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Denmark Targets Mortgage Bond Maturity Extension to Cut Risk

The Danish government introduced plans to address refinancing risks that had threatened to disrupt the housing market and put the country’s $530 billion mortgage market on a collision course with European regulation.

The Business Ministry today proposed that maturities on adjustable-rate mortgage bonds be extended if refinancing auctions fail or interest rates climb sharply. The Danish central bank backed the measure while mortgage banker groups said they were notified less than 24 hours ago.

“We’re intervening to secure the future of the Danish mortgage model as we know it,” Business Minister Henrik Sass Larsen said in a statement. “With this change in legislation, I expect mortgage lenders can keep the short-term adjustable-rate mortgages that very many Danes prefer.”

Banks have scaled back issuance of one-year adjustable-rate mortgage bonds after ratings companies said their use created refinancing risks. The securities financed 40 percent of home loans in the third quarter, unchanged from the previous three months, the Association of Danish Mortgage Banks said Oct. 25.

Nykredit Index

The Nykredit Realkredit A/S index of the most-traded mortgage bonds has returned 0.74 percent this year, including reinvested interest, according to data compiled by Bloomberg. That compares with a 3 percent loss on Danish government bonds with maturities longer than a year.

Banks, which once issued only fixed-rate, 30-year mortgage bonds, have been exploring every avenue to wean borrowers off the loans and adjust to stable funding requirements from the Basel Committee on Banking Supervision. That includes higher fees imposed just as the housing market shows signs of emerging from a five-year slump.

Under the proposal, maturities on loans funded by short-term bonds could be extended if auctions fail or rates jump more than 5 percentage points from the bond being refinanced. The ministry expects the measure to be in place by Jan. 1.

“We were informed less than 24 hours ago,” Ane Arnth Jensen, head of the Association of Danish Mortgage Banks, whose members include Nykredit A/S, the country’s largest covered bond issuer. “This is a fair solution.

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