The importance of setting limits in disbursement process of housing loans MSc Vladimir Mirković (vladamirkovic@orion.rs) PhD Jelena Lukić (jelena.jl.lukic@gmail.com)

Introduction  

LTV ratio: main characteristics In the contraction phase, relaxation measures stimulate the growth of loan’s demand Frequent changes of LTV limit destabilizate market; incentives for banks to increase its placements based on expectations of measures tightening in prospective Fixed value of LTV limit has pro-cyclical impact NBS adopted “Decision on Measures for Safeguarding and Strengthening Stability of the Financial System” in 2011: LTV limit is set at 80% Careful conducting of credit policy followed by adequate collateralization Avoidance of over-indebtedness in retail segment and restricting excessive growth of real estate prices LTV could be very efficient macro prudential tool if the usage of LTV limit is related to countercyclical direction In the expansion phase, tightened measures (lower LTV limit) => decrease of the loan amount & prevention of over-indebtedness => restriction on excessive risk-taking from bank's side

DOMex index DOMex represents unique transparent indicator of trend realized prices per m2 of property insured at National Mortgage Insurance Corporation (NMIC) The main disadvantage: exclusion of data related to realized prices of properties that are funded by cash or unsecured loans Real estate value in Serbia (measured by DOMex index) reached its maximum in Q1 2010, followed by large number of marketable properties as a direct consequence of supporting measures to construction industry Since 2016 there are obvious recovery signs in real estate prices DOMex (Q1 2017) = 106.7, which is cca 0.3 p.p. higher than in Q1 2016

Quality of housing loans portfolio in Serbia is on relatively satisfactory level Share of gross NPL housing loans in total NPL ratio stood at 8.4% in February 2017 NPL ratio of loans indexed in EUR currency, which is cca 75% of total housing loans portfolio, amounts only 3.9% Unfavorable currency structure of housing loans

LTV ratio implementation in other countries Country LTV limit Cyprus, Malta, Czech Republic 70% Slovenia, Ireland 80% Hungary between 35% and 80% depending on currency Sweden, Lithuania, Canada 85% Romania 85% (for loans in domestic currency); between 60% and 80% (for the loans in foreign currency depending on currency and collateral) Norway 10% of disbursed loans could exceed LTV ratio of 85% Estonia 15% of new loans could exceed LTV ratio of 85% Netherlands 101%; from 2018 LTV will be set at 100% Slovakia 100%; 10% of new loans could have LTV limit above 90% and 40% of new loans LTV limit above 80%. Poland 80% for residential and 75% for commercial RE Finland, Latvia 90% Denmark 95%

Conclusion In Serbia, LTV limit is established at 80%: borrower should provide down- payment up to 20% LTV ratio has macro prudential importance in terms of systemic risk control: lower LTV ratio means the lower is probability that decision making process for borrower was motivated by speculative reasons Implementation of LTV ratio is justified with its role that in the process of financial stability maintenance Future researches: the role of housing loans for the quality of bank’s credit portfolio through analysis of their PL and NPL part in more detailed manner!

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