Norwegian Covered Bonds Market
Contents Introduction to the Norwegian covered bonds market
The economic situation in Norway - December 2012
The Norwegian Economy - Background
The Norwegian mortgage and covered bonds market
Annex: Legal framework
Disclaimer This leaflet is prepared by Finance Norway (FNO), the trade organization for banks, insurance companies and other financial institutions in Norway, in cooperation with experts from issuers of covered bonds. The purpose of the document is to give an informal overview of the Norwegian legislation and housing market in respect of c overed bonds, together with a short review of Norwegian economy. Thus the information provided herein is of a general nature and not a professional or legal advice. FNO and the relevant experts accept no responsibility or liability w hatsoever, and the leaflet may not in any way be trusted as a legally binding document. Please note that it cannot be guaranteed that the information is up to date and correct in any way and at any time.
First published June 2011. Chapter on The Norwegian economy - Background is updated June 2012. Chapter on The economic situation in Norway is updated March 2013. Latest version available at www.fno.no/cb
Introduction to the Norwegian covered bonds market The financial industry in Norway Norwegian covered bonds are attractive to investors looking for high-quality instruments with low credit and market risk. The high quality of Norwegian c overed bonds is supported by the Kingdom of Norway’s very strong macroeconomic position. Finance Norway – FNO is the trade organization for banks, insurance companies and other financial institutions in Norway. FNO represents some 180 financial institutions operating in the Norwegian market. The Norwegian Covered Bond Council is an entity within FNO that seeks to promote Norwegian covered bonds as an attractive investment vehicle for foreign and domestic investors. All licensed financial institutions, investment firms and financial markets in Norway are supervised by a single supervisor, Finanstilsynet, the FSA of Norway.
Covered bonds The Norwegian covered bond legislation was adopted in June 2007. It came as a result of a lengthy study and reviews sponsored by the government and with strong support by the financial industry. It is a modern and up to date legislation that provides investors strong protection from the cover pool. The legislation is closely matching corresponding EU directives and regulation, and the Norwegian covered bonds are seen as being among the best in class of European covered bonds. Issuance of the first Norwegian covered bonds started with euro denominated bonds in second half 2007, and had thus just barely started when the crisis hit the international financial markets the following year. In order to provide liquidity to the Norwegian banking market the authorities opted to swap treasury bills against covered bonds with Norwegian banks and mortgages institutions. This gave an impetus to the fledgling domestic market of covered bonds; a large number of banks established new subsidiaries in order to take advantage of this liquidity window. During 2008 and 2009 a total NOK 230 bn. (ca. EUR 30 bn.) of Norwegian c overed bonds was lodged in swap agreements with the Government. These bonds are refinanced in the market at term, or earlier at the choice of the issuer. About NOK 138 bn. are still outstanding (December 2012) and will be refinanced during the next years.
Specialized credit institutions Today more than 20 Norwegian specialized credit institutions are licensed to issue covered bonds. Norwegian covered bonds are protected by law, and the issuers are subject to a particular supervisory regime involving both an independent inspector and the public supervisor, Finanstilsynet. The smallest ones only operate in the domestic market. The largest issuers already have been, and are expected to continue to be, present in the international capital markets on a regular basis. Cover pools are dominated by residential mortgages, and the large majority of the issuers are specialized residential mortgage institutions (cf. the name “Boligkreditt”). Just a small number of issuers are specialized in commercial mortgages or in public sector loans.
Trading of covered bonds The covered bonds are listed. The domestic issues listed on Oslo Børs may be traded on the exchange, but more often are traded off exchange and then reported to and publicized by Oslo Børs. International issues may be listed anywhere, u sually in an international financial center. Some of the issuers supplement their bond issuance with private placements. Private placements and bondholders’ claims rank pari passu in the cover pool.
The economic situation in Norway March 2013
With the oil price still at high levels, high activity in the petroleum sector provides a strong impulse to the mainland economy, where capacity utilization is estimated to be somewhat above the normal level. However, 3.5 percent GDP growth, y/y, in 2012 was somewhat below the central bank forecast and market consensus, mainly due to moderate growth in the fourth quarter, with weak developments in both private consumption and traditional goods exports. The labor market tightened through the first three quarters of 2012, with unemployment, measured by Statistics Norway’s Labor Force Survey (LFS), dropping from 3.3 percent in January 2012 to 3.0 percent in October 2012. However, the LFS-rate sharply increased in November and December and unemployment is currently at 3.6 percent (average of December 2012 – February 2013). On the other hand, registered unemployment at the job centers has not shown the same development, and is still at a low level. Wage growth has been solid, and is projected to remain at a level around 4 percent in the years to come. Private consumption growth has been moderate throughout 2012, and household saving has increased. House prices are still growing at an annual rate of approximately 7-8 percent.
fell through the second half of 2012, also reflected in weak growth in industrial manufacturing. This is due to low international demand and higher wage growth in Norway than in competing countries. However, the economy is markedly divided and in other industries prospects are brighter, especially amongst suppliers to the petroleum industry and other related industries. Petroleum investments grew strongly, by above 14 percent in 2012, partly due to new petroleum discoveries and persistently high oil prices. Even though petroleum investments are projected to grow at a slower pace in the years to come, petroleum activity will provide a substantial growth impulse to the mainland economy. Capital Formation Gross capital formation, Mainland Norway excl. Government, change last 12 months (LTM) 20 15 10 5 Percent
GDP Growth, Mainland Norway Quarter-on-quarter growth, s.a.
0 -5 -10
2006-01 2006-02 2006-03 2006-04 2007-01 2007-02 2007-03 2007-04 2008-01 2008-02 2008-03 2008-04 2009-01 2009-02 2009-03 2009-04 2010-01 2010-02 2010-03 2010-04 2011-01 2011-02 2011-03 2011-04 2012-01 2012-02 2012-03 2012-04
Source: Statistics Norway
Labour market 3,0
5,00 Unemployment rate (right scale)
Total employment (left scale)
Household consumption, quarter-on-quarter change, s.a.
2,50 2,00 2012-11
Source: Reuters EcoWin
Norway is a small and open economy with a significant proportion of exports and imports. Due to slower growth amongst Norway’s main trading partners, traditional exports
Moderate growth in private consumption, increased household saving With low inflation, low electricity prices and solid nominal wage growth, households’ real disposable income showed a solid increase in 2012. Together with high growth in house prices, this enables households to increase their consumption. However household consumption growth was modest through 2012 with 2.9 percent growth y/y. Retail sales showed a particularly weak development during the last quarter of 2012, with negative monthly growth in October. However, retail sales rebounded in January and February 2013, although at a moderate pace. Furthermore the households’ saving rate has increased in recent years and the 2012 average rate of 8.7 percent represents one of the highest saving rates recorded.
