The uncertainties associated with real estate and mortgages continue to be among the principal risks facing the Swiss financial centre. Credit default risk and property valuation risk in particular are a key focus. In its guidance, FINMA sets out the findings from its supervisory activities in the area of mortgages, thereby creating transparency.
In the guidance published today on risks in the real estate and mortgage markets, FINMA summarises the results of its supervisory activities and explains its expectations with regard to the regulatory requirements in the mortgage lending business. It is thus creating transparency. The guidance is primarily aimed at banks. Other institutions supervised by FINMA, such as insurance companies, are generally exposed to the same risks in the mortgage sector. FINMA applies the same principles to their supervision.
Need for regulatory improvement in mortgage lending
The results of the supervisory activities at various banks show that the principles-based regulation concerning mortgage lending is being exploited. This relates in particular to the assessment of affordability and valuation practice and indicates a possible need for regulatory improvement.
According to Article 72d CAO, banks must ensure through internal directives that the affordability of the loans granted is guaranteed in a systematic manner and in accordance with sustainable criteria (credit default risk). In its supervisory activities, FINMA has observed that many banks tend to set loose affordability criteria in their internal guidelines and grant a high proportion of loans outside the affordability criteria they have set themselves (exceptions to policy – ETP). FINMA emphasises the importance of limiting, recording and appropriately monitoring lending transactions with an increased risk profile. It also lists examples of affordability criteria that it considers to be sustainable in the guidance. These affordability criteria are intended to ensure that potential interest rate increases do not have a negative impact on borrowers’ capacity to pay. FINMA’s assumptions about interest rate risk cover a period of several years. From a supervisory perspective, an overall evaluation of credit risk always considers the characteristics of a financial institution.
The regulatory scope for discretion is also often exploited in valuation practice. In its supervisory activities, FINMA has observed qualitative weaknesses that represent a property valuation risk, such as the use of lower capitalisation rates to value investment properties. The industry self-regulation recognised by FINMA represents a minimum regulatory standard that is tightened up by the institutions in their own risk policy where necessary. The requirements here are also based on principles. Accordingly, the institutions must document the method and the statistical basis for the property valuation and validate the valuation models used annually.
Finally, FINMA observes major risks to reputation in the lending business. It recommends that banks systematically record, limit and monitor any reputational risks in a way that is comprehensible to knowledgeable third parties, for example as part of the loan application during the lending process.
Minimum requirements for loan-to-value ratios and amortisation
The requirements for loan-to-value ratios and amortisation contained in the self-regulation reflect the regulatory minimum standards and FINMA expects the banks to comply with them. It also expects the banks to define segment-specific internal requirements for loan-to-value ratios and amortisation that correspond to the risks, in addition to the minimum requirements. Due to the current risk situation, it therefore advises setting lower loan-to-value limits for investment properties, including buy-to-let financing, and higher amortisation requirements.
FINMA’s supervisory activities in the mortgage lending sector
In 2024, FINMA conducted a survey on mortgage underwriting criteria at 27 banks and 18 insurance companies as well as six on-site inspections focusing on commercial mortgages. Since 2021, FINMA has carried out a total of 24 on-site inspections at banks and seven on-site inspections of real estate and mortgage funds in the mortgage lending sector. It also carried out mortgage stress tests at 13 banks. Institution-specific capital add-ons were already imposed in the past for increased risks in connection with real estate and mortgages.
