers will be required to supply at least 10 per cent of the lending value of the property from their own funds, which may not be obtained by pledging or early withdrawal of Pillar 2 assets. This means that the purchase of a property by a mort-gagor using a down-payment derived exclusively from pension fund assets will not meet the minimum standards. The new guidelines require borrowers to be on a sounder financial footing. Equally, they reduce the danger that they will put at risk their retirement capital and, with it, their pensions.
Under the new rules, mortgages must in all cases be paid down to two thirds of the lending value within a maximum of 20 years. Waiving amortisation in the expectation of rising property prices would not, therefore, meet the minimum standards. The amortisation rules require the debt burden to be steadily reduced, which will have a positive effect on long-term financial sustainability.
Revised Capital Adequacy Ordinance contains reference to the new minimum standards
In the event that a mortgage granted after 1 July breaches these new minimum standards, banks will be required to significantly increase the capital involved to cover it. This is stipulated in the Federal Council’s revised Capital Adequacy Ordinance, which also contains a further instrument for reducing mortgage risks. If a bank grants a mortgage amounting to more than 80 per cent of the lending value, it will be required to back it with a higher level of capital. This measure comes into force on 1 January 2013. As a further measure, from 1 July 2012 the Federal Council will have at its disposal a new capi-tal buffer for all banks that can be selectively and temporarily activated for specific sectors, such as the mortgage business.
Although the amortisation requirement has a direct impact on financial sustainability calculations, there are still no binding minimum standards in this central area of residential property financing. However, a realistic assessment of the medium-term financial situation is invariably in the interest of borrowers too, as it ensures that their property remains affordable for them even if interest rates rise or their own income falls.
FINMA views the measures as positive steps
The package of measures for the mortgage sector presented by the Federal Council today, and the binding SBA guidelines issued in this context, are steps towards counteracting the increasing risks in the mortgage market. FINMA welcomes these measures and their rapid implementation. In the medium term, the measures will improve the quality of the banks’ mortgage portfolios or, alternatively, lead to higher capital requirements geared to the risks involved. However, the guidelines will have no direct effect on existing loan agreements and the risks associated with them.
Tobias Lux, Media Spokesperson, phone +41 (0)31 327 91 71, email@example.com