0,5 0,0 -0,5 -1,0 -1,5 -2,0 2006-01 2006-02 2006-03 2006-04 2007-01 2007-02 2007-03 2007-04 2008-01 2008-02 2008-03 2008-04 2009-01 2009-02 2009-03 2009-04 2010-01 2010-02 2010-03 2010-04 2011-01 2011-02 2011-03 2011-04 2012-01 2012-02 2012-03 2012-04
Source: Reuters EcoWin
Source: Reuters EcoWin
Current account, balance in % of GDP
18,00 16,00 14,00
12,00 10,00 8,00 6,00
Nominal and real house prices. Indices. 1985=100. Annual figures. 1985-2012
2011, the trend continued through 2012 and into 2013, with an average y/y growth of 7.9 percent. In addition to high real income growth, the strong development is fuelled by continuing low interest rates and high population growth. There is still potential for further growth, perhaps at a slightly more modest pace going forward. Home building activity picked up sharply in 2011, after falling markedly in the wake of the financial crisis. This trend continued into 2012 with total housing starts reaching approximately 30 000 compared to almost 28 000 in 2011. Downside risk in the housing market should be viewed in light of the terms of trade, which is an important fundamental factor behind income growth. A substantial slide in oil prices or increasing import prices may lead to falling income growth and housing demand at home. On the other hand, increasing construction costs in the long run, due to weak productivity growth in the construction sector and shortage of land, due to increased centralization, may limit the downside risk in the real house price level.
Source: Statistics Norway
Fiscal policy In 2012 the fiscal policy, measured as the change in the structural non-oil budget deficit as a share of trend GDP for mainland Norway, provided an expansionary impulse of 0.8 percent. The 2013-budget predicts an expansionary impulse of 0.8 percent this year as well. Large petroleum revenues give the Norwegian government substantial economic freedom, and the financial crisis was met by strong fiscal stimulus in 2009. Since then, the structural non-oil deficit has remained at a high level, and is substantially higher today than in 2009 measured in fixed prices.
0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2012
Fiscal policy – budget impulse
Per cent of GDP in mainland Norway
Deflated by CPI
Deflated by disposable income
Positive numbers indicate that the budget is expansionary
Source: NEF, EFF, Finn.no, Pöyry and Statistics Norway
Per cent of mainland GDP
Large current account surpluses Norway has experienced large surpluses on the current account for many years, thanks to the sizeable export of petroleum products. The current account surplus was 12.8 percent of GDP in 2011, and 14.2 percent in 2012. However, Statistics Norway projects reduced surpluses 2013 to 2016 due to weaker terms of trade.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Ministry of Finance
House prices still growing Real house prices are high by historical standards. However, income levels have also increased considerably over the last decades, and deflated by income levels house prices are more moderate. Following substantial growth in house prices through
Norges Bank delays first rate hike After the 25 basis points cut in march 2012, the central bank has left the key policy rate unchanged at 1,5 percent ever since. However, at its latest meeting in March 2013 both inflation projections and growth forecasts among Norway’s main trading partners were revised down, resulting in a subsequent lowering of the forward guidance on the key rate, by approximately 20-60 basis points in 2013 and 2014. Thus the first hike was delayed yet again, now signaled to occur sometime during the spring of 2014. In addition to slow growth abroad and low inflation, negative effects from a strengthening of the NOK puts a downwards pressure on monetary policy. Unrest in the international financial markets decreased through the second half of 2012, possibly due to extraordinary monetary policy measures, in order to bring down long term interest rates, such as the OMT-program in the euro zone and additional rounds of quantitative easing in the US. During the second half of 2012 spreads in both bond and money markets decreased and banks and non-financials experienced increased access to long-term market funding. This development has been fairly stable through the first quarter of 2013.
at a modest pace. The aggregate debt burden of the households is currently just below 200 percent, equal to an aggregate household debt two times the size of the aggregate household disposable income. Authorities have expressed concern with the high level of household debt. However, a breakdown of the credit growth and debt burden in households shows that the majority of household credit growth since the early 2000s stems from households in age groups above 45 years. Furthermore, vulnerable groups, households with low income and a high debt burden, make up less than 4 percent of total households. Growth in house prices over a long period of time have put Norwegian households in a significant net wealth position. DNB Markets estimates from August 2012 showed that household financial and real assets exceeded NOK 7 000 bn. At the same time aggregate household debt constituted approximately NOK 2 500 bn.
Monetary policy rates 6,00 UK
Domestic credit, change y/y
Source: Reuters EcoWin 25
The operational target of monetary policy is low and stable inflation, with annual consumer price growth of 2.5 per cent over time. Inflation, measured by the CPI-ATE (CPI adjusted for tax changes and excluding energy products) remained at low levels through 2012, and the trend has continued into 2013, currently at 1.1 percent y/y as of February. According to Norges Bank the growth in costs in consumer related industries have been lower than expected. In addition, low wage growth abroad and a strong NOK may explain why inflation has been below the target in recent years.
Consumer prices, per cent change y/y
-5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total credit indicator 5,00
Source: Reuters EcoWin
The Norwegian krone still strong The NOK strengthened through 2012, but has weakened somewhat through the first quarter of 2013. As of April the import weighted krone exchange rate (I-44) is just above 86, somewhat weaker than the second quarter projection from Norges Bank. Developments in the NOK are heavily affected by shifting focus in the FX market. Even though there are signs of slower growth, the macroeconomic picture is still robust and interest rate differentials are still at a high level. This indicates a strong NOK also going forward. However, foreign banks have sold NOK over the last months (net), which indicate less demand from foreign investors.
Source: Statistics Norway
The most important source of corporate credit is bank loans and lower growth in corporate debt may be explained by stricter banking regulation. In general corporate loans require more capital than mortgages, and banks may be inclined to cut back on credit to businesses in order to adjust the risk weighted balance sheet to meet the new, increased capital requirements. Household credit growth is still higher than the wage growth. Thus the households’ debt burden continues to rise, although
NOK – Exchange rate change Import weighted index I-44 (inverted) 80
Credit market Aggregate credit growth was fairly stable at around 7 percent y/y in 2012, until falling markedly in December and January 2013. Household credit growth has shown a stable development, currently growing at 7.2 percent y/y as of February 2013. Thus the drop in aggregate growth is due to lower credit growth to businesses which fell markedly during the last part of 2012 and into 2013.
