Denmark’s plan to cut refinancing risks in its $550 billion mortgage market doesn’t go far enough to address threats to the system, Standard and Poor’s said.
“The law, as we understand it, will not discourage the use of short-term F1 mortgage loans,” Alexander Ekbom, an analyst at the credit rating company, said yesterday in a note, referring to loans that are financed annually. “Therefore mortgage lenders’ dependence on short-term liabilities will remain high, perpetuating the status quo,” Ekbom said.
To avert a mortgage bank collapse, the government has proposed extending maturities on bonds used to finance loans with longer terms by 12 months at a time if refinancing auctions fail or rates climb more than 5 percentage points. Danish mortgage lenders fund about one-third of home loans through bond sales held quarterly.
Since Business Minister Henrik Sass Larsen unveiled the measure in September, lenders and investors in the Nordic country have been waiting to hear S&P’s response after the rating company said concerns over the refinancing risks could lead to credit downgrades.
Denmark is seeking to rein in its home-loan industry, the world’s biggest per capita. Danes owe their creditors about 321 percent of disposable incomes, a world record and a level that warrants a policy response, the Organization for Economic Cooperation and Development said in November.
A recommendation by the European Banking Authority to limit covered bonds’ use in bank liquidity buffers could have a more significant impact on the Danish market than the government’s proposal, S&P said. The Danish government is lobbying the European Commission to reject the plan.
“This could have a more profound effect,” with borrowing costs rising, reduced liquidity in the government bond market, and increased foreign currency exposure, Ekbom said. Exemptions are possible and Denmark is a likely candidate, he said.
Jesper Berg, head of regulatory affairs at Nykredit Realkredit A/S, Denmark’s largest mortgage lender, said he wasn’t ‘as discouraged as others’’ by the S&P feedback.
“They say the proposal is a step in the right direction and clearly there still is an issue in the amount of F1 loans that need to be refinanced,” he said. “All of us recognize that.”
Ulrik Noedgaard, director general of the Financial Supervisory Authority, said in January that the agency this month will present guidelines on how much in adjustable-rate and interest-only loans banks should offer.
Those guidelines should go some ways to address S&P’s concerns, Berg said.
“There is still some risk -- a very little amount of risk -- on the table that needs to be worked on, but the legislation is, if not a giant leap for mankind, at least a step in the right direction,” Berg said.
The industry has taken steps to reduce demand for the loans, their most popular product, by raising prices. That’s narrowed the spread to more expensive mortgages and prompted a shift to longer maturities.
Realkredit Danmark A/S, the mortgage arm of Denmark’s largest lender Danske Bank A/S (DANSKE), said Feb. 4 it will sell in auctions later this month about 39 billion kroner ($7 billion) in one-year bonds, 15 billion kroner fewer that originally estimated, after borrowers switched to other types.
“It’s primarily the task of the industry to reduce” one-year bonds, Karsten Beltoft, director of the Danish Mortgage Bankers’ Federation, said by phone. “We have our own interest in reducing the refinancing risk to make the system as secure and robust as possible.”
The government’s proposal, which still needs to be approved by parliament, “is fire insurance,” Beltoft said. “But that doesn’t mean we shouldn’t’ care about minimizing the risk of having a fire.”
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