Denmark rejected a plan by mortgage banks to split troubled loans, forcing the industry back to the drawing board to figure out how to save borrowers who can’t afford to start amortizing interest-only debt this year.
The Business Ministry in Copenhagen said the plan would breach the law by weakening collateral, putting the entire system at risk and driving up interest rates, said Karsten Beltoft, head of the Mortgage Bankers’ Federation.
The decision follows talks late yesterday between the government and mortgage industry representatives on how to treat borrowers who won’t be able to afford the interest-only loans they took out a decade ago once amortization requirements kick in this year. Borrowers are also struggling as a deepening property slump drives house prices down to 2005 levels.
“The ministry said it doesn’t agree that the model we have suggested is within the law,” Beltoft said today in a phone interview. “It is a disappointment. We suggested the model because we thought it was a good one. Now we have to look for alternatives.”
Since the nation’s housing bubble burst in 2008, borrowers have seen their property values sink more than 20 percent, making them more reliant on debt terms that have freed them of the obligation to pay down their principal. More than 100,000 households may need to have special terms negotiated, according to a February study by the University of Southern Denmark.
The mortgage industry wanted the government to approve a plan that would allow homeowners to treat their property debt as two separate loans. The move would give lenders the freedom to let borrowers roll over debt within an 80 percent loan-to-value threshold into new interest-only loans. Only debt exceeding that limit would be amortized. Without the proposed change, borrowers would need to start amortizing the whole amount.
The government rejected the plan for fear it would reduce confidence in Denmark’s mortgage system, Beltoft said.
“They’re afraid for the security of the system,” he said. “They think the collateral will be weakened by this model, and it’s written in the law that you cannot weaken the value of the collateral.”
Danish mortgage banks aren’t allowed to grant loans that exceed 80 percent of a property’s value. Any shortfall caused by house price declines is filled by the banks, which must provide extra collateral to maintain their credit ratings.
Danish central bank Governor Lars Rohde today supported the government in its rejection of the plan. It is “important” not to tinker with the mortgage legislation, Rohde said at a press conference in Copenhagen.
House price declines have forced Danish mortgage banks to provide 131 billion kroner ($23 billion) in supplementary collateral since 2007 to meet regulatory requirements and another 107 billion kroner to meet investor demands, the Financial Supervisory Authority said in December.
The provisions have supported AAA credit ratings for Denmark’s mortgage-backed covered bonds, helping push yields down to record lows last year as investors fled Europe’s debt crisis in search of safer assets.
The Nykredit index of the mortgage market’s most-traded bonds hit a record high yesterday after negotiations over a rescue package for Cyprus faltered, casting doubts on Europe’s ability to prevent its debt crisis from igniting again and raising the appeal of haven assets. The index rose to 405.32 at close yesterday in Copenhagen.
“We agree that it’s essential to have certainty about the system,” Beltoft said. “Where we disagree is what this would mean for the mortgage system.”
“We will continue the dialogue with the ministry about an alternative,” he said. “We know that more people in the years to come will have a loan-to-value ratio above 80 percent and, depending on the economic situation, we might see more people coming into problems.”
Eighty percent of borrowers under 35 years of age are already in trouble, while half of borrowers between 35 and 45 are “under water,” Curt Liliegreen, head of the Center for Housing Economics in Copenhagen, said by phone this week.
While most families have “robust finances,” those with interest-only loans often have lower savings, take out larger mortgages and “do not compensate for this by otherwise saving up,” the Danish central bank said in a December report. Ten percent will be unable to repay their debt over the remaining 20 years of the loan, it said.
The government yesterday cut its 2013 economic growth forecast to 0.5 percent to 1 percent. It had previously forecast 1.2 percent growth. The economy contracted 0.6 percent last year, its worst performance since 2009.
“The housing market is still having a rough time,” Steen Bocian, chief economist at Danske Bank A/S, said yesterday.
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