The standards for underwriting in the European residential market in regards to debt-to-income (DTI) ratios may lead to poorer performance among adjustable-rate mortgages. This applies especially to any loans being approved in the current era of traditionally low interest rates on the continent, according to a report from Fitch Ratings. DTI is a contentious sticking point among mortgage providers in the space. On the one side some banks say high DTIs are necessary to get first time buyers on the property ladder. Others, such as HousingWire’s sources at lender Investec, say the risk is too great as job stability is virtually nonexistent in large swaths of Europe, primarily in the areas hardest hit by the recession. With all things considered, Fitch assumes higher default probabilities for adjustable-rate loans originated during periods of low interest rates, thus the results of the current research. The DTI is one a major drivers behind mortgage underwriting in Europe. with adjustable-rate loans, the DTI becomes more of a variable, according to each lender, as the applicant’s debt service commitments on the requested loan are subject to changing interest rate levels. Fitch’s analysis reveals that the process of employing “forward-looking” DTI modeling is woefully inadequate at this stage. “In those countries where the bulk of mortgage originations consisted of [adjustable-rate] products, such as Italy, Spain,Portugal and Greece, the limited use of forward-looking DTI ratios was one of the main factors that contributed to the wave of delinquencies and defaults experienced in 2007 and 2008 by [adjustable-rate] loans originated between 2003 and 2005,” says Milan-based Michele Cuneo, a researcher on Fitch’s European structured finance team. As an example, Fitch states that, Euribor-linked (The European interbank rate) loans originated between 2003 and 2005 had an initial DTI ratio based on interest rates of around 2%. As such, when Euribor moved to around 4% in 2007-2008, the affordability of these mortgages was significantly affected, especially for loans that were originally approved with high DTI ratios. Write to Jacob Gaffney.

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