Looser mortgage rules in Europe raise risks for lenders, warns Moody's

By Iain Withers

LONDON (Reuters) - The roll-out of looser mortgage rules across several European countries has raised the risk of loan defaults and is a negative for lenders' credit profile over the long term, credit ratings agency Moody's said on Tuesday.

Bank regulators in six European countries with some of the region's highest household debt levels - Britain, Switzerland, Netherlands, Norway, Sweden and Finland - have all taken action to ease lending limits on mortgages since 2022, Moody's said in a report shared with Reuters.

Actions taken include both Finland and Norway increasing the loan-to-value cap on residential mortgages from 85% to 90%, while Britain has eased stress test requirements on home loans. Britain is consulting on further easing rules in response to its government's push for pro-growth policies.

"While the loosening of lending rules is modest so far and supports house prices in the short term, it can increase the risk of defaults and subsequent mortgage losses over time," the report stated.

"It therefore increases long-term risks to mortgage loan performance and is credit negative for mortgage lenders, mortgage covered bonds, and certain residential mortgage-backed securities," it added.

The publication did not announce any credit rating actions.

The softening of mortgage rules comes after more than a decade of tighter regulations following the 2007-9 global financial crisis, Moody's said. Soaring loan default rates in the crisis had threatened the viability of some banks.

In recent years, European banks have generally enjoyed strong profits driven by higher interest rates that have boosted income from lending, while losses from loan defaults have remained low.

Despite the heightened risks from relaxed lending rules, Moody's said they were largely mitigated by better lending standards and larger loss-absorbing capital buffers at banks.

Relaxed lending rules would not necessarily lead to increasing mortgage lending as banks set their own underwriting criteria and risk appetite, Moody's added.

(Reporting by Iain Withers. Editing by Tommy Reggiori Wilkes and Mark Potter)