105 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Reuters EcoWin
The Norwegian Economy Background
Summary Norway has gradually become one of the wealthiest countries in the world. According to the IMF GDP per capita was 11 per cent higher in Norway than in the United States and 69 per cent higher than in the Euro area in 2011 (adjusted for purchasing power differences). A main feature of the Norwegian economy is the large production of crude oil and gas. This production stems from the hydrocarbon resources on the continental shelf off the Norwegian coast. Production of crude oil and gas accounts for over 22 per cent of total GDP and approximately 50 per cent of total exports. In spite of the importance of oil and gas, the Norwegian economy is well diversified and only 1.7 per cent of all employed persons work in the petroleum sector (2011). However when including employees in all businesses which directly or indirectly supply goods and services to the petroleum sector, the figure was a pproximately 8 per cent in 2009 according to Statistics Norway. The Norwegian economy escaped relatively unharmed from the recession following the 2008 financial crisis, and seems to withstand most of the effects from the current problems in the euro zone. Thanks to its petroleum sector and sound petroleum wealth management, Norway enjoys a strong fiscal position. However the traditional exports sector have experienced falling demand and reduced prices. Together with a strong krone this has led to a somewhat divided economy with high activity in the petroleum sector and all its related industries whereas the traditional exports sector is facing reduced growth prospects. Low cost production and squeezed margins of finished goods and many services which Norway import, have resulted in a substantial improvement in the terms of trade and the current account balance. The overall current account remains in large surplus, at 14 per cent of GDP in 2011 up from 13 per cent in 2010. GDP by activity and expenditure The contribution from different industries to GDP changes over time. In 2011 oil and gas accounted for 22 per cent, manufacturing, electricity and construction for 15 per cent, the services industries for 35 per cent and General government for 16 per cent of GDP. GDP by kind of main activity 2011 Financial services 4 %
Agriculture, forestry and fishing 1%
VAT and investment levy 11%
Manufactoring, electrisity and construction 15%
General government 16%
Oil and gas 22%
Other services 21%
Commodities, vehicles and repairs 7 % Transport 3%
In 2011 the export surplus was 14 per cent of GDP. 41 per cent of GDP was spent by households and NGOs, 22 per cent by general government consumption and investments accounted for the remaining 23 per cent. GDP distributed by expenditure 2011
Export surplus 14%
Consumption by households and NPOs 41%
Government consumption 22%
Government financial position Oil production peaked around 2000 at around 180 million standard cubic meters of oil equivalent (Sm3 o.e.) and has fallen over the last decade, but since the mid-1990s gas production has increased and by 2010 gas made up around 40 per cent of the total petroleum production of approximately 220 million Sm3 o.e. Gas production is expected to rise further while the oil production diminishes and the total level of production is expected to remain unchanged for the next 10 years. Although falling since March 2012, the increase in oil price over the last decade has to a large extent compensated for the decrease in oil volumes. Revenues from oil and gas activities are invested in The Government Pension Fund Global (GPFG). The Fund has a twofold purpose of smoothing out the spending of volatile oil revenues in government budgets, and at the same time acting as a long-term savings vehicle allowing the Norwegian government to accumulate financial assets in order to help cope with large, future financial commitments associated with an aging population and pensions. The government’s “fiscal rule” requires petroleum revenues to be phased gradually into the Norwegian economy, roughly in line with the expected real return on the Government Pension Fund Global, estimated at 4 per cent. Thus, even if government petroleum revenues should disappear in the future, government spending will be maintained at the same level. At year-end 2011, the size of the Fund was NOK 3 312 billion (EURO 436 billion or USD 543 billion). This is approximately 1000 billion more than Norway’s GDP for 2011 and makes the Fund one of the largest single-owned funds in the world. The public sector in Norway stands out as the most financially solid among the OECD countries. The general government financial balance showed a surplus of around 10 per cent of GDP in 2010 and 12.5 per cent in 2011. Norway has an extensive social welfare system with an elaborate social safety net and public services such as education and universal healthcare. Comprehensive benefit schemes guarantee a good standard of living for individuals of old age and in periods of illness, disability, pregnancy and unemployment.
banks have chosen this option, which leads to a more even distribution over time. At the end of 2011 Norwegian mortgage institutions had a total of approximately NOK 740 billion (EUR 95 billion) in outstanding covered bonds.
Government financial balances 2011 Surplus (+) or deficit (-) in percent of GDP 15,00
The rise in non-performing loans has been limited and profitability in the banking sector strengthened in the course of 2009 and 2010. The results in 2011 were somewhat lower than in 2010, although the figures from 2010 were influenced by positive one-off effects. When adjusting for these effects, last year’s results were slightly better than the previous year. Banks’ good performance reflects low exposure to dubious assets, a robust domestic economy and a relatively conservative prudential framework.
In percent of GDP
5,00 0,00 -5,00 -10,00
Source: OECD Economic Outlook 89
The EEA Agreement, European regulations Norway is not a member of the EU, but participates in EU’s internal market under the European Economic Area Agreement (EEA). According to this agreement most EU regulations are implemented in Norway, which means Norway is bound by the Acquis Communautaire and future EU directives and regulations. The only exceptions are agriculture, fisheries and some taxation rules. As a party to the EEA Agreement Norway is obliged under this treaty to implement all EU directives that relate to financial institutions and markets, such as the Capital Ratio Directive, MiFID, Prospectus Directive, etc. Norway has its own national currency, NOK. The advantage of having a national currency is that monetary policy can be used as an effective tool by the authorities to stabilize the economy and also adjust for adverse shocks.
The financial sector Norway has a relatively small financial sector compared to other countries. The financial sector accounts for 5 per cent of the mainland GDP (market value) and 2 per cent of the employment (2011) in the mainland economy. To ease liquidity conditions in the wake of Lehman Brothers and the subsequent turmoil in the financial markets during the fall of 2008, the authorities introduced a number of measures. The most important one was the swap arrangement managed by the central bank, which allowed banks to swap covered bonds for treasury bills and thereby acquire the liquidity they needed in the market. NOK 230 billion was drawn upon by the banks before the scheme was discontinued in December 2009. At the end of the agreement period the participants must buy back the covered bonds at the original price. Most agreements were 3-5 years, thus these covered bonds have to be r efinanced in the market. Numerous contracts have already reached m aturity. The mortgage institutions have pursued an active issuance policy and thus covered the refinancing of the maturing swap contracts as well as other financing purposes. In December 2013, March 2014 and June 2014, approximately NOK 120 billion combined will reach maturity. To counteract a potential sudden increase in supply of covered bonds in the market, the government has offered banks to terminate the swap contracts earlier than originally scheduled. So far several
Loan losses in banks and mortgage institutions (in per cent of gross lending) 1,40 1,20 1,00 0,80 0,60 0,40 0,20 0,00 -0,20 -0,40 1999 2000 2001 2002 2003 2004 2005
2008 2009 2010 2011
Demography The population of Norway is projected to rise considerably, from 5 million today to about 7 million in 2060. The main prerequisite for such a scenario is continued high immigration. In 2011 there were 2.2 million private households in Norway, an increase of 31 000 from the previous year. Approximately eight out of ten people live in urban areas compared to 50 per cent after World War II. The growth in the number of residents is particularly high in the largest urban areas. The high population growth together with urbanization and limited newbuilding may lead to an upward pressure on house prices and investments in urban areas.
Labour Market The unemployment rate is very low in Norway, at 3 per cent. Most people are employed in tertiary industries, which count for nearly 78 per cent of the employment figure. Primary industries now comprise just above 2 per cent of the work force and secondary industries around 20 per cent. Labor productivity is high in Norway. Even if one excludes the oil and gas sector, the Norwegian economy has one of the highest productivity rates within the OECD. The population is highly educated. According to OECD figures, approximately 36 per cent of the population between 25 and 64 years hold a degree from higher education, well above the OECD average of 28 per cent.
