Much is right with Swedish macroprudential policy. But regarding risks associated with household debt, the policy does not pass a cost-benefit test. The substantial credit tightening that Finansinspektionen (FI, the Swedish FSA) has achieved – through amortization requirements and more indirect ways – has no demonstrable benefits but substantial costs. The FI, and international organizations, use a flawed theoretical framework for assessing macroeconomic risks from household debt. The tightening was undertaken for mistaken reasons. Several reforms are required for a better-functioning mortgage market. A reform of the governance of macroprudential policy – including a decision-making committee and improved accountability – may reduce risks of policy mistakes.
Update, June 202: Problems of the amortization requirements confirmed
The paper was written before the onset of the coronavirus pandemic. It emphasizes that the FI’s mandatory amortization requirements substantially increase the mortgagors’ housing payments and reduce their cash-flow margins. Thereby the amortization requirements reduce households’ resilience to shocks – in contradiction to the FI’s objective to increase the resilience.
The paper also notes that the FI is aware of the problem that amortization requirements reduce households’ resilience. Its response to this problem and contradiction is to allow mortgage firms to make exemptions from amortization payments for mortgagors “for a limited period” on “special grounds.” However, the special grounds FI mentions refer to situations when individual mortgagors face individual problems in fulfilling their debt service for reasons such as “unemployment, long periods of absence from work due to illness and the death of a close relative.” There is no suggestion in the FI’s discussion that mortgage firms might consider mortgagors’ consumption or the macroeconomic risk from a reduction in mortgagors’ consumption—the FI’s official rationale for having introduced the amortization requirements. It difficult to believe that mortgage firms would exempt mortgagors from amortization on the ground that certainly they can fulfill their debt service, but they cannot maintain their normal consumption. The mortgage firms will most certainly be focused on any risk to their individual debt service rather than on any macroeconomic consequences. Thus, the FI has not provided any mechanism through which the exemptions to amortization payments would avoid the reduced resilience caused by the amortization requirements.
The problems of the mandatory amortization requirements were confirmed, when the corona pandemic forced the FI in March 2010 to adapt and to make a surprise special recommendation: “Loss of income due to the corona-virus [is] a cause for exemption from amortization.” But borrowers have no right to an exemption; it is still the mortgage firm that decides. And the recommendation did not apply to those that have not yet lost their income. In April, the FI corrected the latter and stated that banks may grant all mortgagors amortization exemption. But the exemption is only in force until the end of June 2021. As Bäckman has argued – and is argued in the paper – it is better to simply abolish the amortization requirements.