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Danish Government Phases Out Short Mortgage Sales: Nordic Credit

The Danish government is shifting to fixed-rate mortgages with longer maturities to finance public housing as policy makers bet against further declines in borrowing costs.

Denmark’s Housing Ministry said Oct. 26 it will fund new public housing with only fixed-rate, 30-year loans starting next year, and it will refinance 6.6 billion kroner ($1.1 billion) in one- and three-year bonds into five-year papers. The ministry, which estimates its total mortgage borrowing is at 135 billion kroner, said 60 billion kroner in adjustable-rate mortgages won’t be rolled over into-fixed-rate products “for now.”

“We decided to increase the duration-to-maturity on our portfolio to buy insurance” against interest-rate increases, Lise Nielsen, a departmental head at the ministry, said in a telephone interview. While the government declined to comment on where it thinks interest rates will go, the decision to shift its borrowing maturities “is a sign we want to go long on our portfolio,” she said.

Danish homeowners will probably refinance as much as 475 billion kroner at mortgage bond auctions this quarter as banks arranging the sales advise borrowers to cut their risk and lock into fixed rates, according to Realkredit Danmark A/S. The ministry’s decision to shift away from short-term financing may help persuade regular homeowners to follow suit.

Finance Group

The auctions of one-, three- and five-year bonds used to finance loans in Denmark’s $496 billion mortgage market will attract about 200,000 Danish homeowners, Realkredit Danmark estimates. With the central bank’s deposit rate already below zero, borrowers shouldn’t assume rates can fall even further, according to Realkredit Danmark.

“The changes we’re making are in line with recommendations by mortgage lenders,” Nielsen said. The decision follows meetings of a so-called finance group, which includes representatives from the central bank, the Finance Ministry and the Business Ministry, she said.

“It’s an important signal that supports the efforts being made by the mortgage banks to move customers to a longer fixing period,” Karsten Beltoft, director of the Mortgage Bankers’ Federation in Copenhagen, said in a phone interview. “It makes good sense to fix rates for a longer period. The difference is very small right now.”

Financial Security

Households’ preference for shorter maturity mortgages decreased in the third quarter, Realkredit Danmark, the mortgage arm of Danske Bank A/S, said today. One- and two-year loans accounted for 12 percent of gross lending, compared with 32 percent in the fourth quarter of 2011, the Copenhagen-based lender said.

“We are pleased to see an increasing number of customers choose loan types that offer more financial security,” Realkredit Danmark Chief Executive Officer Carsten Noeddebo said in a statement.

The one-year mortgage bonds have come under scrutiny from the central bank and rating companies, which have warned of refinancing risks associated with using short-term bonds to finance home loans as long as 30 years. More recently, the Basel Committee on Banking Supervision’s stable funding proposal has threatened to make it too expensive for banks to continue issuing the loans.

Basel, which wants banks to move away from such short-term funding, has excluded liabilities with effective maturities of less than one year from its definition of stable funding.

Nykredit Committed

Realkredit Danmark has shown willingness to wean borrowers off the securities, while Nykredit Realkredit A/S, Denmark’s biggest mortgage issuer, is committed to the bonds, it said this month.

About 80 percent of the total amount being refinanced at auctions starting next month will come from one-year loans, according to Realkredit Danmark. The bank estimates that refinanced mortgage debt this year will reach an all-time high of 715 billion kroner amid record-low borrowing costs.

Demand for assets out of AAA rated Denmark has pushed down yields. The central bank has left its deposit rate at minus 0.2 percent since July to fend off a capital influx and defend the krone’s peg to the euro.

The yield on the 2 percent benchmark one-year adjustable-rate mortgage note due April 2013 was 0.435 percent today, and traded as low as 0.24 percent in August, according to Danske Bank prices available on Bloomberg. The note’s spread to Denmark’s government curve was little changed at 65 basis points, according to bid prices, compared with as wide as 90 basis points in September. The yield on the 4 percent note due April 2017 was little changed today at 1.23 percent.

‘Quite Sensible’

The housing ministry’s decision to shift to longer-term mortgages is “quite sensible, they’re a long-term borrower,” said Jens Peter Soerensen, chief bond analyst at Danske Bank A/S in Copenhagen. If rates rise, the ministry “cannot pass that cost on to households, because rents are fixed in many cases, because this is social housing,” he said.

The ministry is planning to move 2.9 billion kroner in mortgages requiring annual refinancing and 3.7 billion kroner in loans that are refinanced every third year into mortgages backed by five-year bonds, Nielsen said.

Demand for mortgages that only need to be refinanced every fifth year “has put some pressure on the five-year adjustable-rate mortgage bond segment,” Soerensen said. “But that is not only due to the public housing agency.”

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