Leverage Under Attack in Danish Mortgage Review: Nordic Credit
Denmark, home to the world’s highest household debt burden, is exploring the option of requiring home buyers to cough up bigger down-payments in an effort to wean the recession-stricken economy off leverage.
The nation of 5.4 million, which has seen house prices slump about 25 percent since a 2007 peak, has relied too much on credit to finance home ownership, according to the Financial Supervisory Authority. The regulator now says bigger mandatory down-payments may be a way to force households to delay property purchases until they can really afford them.
The comments come as Danes refinance as much as 475 billion kroner ($81 billion) in adjustable-rate mortgages at near record-low yields. While the bond-backed portion of Denmark’s residential property market complies with an 80 percent loan-to- value rule, access to bank loans to help home buyers finance the rest may have been too lax, the FSA said.
“With the Danish model in general, you don’t have to come up with a lot of down-payment, if any, to finance a house,” FSA Director General Ulrik Noedgaard said in an interview in Copenhagen. The system needs to become “more robust,” he said.
The regulator wouldn’t push for stricter rules until the housing market stabilizes, he said.
Denmark’s private debt burdens swelled to 322 percent of disposable incomes in 2010, Standard & Poor’s estimates. While that’s backed by a high savings rate in the form of pensions and home equity, those assets can be hard to access when financial markets are stressed, central bank Governor Nils Bernstein has warned.
The FSA is now looking at “the amount of leverage that households can take up, for example, by regulating over the housing cycle the amount of down-payment you have to come up with,” Noedgaard said. “We want to think through the various instruments; this is planning for the future.”
The Association of Danish Mortgage Banks said it’s willing to consider the idea, which it said parliament should decide on. A government committee is examining the origins of Denmark’s bubble and potential measures to prevent another.
Still, the Copenhagen-based industry group said it doubted requiring minimum down-payments would be effective, because buyers would probably find funding outside the financial system.
“We are not convinced, but we are open minded,” Ane Arnth Jensen, the association’s director, said by phone today. “It’s too early to make a final judgment now but it’s not easy to prevent bubbles. If it were easy, a solution would have been invented already.”
Though Denmark’s household liabilities are high, government debt is less than half the euro-zone average, the European Commission estimates.
Denmark pays less than Germany to borrow over 10 years, with the yield on the nation’s benchmark 3 percent note due November 2021 at 1.117 percent at 10:33 a.m. in Copenhagen, or about 24 basis points less than the yield on similar-maturity bunds. Denmark’s government charges investors to hold its two- year debt, which yielded minus 0.166 percent.
Low government yields have helped ease borrowing costs in Denmark’s mortgage bond market, which is the world’s third- largest after the U.S. and Germany. Danish refinancing auctions for one-, three- and five-year mortgages generated yields as low as 0.5 percent at Nordea Bank AB (NDA)’s mortgage unit, the bank said yesterday. Realkredit Danmark A/S, the mortgage arm of Danske Bank A/S (DANSKE), sold one-year bonds at 0.56 percent, it said.
The yield on the January 2014 note issued by Nykredit A/S, Denmark’s biggest mortgage lender, had a bid-to-maturity yield of 0.40 percent in Copenhagen trading, bringing the spread to the government’s benchmark 2 percent note due 2014 to 57 basis points.
Yet bank loans, which don’t have the same collateral backing as mortgage bonds, have gone up in cost. The effective interest rate on new lending to households for residential property purchases was 6.2 percent in September, central bank data show. That compares with 5.9 percent a year earlier, according to the bank. That’s putting more pressure on household finances as property values continue to sink.
Denmark risks sliding into its second recession as continuing house price declines undermine consumer spending, Thomas Dorsey, head of the International Monetary Fund’s Danish mission, said Nov. 5, after concluding a review of the economy.
Any new restrictions would apply to both mortgage and regular lenders, Noedgaard said. “Setting limits for what mortgage institutions can do, without getting a grip on what banks can do, will not do the job,” he said.
Denmark’s real estate crisis sent impairment levels soaring, resulting in the failure of more than a dozen commercial banks since 2008. Toender Bank A/S, the most recent insolvency, underscores the continued pressure on Danish bank assets, Moody’s Investors Service said in a Nov. 8 note.
The FSA in April imposed tougher writedown rules as it pushes stricter solvency standards. The regulator is also forcing banks to document the extent to which their boards fulfill minimum professional requirements. In addition, the watchdog is taking a closer look at how banks calculate risk in internal ratings models.
Mortgage banks, which in Denmark operate under separate licenses from regular lenders, have had to meet additional collateral demands from regulators and ratings companies to compensate for falling house prices and refinancing risks. The industry has responded by putting up 246 billion kroner in extra collateral since 2007, the central bank said in June.
The FSA’s proposals will help avert the next crisis and are not a measure the regulator would enforce in the middle of the current turmoil, Noedgaard said. Requiring a minimum down- payment “is not a thing that we want to do now,” he said. “This is an instrument we want to get comfortable with.”
The central bank has signaled it’s unlikely to back mandatory down-payments, cautioning that implementation may be too complicated and could spawn a shadow market for loans.
“It would be difficult to enforce a requirement that some or all of the remaining payment must be covered by savings,” central bank spokesman Karsten Biltoft said in an e-mailed response to questions. “Such a measure might also inadvertently create a gray market for loans.”
Banks should be left to resolve the matter on their own, Biltoft said.
“We have confidence that lenders, in connection with housing purchases, will find a sensible balance between own- financing and debt financing as part of a total credit assessment,” he said.
The financial industry has already taken steps to tighten lending, according to the most recent quarterly lending survey by the central bank. Mortgage banks have raised fees on interest-only, adjustable-rate loans. Regular banks have raised interest rates on consumer lending.
Danske Bank, the country’s largest lender, said Oct. 30 it had tightened its credit policy for customers whose homes had declined in value. The lender’s LTV ratios for home loans in Denmark were second only to ratios Ireland, rising to 73.7 percent as of Sept. 30, compared with 69.5 percent a year earlier.
Internal industry controls are sufficient for now, Noedgaard said.
“We feel that, where we are in the business cycle and the housing cycle, the right approach now is self-regulation,” he said. “I see significant changes in the way the institutions are addressing this, and we are quite happy with what we see right now.”
To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at email@example.com