High labor immigration from member countries of the EU, due to Norway’s participation in the EEA and the strong economy, also gives high flexibility in the Norwegian labor market.
Total debt and mortgages to Households
2 500 000
2 000 000 NOK mill.
Compared to other countries, a high per cent of the adult population in Norway is employed. This is mainly due to the fact that the majority of Norwegian women are working. Between the ages of 16 to 74, 72 per cent of the men and 67 per cent of the women are currently employed.
1 500 000
1 000 000
Housing Market There are a total of 2.3 million dwellings in Norway as of 2011. This corresponds roughly to the number of households. Nearly 80 per cent of Norwegian households own their dwellings. Real property in Norway is registered in a central register to which real estate agents, lawyers, banks etc. have direct access. The database is daily updated with information about owner, restrictions on use, charges and encumbrances etc. If a transaction is submitted for registration one day, it will be registered in the database at the latest on the following day. There is also a “GAB” register (street, address and building register) where technical data about the property is kept. Here all permits and applications concerning any property will be registered. This database is also continuously updated.
Dwellings by type of building 2011 Other building 4%
Multi-dwelling building 23%
Detached house 52%
Row house, linked house and house with three dwellings or more 12%
House with two dwelllings 9%
Residental mortgage market Most residential mortgages are loans to households. As of February 2012, 96 per cent of mortgages to households were granted by banks and mortgage credit institutions. Lending to households in Norway other than mortgages is limited because of the possibility of consolidating consumer loans into less expensive mortgage loans.
0 96 97
Total debt households
10 11 12
Mortageges to households
Traditionally most housing loans in Norway are floating rate loans. The interest rate is not directly linked to a quoted market rate, but set individually by each bank based in general on an evaluation of (i) the bank’s funding costs, (ii) the competitive market situation and (iii) the bank’s overall financial condition. As of December 2011 approximately 7 per cent of loans from banks and 6 per cent of loans from credit mortgage institutions granted to households were fixed interest rate loans.
Taxation The Norwegian tax system may explain much of the development in house prices and the high share of owner occupied housing. Norway’s current tax system provides strong incentives to invest in housing as the benefit of owner occupied housing is untaxed, interests paid on mortgages are deductable and effective real estate taxes are very low as compared to the OECD area. In addition the tax valuation of dwellings is very favorably treated in respect to the wealth tax system. Norway applies an individual wealth tax that is calculated based on net worth, i.e. gross wealth less debt. The maximum rate applied is 1.1 per cent of net wealth, and it applies to net wealth in excess of NOK 700 000. Only app. 25 per cent of the assessed market value of dwellings is basis for the wealth tax. In comparison, the full market value of financial assets is basis for the wealth tax. Interest and capital gains are taxed 28 per cent. If a dwelling is occupied by the owner for a minimum of one year, the dwelling is eligible for tax free capital gains if sold. For second homes the period is a minimum of five years. As a main rule, borrowing costs, i.e. expenses relating to the establishment, service (interest expenses) and termination of a loan are deductible from taxable income for all Norwegian taxpayers. This includes all accrued interest expenses, expenses relating to provision of collateral, deferrals, etc. The tax rate applied is 28 per cent. Associated with real estate purchases, a charge (stamp duty) of 2.5 per cent of the market value is payable to the state.
The Norwegian mortgage and covered bonds market
a. Residential mortgages
Traditionally mortgages are refinanced each time a dwelling change hands. A consumer taking up a personal mortgage loan will be personally liable for the debt hereunder. The borrower will continue to be liable for the loan until it is fully repaid, also if the relevant housing has been sold without giving full r edemption of the outstanding debt. A borrower may therefore not choose to move out of the dwelling and “leave” the debt behind. This also applies if a personal debtor is put under insolvency procedure. Should a person subsequently to the closing of bankruptcy proceedings come to means, for instance through inheritance, his creditors are free to take renewed a ction to satisfy any claim, as long as the claim has not turned obsolete. Since the debt is personal, the borrowers have strong incentives to meet their debt obligations. Even during the Nordic b anking crisis, in the early 1990’s, as house prices decreased and u nemployment rose, bank’s losses on loan to households were limited. In accordance with the Financial Contracts Act the borrower should receive at least six week notice before an interest increase. Most banks use a similar notification procedure before an interest rate reduction. As of 2012, less than 10 per cent of residential mortgages are fixed interest loans. Maturities and refinancing Normally loans are currently written with 25-30 year maturity. In Norway there is no prepayment penalty on floating interest rate loans and it is also easy to move your mortgage to another institution. Refinancing of mortgages are common, for instance in connection with buying a new home, taking out a mortgage to buy a new car etc. This practice requires frequent credit assessment, which again will maintain the quality of the pool.
Origination based on sound credit assessment When Norwegian banks asses mortgage applications the primary focus is on the applicant’s debt serving capacity and ability. Most banks use models to estimate the borrower’s cash flow after living and financing expenses. In addition, the banks normally perform stress tests on the applicant’s capability and ability to repay if the interest rate were to increase.
The lender shall also dissuade the customer in writing, before entering into the contract, if the lender has to assume that the financial capacity or other circumstances of the borrower indicate that he seriously should consider refraining from taking the loan. This ensures a conservative underwriting policy. For more information see the “The Financial Contracts Act”, in the Annex: Legal framework.
Transparent information about individuals The legal environment in Norway gives financial institutions easy access to important information about potential and current borrowers. This allows for detailed insight into the applicant’s financial status and behaviour, thus further ensuring the quality of the credit assessment.
The banks retrieve data from the credit information agencies regarding the applicant. E.g.:
• Tax records for the last three years (taxable income, taxes paid, net taxable wealth, marital status etc) • Any debt collection outstanding (since 3 years) • Directorships • Any bankruptcy
With these data, the bank will know whether the applicant pays his bills (electricity, phone etc). Together with internal payment history, information from the applicant and the external retrieved data provide in-depth understanding about the applicant’s financial behaviour and the likelihood of default on the applied mortgage.
Assessment of the properties The Norwegian Covered Bond legislation requires that residential properties shall be set at a prudent market value. The most common method to set a market value is by use of the selling price of similar dwellings in the same area, or an authorized external appraiser.
In Norway, most real property is sold through authorized real estate agents. They have undergone special training to conduct estate agency, and are subject to strict authorization rules and strict control routines on the part of the authorities. An estate agent may also give a valuation of the property, but in most cases banks will use a professional appraiser.
Normally real estate is sold through an open auction. The auction price will then reflect the true market valuation of the property.
AVM company Most Norwegian banking groups make extensive use of Eiendomsverdi as an AVM company, for estimating market values of residential real estate and indexing the values in accordance to subsequent development in the residential real estate market. The estimations are based on a complex valuation model.
