Macroprudential tools that would allow German regulators to set rules for residential mortgage lending, such as LTV caps, are in the pipeline and, according to LBBW analysts, these would increase the attractiveness of German Pfandbriefe as they would enhance the quality of loans in cover pools.

In its latest Financial Stability Review the Bundesbank last Wednesday said that, although there are no signs of critical macroeconomic developments in Germany’s housing market, a set of tools specifically targeting housing loans should be prepared, as was recommended by the Financial Stability Committee in June.

The four proposed instruments in relation to loans for the construction or purchase of residential properties in Germany, which would be at the disposal of BaFin, are:

A cap on a borrower’s total debt in a residential real estate loan as a share of the market value of the property used as collateral (loan-to-value ratio, LTV).

The setting of a final deadline for the amortisation of a certain fraction of a loan or the setting of a maximum maturity (amortisation requirement).

A cap on a borrower’s capacity to service debt as a share of their income (debt-service-to-income ratio, DSTI).

A cap on the borrower’s total debt relative to their income (debt-to-income ratio, DTI).

Although it is not clear whether the regulatory tools will be adopted, or when they would enter into force if adopted, the Bundesbank said they are “in the pipeline”.

Analysts at LBBW said the rules, if introduced as currently proposed, would have a positive impact on German Pfandbriefe and further enhance their attractiveness.

“If they introduce these rules it would be very positive for Pfandbriefe,” said Alexandra Schadow, senior investment analyst at LBBW. “The assets included in cover pools in future would be of increasing quality due to the fact that there are fixed rules for the whole mortgage books of German banks.

“Currently in Germany there is already the very conservative rule of an LTV limit of 60% for cover pool assets, but it’s possible to have a loan from one person where the LTV is higher, for example. If these rules are implemented, credit quality will increase on the whole at a borrower level because you have to fulfil specific criteria, like affordability.”

Schadow cited France, where a debt to income ratio is fixed by the central bank, as an example.

“In France this specific rule, in my view, is one important contribution to mortgage books of good quality which is also represented in the cover pool,” she said.

Comparable rules tightening requirements for new mortgage loans have been seen elsewhere. Mandatory mortgage loan amortisation is expected to be introduced in Sweden in the spring of 2016, while Norway announced tightened residential mortgage lending regulations in June.