If housing prices were to fall, for instance, housing declines in value while mortgages remain constant. Consequently, the loan-to-value ratio of the mortgage increases. As mortgages with an excessive loan-to-value ratio cannot be used as collateral, falling housing prices can thus mean that some of the collateral must be removed or replaced. As the banks have often allocated an extra buffer of collateral, there is scope to remove mortgages that no longer meet the requirements, without having to replace them with other collateral. However, if the banks do not replace the collateral that has been removed, it may limit their possibilities to issue further bonds based on this collateral. The reason for this is that both investors and credit rating agencies often require a buffer of additional collateral. The banks can top up the collateral by earmarking other types of collateral, such as government bonds, by selling parts of their liquidity buffers or by issuing short-term securities and then earmarking the liquid funds they receive. However, the opportunity to top up the collateral in this way presupposes that the financial markets are functioning normally and that investors have confidence in the Swedish banks. Heavily falling housing prices can disrupt market functioning Covered bonds are subject to special legislation that ensures that these securities are very safe. Although this regulation has worked well so far, one cannot rule out the possibility that heavily falling housing prices could disrupt the functioning of the market and thus affect the banks.
This means  5  See M, Sandström, D, Forsman, J, Stenkula von Rosen and J, Fager Wettergren (2013), The market for Swedish covered bonds and links to financial stability, Economic Review, 2013:2. Sveriges Riksbank. 6  See L, Marklund (2014), Consequences of an increased loan-to-value ratio for the funding of mortgages with covered bonds, The analysis group’s memorandums on household indebtedness, No. 7, Sveriges Riksbank. www.riksbank.se. BIS central bankers’ speeches  5  that higher interest rates could have an effect on the household’s finances. A further reason for concern is that households’ expectations of future mortgage rates are much lower than the Riksbank’s. This could mean that households do not have sufficient scope in their budgets for higher interest rates. A study based on data from the end of the 1990s and up to 2012 shows that households have acted rationally and that it has been financially beneficial for them not to amortise their loans.7 It has been more profitable to instead invest their savings in financial assets, such as equity funds and fixed-income funds. This is because the return on these types of fund was high during this period, at the same time as mortgage rates were low and housing prices rose, with the exception of shorter periods of time. But although it has been a rational decision not to amortise the loans, I also believe that these conditions have laid the foundations for a new type of behaviour among households. It has quite simply become more common not to amortise.