The data base for this model is updated on a daily basis with information received from the governmental Norwegian Land Registry and 95 per cent of the real estate agencies in Norway (in terms of volume the percentage is much higher). In principle all residential properties (more than 2 mill.) are comprised in the database, which was established in the year 2000.
Monitoring of originated residential mortages When mortgages have been granted, most Norwegian banks update their internal rating of the customers on a monthly basis. The purpose is to identify if there are any changes in the portfolio quality, and if any remedial action have to be implemented. Furthermore, most Norwegian covered bond issuers update the valuations on the properties in the portfolio on a quarterly basis. This update is based on estimates from Eiendomsverdi.
For each property, updated value is calculated using information about any sales for similar properties in the neighbourhood lately. Due to the richness and granularity in their database (all residential property sales in Norway are recorded within 1 week into the database), the estimates from Eiendomsverdi model are generally perceived as robust.
b. Norwegian covered bond legislation
Background The Norwegian Covered Bond legislation entered into force on 1 June 2007. Relevant amendments were made to the Financial Services Act, hereafter “the Act”, and on 25 May 2007 the Ministry of Finance adopted a supplementary regulation, hereafter “the Regulation”, to the Act.
The legislation fulfils and is in compliance with the r elevant EU legislation, i.e. EU UCITS 22 (4) and Directive 2006/48/ EC. Hence the Norwegian Covered Bonds are in c ompliance with the UCITS, the CRD directive, and are e ligible for reduced (10 %) risk weighting under the standard method for capital adequacy requirement. The Norwegian Covered Bonds are also eligible as collateral in ECB.
The issuance of covered bonds – a specialist banking principle The legislation permits specialised mortgage credit institution to raise loans by issuing covered bonds. These institutions are licensed credit institutions, supervised by the Financial Supervisory Authority of Norway – Finanstilsynet, hereafter the FSA. They are subject to the same type of regulations as other Norwegian financial institutions, for example capital adequacy requirements, general requirements for liquidity management etc.
A commercial bank or a savings bank will not be allowed to issue such bonds in its own name, but may establish a mortgage credit institution as a subsidiary. Alternatively, a mortgage credit institution may be established as an independent institution with several shareholders.
A licensed mortgage credit institution may raise loans by issuing covered bonds where the object of the institution, as laid down in the articles of association, is (1) to grant or acquire specified types of mortgages and public sector loans and (2) to finance its lending business primarily by issuing covered bonds. The articles of association of the institution shall state which types of loans that shall by granted or acquired by the institution. The scope of the business will therefore be restricted and the institution will have a very narrow mandate. Thus, Norwegian issuers of covered bonds are transparent companies.
Regulation and supervision Mortgage and other credit institutions are regulated under chapter 3 of the Act. This chapter sets out the general provisions for a credit institution, i.e. the obligation to obtain a license and to fulfil capital requirements and undertake organisational measures etc.
The issuing of covered bonds is regulated by chapter 2, subchapter IV of the Act. The issuance of such bonds is not subject to any further governmental approvals. However the articles of association shall be approved by the FSA. Furthermore, the institution shall notify the FSA no later than 30 days prior to the initial issuance of covered bonds. The FSA has the power to instruct licensed mortgage institutions not to issue covered bonds whenever the financial strength of the institution gives rise to concern.
The Act gives the bondholders a preferential claim over the cover pool in case of bankruptcy. The term “covered bonds”, or literally “bonds with preferential claim” (in Norwegian “obligasjoner med fortrinnsrett”) is protected
by law. The assets in the pool remain with the estate in case of bankruptcy, but the bondholders and derivative counterparties have exclusive, equal and proportionate preferential claim over the cover pool, and the administrator is bound to assure timely payment, provided the pool gives full cover to the said claims.
Eligible assets – loan to value ratios According to the Act the cover pool may consist of the following assets: a. Residential mortgages b. Commercial mortgages c. Loans secured on other registered assets (subject to further regulations) d. Public sector loans e. Assets in form of derivative agreements (in accordance with the Regulation) f. Substitute assets (in accordance with the Regulation)
The mortgage loans have to be collateralised with real estate or other eligible assets within the EEA or OECD, and the public sector loan borrowers have to be located within the EEA or OECD. The Regulation adds rating requirements on the individual national government of the country where the mortgaged property or the borrower has its location.
Loan to value ratios (LTV) and monitoring are fixed by the Regulation, in accordance with the EU Directive 2006/48/EC. For residential mortgages the LTV is 75 %, and for commercial mortgages 60 %. The mortgage credit institution shall monitor the development of the LTV of the individual asset as well as the market of the underlying assets, according to the Act, and in accordance with the said directive.
Upon inclusion of loans in the cover pool, a prudent market value shall be set. The market value for a property shall be set individually by an independent and competent person. The valuation shall be documented. However, valuation of residential properties may be based on general price levels.
Predominantly, residential properties in Norway are sold in an open auction in the market. Hence the actual selling price in principle reflects the market value and a recent sales contract may serve as documentation of the market value of a property.
The mortgage institution shall establish systems for monitoring subsequent price developments. Should property prices later fall, that part of a mortgage that exceeds the relevant LTV limit is still part of the cover pool and protects the holders of preferential claims. However, that part of a loan that exceeds the LTV limit is not taken into account when calculating the value of the cover pool to compare it with outstanding covered bonds, ref the matching regulations, described below. The same principle applies to loans that are in default, i.e. more than 90 days in arrears.
Derivative agreements and substitute assets The derivate agreements and the substitute assets are, logically, accessory to the loans. The substitute assets may only amount to 20 % of the cover pool (30 % for a limited period of time with the consent of the FSA). In
a ddition, the substitute assets ought to be secure and liquid. The Regulation adds requirements necessary in order to comply with the description of covered bonds given in EU Directive 2006/48/EC. Counterparty and rating regulations in a ccordance with the directive apply to these two asset classes, as well as to the public sector loans.
Matching regulations The Act establishes a strict balance principle, i.e. the value of the cover pool shall at all times exceed the value of the covered bonds with a preferential claim over the pool. The Regulation establishes a strict mark to market principle of both assets and liabilities. Only the value of non defaulted mortgages within the LTV limits is taken into account in this context. Also, the act caps the maximum exposure to one single borrower at 5 % of the cover pool when compliance with the matching requirement is assessed.
There is no requirement in the legislation for a certain percentage of overcollateralization. However, if an issuer chooses to provide voluntary overcollateralization, these assets are part of the cover pool, and bankruptcy remote in case of the issuer going into bankruptcy proceedings. Equally, the mortgage credit institution shall ensure that the payment flows from the cover pool enable the institution to honour its payment obligations.
The mortgage institution may enter into derivative agreements in order to secure the balance principle and payment obligations. If it has a positive market value, a d erivative agreement will be part of the cover pool, if negative, the counterparties to derivative agreements will have a preferential claim over the pool, pari passu with the holders of covered bonds. As a corollary to this, the counter parties in the derivative agreements will be subject to same restrictions with respect to declaration of default as the bondholders. In addition to this, the mortgage institution will have to adopt strict internal regulations with respect to liquidity risk, interest rate risk and currency risk.
