Denmark’s $500 billion mortgage industry is looking at how to keep struggling homeowners afloat as the nation’s push into interest-only loans a decade ago now threatens a jump in losses amid rising unemployment.
Loan writedowns for mortgage banks in Denmark jumped 51 percent in the first half of last year, according to a report released last month from the financial regulator. Losses rose 17 percent in 2011, compared with a 25 percent drop in provisions at 35 of Germany’s largest credit banks and a 55 percent drop in net loan losses at Sweden’s mortgage lenders.
Loans that allow principal payments to be postponed by as many as 10 years now comprise more than half of outstanding mortgages after being introduced in 2003. Denmark’s two mortgage banking groups, whose members include Nykredit A/S, Europe’s biggest issuer of home-loan backed bonds, are in talks with regulators on how to help homeowners that are unable to meet principal payments or refinance into similar loans.
“There’s a double interest, to help people and to avoid losses,” Jan Knoesgaard, deputy director of the Association of Danish Mortgage Banks, said in a phone interview. “It’s not that many this year, but more and more homes in the coming years will find their 10-year period is running out.”
Escalating loans losses, coupled with signs interest rates are on the rise, could stall efforts in Denmark, home to the world’s third-largest mortgage bond market, to emerge from a four-year slump in its housing market. Home foreclosures jumped to the highest in two decades last year as the economy contracted, even amid record-low interest rates and signs the housing market stabilized.
The yield on Denmark’s government bond maturing 2023 has jumped 33 basis points since a low in the first week of December to about 1.63 percent. Danes’ finances got a boost last year from investor demand for their AAA rated mortgage bonds amid a flight from the struggling euro area. The yield on one-year adjustable-rate loans averaged 0.42 percent in recent auctions, the mortgage association said Dec. 17. The Nykredit index of the market’s largest, most traded mortgage bond series, hit a record 404.72 last month.
The index rose to 404.44 yesterday in Copenhagen trading from 404.02 a day earlier.
More foreclosures could trigger another downward spiral in the housing market. Households have too much debt and the cost of that debt is likely to worsen as rates go up, weighing on the market, said Andreas Hakansson, an analyst at Exane BNP Paribas.
“This problem will only become bigger over time as more households lose their interest-only status at the same time,” Hakansson said in an e-mail response to questions.
Mortgage banks by law can lend 80 percent of a property’s value. Homeowners whose property values have dropped, pushing loan-to-value ratios above 80 percent, can refinance though generally only to mortgages that require principal. Lenders that extend the interest-only period must write down the loans.
“That’s not a very good solution for the mortgage banks,” Karsten Beltoft, director of the Mortgage Bankers’ Federation, said in an interview. “Banks will have to write down customers and they don’t want to do that.”
The industry hopes to have an answer from the Financial Supervisory Authority on what can be done by April, Beltoft said. He declined to provide details, saying the proposal was still under discussion.
The prospect of having to begin paying principal and record-low rates for fixed mortgages may drive a switch to more traditional loan products, Jens Peter Soerensen, chief bond analyst at Danske Bank A/S, said today by e-mail.
Homeowners who took out 5 percent, interest-only loans at the housing market’s peak, in 2007, would pay about 1500 kroner less per month, including principal, if they swapped to the prevailing fixed rate, amortized loans available now, which have rates of 3 percent and 3.5 percent, he said.
“There is a strong incentive to do something now, rather than wait,” Soerensen said.
The industry’s writedowns rose 51 percent in the six months through June, to 1.9 billion kroner ($333 million), the FSA said in a report last month. The level is at a “relatively low level seen over time,” the FSA said.
House price declines have slowed after plunging at least 20 percent since a 2007 peak. The burst property bubble, coupled with a fall in exports, hurt the economy last year as consumers, whose debt is almost three times their disposable income, reined in spending. House prices fell 0.1 percent in October from a month earlier, according to the statistics agency.
“The housing market is still fragile and sensitive to sentiment changes and rapid interest rate increases,” the Finance Ministry said last month.
Interest-only loans made up 56 percent of outstanding mortgage bank debt after climbing 4.7 percent in the third quarter from the same period a year earlier, the Copenhagen-based mortgage association said in October. That compares with 55 percent a year earlier.
Gross unemployment will remain unchanged at 5.7 percent in 2013 even as the economy grows, the government said in December. The government forecast gross domestic product growth of 1.2 percent after a 0.4 percent contraction in 2012.
About 5 percent of households spend more than half their income servicing their debt, and about a quarter of those families have interest-only loans with adjustable interest rates, the Business and Growth Ministry said in a study today.
The expiration of interest-only payment periods doesn’t constitute a risk to the housing market “in the first coming years” as the “main part” of households will be able to renew their mortgages this year and next, the ministry said. As of May 1, the government will allow lenders to offer interest-only and adjustable-rate loans only to customers that can finance their purchases with traditional loans.
Danish central bank Governor Nils Bernstein has urged banks to restrict use of interest-only loans. While the bank found in a December report most household budgets are “robust” and can survive a longer period of joblessness or rising rates, it concluded the loans introduce imbalances in households and the mortgage industry and inflate house prices.
The industry has defended the loans, saying the products and adjustable-rate mortgages have helped soften the effect of the economic contraction and helped keep people in their homes. Foreclosures fell in December to 363 from 451 a month earlier, the Copenhagen-based statistics agency said.
“We don’t think these are a mistake,” Knoesgaard said. “It’s not black and white only.”
Foreign investors bought 34 billion kroner in bonds in November, the biggest amount in almost two years, the central bank said Jan. 7. The purchase brought foreign holdings to a record 487 billion kroner, or 16 percent, the bank said.
Still, last year’s foreclosure total is the second highest since Denmark experienced its last housing crisis, in the early 1990s, Nordea Bank AB housing economist Lise Bergmann said this week in a note. Rising unemployment among homeowners with the fewest resources probably drove the increase, she said.
“Mortgage banks already have a problem today,” Beltoft said. “If house prices stay at the level they are today, we will see the problem grow in 2015 and 2016.”