Register and inspector The mortgage institution shall maintain a register of issued covered bonds, and of the cover assets assigned thereto, including derivative agreements. To oversee that the register is correctly maintained, an independent inspector shall be appointed by the FSA. The inspector shall also regularly review compliance with the requirements concerning the balance principle, and report to the FSA, yearly or whenever the institution does not comply.
Timely payment As long as the cover pool fulfils the matching requirements, the bondholders and counterparties in derivative agreements have the right to timely payment, even in case of the issuer going into bankruptcy proceedings. The preferential claim also applies to payments that accrue to the institution from the cover pool. And, as long as they receive timely payments, the creditors have no right to declare default. Details about this may be reflected in the individual agreements between the issuer and (the trustee of) the bondholders. These provisions will also apply to any netting agreements between the institution and its counterparties in derivative transactions.
Bankruptcy proceedings In case of bankruptcy of the mortgage credit institution an administrator shall be appointed by the court. The bankruptcy manager shall ensure proper management of the cover pool and also ensure that holders of covered bonds and derivative counterparties receive agreed and timely payments. Bankruptcy or insolvency does not in itself give holders of covered bonds and derivative counter parties right to accelerate their claims. Should it not be possible to make contractual payments when claims fall due, and an imminent change that will ensure that such contractual payments are unlikely, the bankruptcy manager shall introduce a halt to payments. Thereafter further administration of the cover pool shall proceed under the general bankruptcy legislation.
Legislation supplementing the covered bond legislation The legal framework regulating the housing market is well developed. This framework provides legal certainty and foreseeability for both consumers as borrowers and owners of housing, and for credit institutions as lenders and creditors. This includes specific consumer protection legislation, a centralized electronic registry system for the ownership of and rights (mortgage etc) in real property, and an effectively and expedient forced sale procedure.
The Financial Contracts Act (Act 1999-06-25 no. 46) regulates the contractual conditions in respect of a loan agreement between financial institutions and their customers, both consumers and corporate clients. The Act applies in principle to all types of loans, whether they are secured or not. This also includes mortgage backed loans included in a cover pool. The act is invariable in respect of consumer contracts, i.e. it cannot be dispensed with by agreement that is detrimental to the customer.
The Mortgage Act (Act of 8 February 1980 no. 2) regulates mortgages on real property. Mortgage rights acquire legal protection by registration in the Land Registry/Register of Deeds.
The Forced Sales Act (Act of 26 June 1992 no.86) provides for an effectively and expedient forced sale procedure. A lender may, if a loan is accelerated and the borrower fails to pay any due amount, file an application before the county court for a forced sale of the property that backs the mortgage loan. The registered mortgage contract will itself constitute basis for such application. The court will normally appoint a real estate broker to administer the sale in order to obtain a reasonable price. Normally, nine to twelve months are required to repossess the property and satisfy the holder of a mortgage.
Annexes: 1. Legal framework
Website information: www.fno.no/cb 1. Financial Institutions Act 2. Regulation on mortgage credit institutions
Annex: Legal framework 1. The Financial Contracts Act The Financial Contracts Act (Act 1999-06-25 no. 46) regulates the contractual c onditions in respect of a loan agreement between financial institutions and their customers, both consumers and corporate clients. The Act was amended June 2010 (Act 2010-05-07 no. 15, entering into force 11 June 2010), to implement the EU Consumer Credit Directive (2008/48/EU). The act applies in principle to all types of loan, whether it is secured or not. This also includes mortgage backed loans included in a secured bond portfolio. The act is invariable in respect of consumer contracts, i.e. it cannot be dispended by agreement that is detrimental to the customer. Loan contracts are covered by the general provisions in chapter 1 of the act, and by chapter 3 that regulates loan agreements in specific. The latter regulates issues as contractual information, including pre-contractual information, an obligation to dissuade, changes to the terms of the c ontract, interest, early repayment, transfer of the lender’s claim, change of creditor, and default.
Section 46 sets out provisions for information to be given in respect of any case of marketing of a credit contract. This includes, but is not limited to, information in respect of credit costs, including the effective annual interest rate (APRC), the total credit amount and the amounts of any installments. Section 46 a sets out the pre-contractual information requirements for the lender. The lender shall before entering into the contract, inform the borrower in writing of such information as required by the EU Consumer Credit Directive. The information shall in accordance with the EU-legislation be given by a standardized information sheet as set out in the Regulation to the Act. The information includes, but is not limited to, information in respect of the total credit amount, the nominal and effective interest rate, costs and charges, expiry date, conditions precedent, and security (mortgage, pledge etc) required by the lender. The information shall also include reservations in the contract concerning changes in the interest rates, charges and other expenses, and the borrower’s right to early redemption, and charges etc, which may accrue if this right is
exercised. Moreover, the information shall also include the conditions for termination and forced repayment. Section 48 requires that a loan contract with a consumer shall include most of the information as set out in section 46 a. Moreover, section 48 requires that a loan contract shall include some additional information, among other things, about the relevant dispute resolution arrangement as mentioned in section 4 and 5 and the name and address of the relevant supervisory authority. Such an alternative dispute resolution system, The Complaints Board for Consumers in Banking, Finance and Mutual Fund matters, was established in 1988. This is a non-governmental body established by agreement between the financial industry associations and the Consumer Council. The By-laws of the board were approved by Royal Decree May 2000. Statements made by the board are advisory, but are in most cases followed. The Lender shall prior to entering in to a loan contract, assess the credit worthiness of the customer based on information given by the
customer, and if necessary from a relevant database, cf. Section 46 b. Moreover, the lender shall dissuade the customer in writing, before entering into the contract, if the lender has to assume that the financial capacity or other circumstances of the borrower indicate that he/ she seriously should consider refraining from taking the loan, cf. section 47. The lender’s failure in this respect may lead to a reduction of the borrower’s obligations, to the extent reasonable. The terms of a loan contract may not be changed unilaterally by the lender, cf. section 49. Exceptions are made for interest rates, charges or other costs, provided the provisions for this are included in the pre-contractual information and the loan contract, cf. section 46 a and section 48 (2). The lender shall notify the borrower of any changes in a loan contract, cf. section 50. If the interest rates, charges or other costs in a contract for a repayment loan, including a self-amortizing loan, are changed, the notification shall contain information about the reasons for the changes and the effect on loan profile, and also the borrowers’ right to redeem the loan and the cost in this respect. Where the borrower is a consumer, changes in e.g. interest rates and cost etc may be implemented not earlier than six weeks after the written n otification from the lender. A shorter time-limit may be set where the interest rate is changed as a result of a materiel change in the money market rate, bond market yield or general level of interest rates for deposits with and borrowing by institutions. For fixed rate loans there are specific provisions and time limits for loans where the interest rate etc may only be regulated at specific dates, i.e. end of an interest rate period. The terms of a loan contract may include exemptions from the notifications provisions in respect of interest rates that are referring to a reference rate made public and available to the borrower. In the event of late payment, the lender may demand penalty interest, cf. section 51. The penalty interest rate is regulated in the Act on Interest on late payments. For consumers the interest rate may not be higher than set out by law. The borrower is entitled to redeem the loan entirely or in part at any time, cf. section 53. Borrowing costs shall only be payable for the utilized credit period. The institution may not demand any other contractual charge where the borrower is a consumer. Never the less, in the case of fixed interest rate loan, the lender may in addition demand coverage for interest rate loss in the lock-in period, provided the lender’s rights are set out in the contract and included in the pre-contractual information (cf. section 54). For fixed rate loans there are specific provisions for repayment connected to the end of a lock-in period and a new offer for the borrower (consumer). When the contract entitles the lender to cover loss, a consumer shall to the same extent be credited any interest gain accruing to the lender. This right may be departed from in the contract, and the lender’s right shall also be included in the pre-contractual information.
The King (Ministry of Justice) has issued regulations concerning the calculation of interest, including the APRC, and other compensation. The lender may demand redemption of the loan before maturity in the case of default. The grounds for such demand for early redemption from a consumer are mandatory set out in section 52. This includes i.a. the case where the borrower is in, or it is clear will be in, material breach of the contract and in the case of bankruptcy or debt settlement proceedings. Except with the borrower’s special consent, the lender’s claim may only be transferred to an other financial institution, cf. section 45. The change of creditor may in principle not reduce the rights of the customer in respect of the new lender, but the rights of set off etc. are excluded in respect of the cover pool under the covered bond regime, cf. section 2-30 of the Financial Institutions Act. The borrower shall be notified about the change of lender. 2. The Mortgage Act The Mortgage Act (Act of 8 February 1980 no. 2) regulates mortgages on real property. Ownership and special rights in real property may be mortgaged under the provisions set out in Chapter 2 of the Act, cf. section 2-1. This also includes lease and a right of dwelling, and also parts in cooperative building societies. Unless otherwise agreed, real property mortgage comprise the land, houses and building that the mortgagor owns and accessories and rights as set out in law, cf. s ection 2-2. A mortgage may also be established on a lease of land or an owner section in a building/freehold apartment, cf. section 2-3 and section 2-4. Mortgage rights acquire legal protection by registration in the Land Registry/Register of Deeds. See below. According to section 1-7 of the Act, the mortgage debtor has an obligation to provide proper care and maintenance of the property so that the mortgagee’s security is not reduced. Furthermore the mortgagor has a duty to take out standard insurance for the property. Most lenders holding mortgages will obtain a certification from an insurance company to ascertain that the property or dwelling actually is properly insured. In the case of mortgages of less than NOK 7.5 million, the credit institutions will normally rely on a self statement of insurance from the customer. The latter is based on the fact that a mortgagee is secured by a separate guarantee scheme (pool), the “Panthavergarantiordningen”, in an amount of up to NOK 7.5 million in case the property is not insured. Should the debtor be in arrears of installments etc, the mortgagee may accelerate the loan cf. section 1-9 of the act. However this has to be read in connection with the provisions under section 52 of the Financial Contracts Act (see above) that sets out mandatory rules for a credit institution’s call for early redemption by a consumer. If the provisions for accelerating the loan are fulfilled and the debtor fails to pay, the mortgagee may file for forced sale of the property (see below).
3. Land Registry – Register of Deeds The Norwegian Parliament resolved to transfer responsibilities to land registration from the courts to the Norwegian Mapping and Cadastre Authority (NMCA). To implement this decision the Department for Cadastre and Land Registry was established in January 2003. The registration process and the effect of this are regulated in the Title of Registration/Deed Registry Act (Act of 7 June 1935 no. 2). The ownership and other rights, including mortgage (lien), in real property, presuppose that the relevant property has been individualized and registered by number designation in the land register. Each property will have its own “page” in the register (grunnboka) and the register is electronic. The register is based on the principle that the information included in the register is correct, and the information that is not stated therein does not exist, i.e. the credibility and reliability of the register has in principle both negative and affirmative effect. Rights, including ownership and mortgage, acquire legal protection by registration in the Land Registry/Register of Deeds. This also applies to parts in cooperative building societies. Exemptions are, to the extent provided for by law (statutory liens a ccording to section 6-1 of the Mortgage Act), made for e.g. taxes on the property and for joint expenses in building societies and owner sections-companies (freehold apartments). To provide for the administration of a bankrupt estate, there is also a statutory lien for the bankrupt estate equivalent to 5 % of the value the property, limited to 700 times the standard court fee (NOK 860 as of June 2010), cf. section 6-4 of the Mortgage Act. 4. Forced sales Act The Forced Sales Act (Act of 26 June 1992 no.86) provides for an effectively and expedient forced sale procedure. A lender may, if a loan is accelerated and the borrower fails to pay any due amount, file an application before the county court for a forced sale of the property that backs the mortgage loan, cf. section 4-4 of the Forced Sales Act. The registered mortgage contract will itself constitute the basis for such application, cf. section 11-2 and 12-2. There is no need for additional judgment by the court to provide such basis for a forced sale. There are specific provisions for a 14 days prior written notice of the debtor before an application for a forced sale can be filed on the basis of the registered mortgage contract, cf. section 4-18. The court will, after giving the debtor a right (with time limit) to comment upon the application, decide if the forced sale shall be carried out, cf. section 11-9. The court will normally appoint a real estate broker to administer the sale in order to obtain a reasonable price. However this is rare, the court may also decide that the forced sale shall be carried out through an auction if this is deemed to give a better price, cf. section 11-12. The court may also decide to evict the debtor from the premises if the sales procedure is hindered or there is a possible loss of value of the property, cf. section 11-14.
The lender (applicator) may ask the court to affirm a bid on the property, cf. section 11-28. The court shall affirm the bid provided the provisions in section 11-30 are fulfilled, i.e. that such bid gives full redemption to creditors with better priority than the applicator and there is no reason to believe that a higher bid is possible to obtain. The court will then by a decision distribute the dividend of the sale to the creditors that hold lien in the property. Normally, 9-12 months are required to repossess the property and satisfy the holder of a mortgage. 5. Creditors Recovery Act The Creditors Recovery Act (Act of 8 June 1984 no 59) sets out the provisions and limits for the creditors’ recovery in the case of bankruptcy, forced sale etc. In the case of forced sale of debtor’s necessary housing or dwelling rights, the law gives the court an initial right, upon the debtor’s request, to decide that the forced sale may only be executed if the debtor is provided with another dwelling which in terms of location, size, price and other factors satisfies reasonable requirements, cf. section 2-10 and section 11-7 of the Forced Sales Act. However, some important exemptions apply with regard to the debtor’s right to another dwelling. First, the right does not apply if the debtor has failed to do what he can to procure another dwelling or the forced sale is executed for the collection of rent etc. Second, and more important for credit institutions, the debtor’s right to a new dwelling is also excluded if the forced sale is executed to collect interest or ordinary matured installment of loan secured by mortgage on the property, the lease or the document of access. And third, if collection is sought for more than the matured amount, the same applies if the extraordinary amount has fallen due because the terms of the mortgage have been defaulted by material neglect of the maintenance of the property or the duty to uphold insurance for the property. Due to these exemptions applying to the debtor’s right to another dwelling, the credit institutions will in practice solely apply for forced sale on the basis of interest and matured installments.
6. Debt settlement Opening a debt settlement estate The Debt Settlements Act (Act of July 17 1992 no. 99) provides for the debtor’s right, in case of severe debt burden, to apply for debt settlement. Only debtors who are permanently incapable of meeting their obligations can obtain debt settlement. Debt settlement under the law may not be instituted before the debtor, to the best of his ability, on his own hand has sought to reach a settlement with the creditors. A debt settlement estate is opened and handled by the public enforcement authorities (the County court as Court of Seizure and the enforcement officer). The court may only initiate debt settlement proceedings if this is not deemed to be obviously offensive to other debtors or for the society in other respects. Debt settlement may be voluntary or mandatory for the creditors, and can imply delays in payment or a reduction in claims. The debt settlement period shall normally be five years. In case of a mandatory settlement, the settlement period may in special cases be extended, but not for more than 10 year all together. In the case of no agreement is reached in respect of a voluntarily debt settlement, the debtor may apply for a mandatory settlement for the county court. A mandatory debt settlement confirmed by the court shall entail that a debtor who has satisfied the conditions, shall be released from the debts covered by the settlement at the end of the settlement period. However, this does not include 1) mortgaged backed debt in housing within the market value of the dwelling plus 10 %, and 2) other debt secured within the value of the relevant mortgage/ security item. The debtor will thus normally not be free of his mortgage backed housing debt by the end of the debt settlement period. The right of the debtor to keep dwellings and assets The debtor will only have a duty to sell the dwelling if this will provide better coverage for the creditors and the dwelling exceed what can be deemed reasonable dwelling for the debtor and his or her family. If the debtor may keep his present dwelling, then the value of the dwelling shall be set by the enforcement officer and two other competent persons (valuers). For debt secured by dwelling, i.e. mortgage loan, the debt secured within the set value plus
10 % shall receive payment of interest under the debt settlement period. No installments shall be paid in this period, but no reduction shall be made in the principal outstanding. The debtor is also entitled to retain enough of his income to meet reasonable expenses in maintaining himself and his household. The debtor has a further right to keep personal assets and means of transportation to the extent reasonable. The authorities have stipulated the rates for standard needs for subsistence. Change in the debt settlement The law opens up for changes in the debt settlement from both the debtor and the creditors. The decision is to be made by the court. The debtor may ask for a change in case of unforeseen circumstances, or if special circumstances reduce the debtors ability to meet the conditions of the debt settlement. This includes i.a. the case where the value of the dwelling, in the end of the settlement period, has a materially lower value (market-) than set originally by the valuers (see above). The creditors may ask for a change in the debt settlement if there is a significant/material improvement in the debtor’s financial position within the settlement period. If the improvement is caused by the debtor receiving a large amount of money, the amount may fully or partly be distributed to the creditors without any further change in the settlement. Also a material increase of the value of the housing can result in a change of the settlement. Furthermore, if the debtor within two years after the end of the settlement period receives a considerable inheritance, prize/profit or the like, the court may partly or fully set the settlement aside. This does not include any profit that stems from a increase of the value of housing. Concluding remarks During the first five years after the Act was adopted in 1992 there was an increase in the number of debt settlement cases, but since then the number of cases has been oscillating back and forth with business cycles, without any specific trend. The share of voluntary settlements, i.e. out-of-court settlements, has been steadily increasing and was about 80 % in 2010. There were in total about 3300 debt settlement cases in 2010.
Total Covered Bonds outstanding and issuance 2007-2011 Outstanding (in mln EUR)
Total Covered Bonds Outstanding
Outstanding Covered Bonds backed by Public Sector Outstanding Covered Bonds backed by Mortgage
Outstanding Covered Bonds backed by Ships
Outstanding Covered Bonds backed by Mixed Assets
Total Outstanding Public Placement
Outstanding denominated in EURO (stated in mln EUR)
Outstanding denominated in domestic currency (stated in mln EUR)
Outstanding fixed coupon
Total Outstanding Private Placement
Outstanding denominated in other currencies (stated in mln EUR)
Outstanding floating coupon Outstanding other
0 0 0 0 0
Total Outstanding Number of Issuers
Issuance (in mln euro) Total Covered Bonds Issuance
New Issues of Covered Bonds backed by Ships
New Issues of Covered Bonds by Mixed Assets
Total Issuance Public Placement
Issuance denominated in EURO (stated in mln EUR)
Issuance denominated in domestic currency (stated in mln EUR)
New Issues of Covered Bonds backed by Public Sector New Issues of Covered Bonds backed by Mortgage
Total Issuance Private Placement
Issuance denominated in other currencies (stated in mln EUR)
Issuance fixed coupon
Issuance floating coupon Issuance other Total issuance Number of New Issuers
0 0 0 0 6 458
Total Covered Bonds outstanding and issuance, per issuer, 2010-2011 (in million euro) Issuer
Total Covered Bonds Total Covered Bonds Outstanding Issuance 2010 2011 2010 2011
BN Boligkreditt 327 268 Bustadkreditt Sogn og Fjordane 301 510 147 211 DNB Boligkreditt 37 099 48 353 11 189 11 254 DNB Næringskreditt 307 310 Eiendomskreditt 243 292 141 47 Fana Spb Boligkreditt 346 400 218 52 Gjensidige Bank Boligkr 230 426 38 193 Helgeland Boligkreditt 300 410 175 125 KLP Kommunekreditt 1 184 2 843 1 184 2 037 Landkreditt Boligkreditt 38 160 38 122 Møre Boligkreditt 653 916 237 337 Nordea Eiendomskreditt 7 594 8 960 1 194 5 171 Pluss Boligkreditt 1 075 1 083 448 129 Sandnes Sparebank Boligkreditt 550 709 166 555 SpareBank 1 Boligkreditt 12 100 16 551 4 080 6 025 SpareBank 1 Næringskreditt 941 1 020 67 Sparebanken Vest Boligkreditt 2 381 3 648 1 037 1 348 Sparebanken Øst Boligkreditt 314 729 154 413 Storebrand Boligkreditt 1 489 1 543 282 258 Sør Boligkreditt 512 864 348 Terra Boligkreditt 4 068 5 158 1 581 1 546 Toten Spb Boligkreditt 161 161 Verd Boligkreditt 186 297 174 110 Total
72 238 95 611 22 483 30 509
Photos: Vivian Olsen, FNO
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