Denmark Races to Prevent Foreclosures as Home Prices Sink

Representatives from Denmark’s mortgage industry are meeting with the government today in the hope of easing repayment terms on interest-only loans that threaten to unleash a wave of foreclosures this year.

The Association of Danish Mortgage Banks and the Mortgage Bankers’ Federation are due to start talks with Business Minister Annette Vilhelmsen to decide how to treat borrowers who won’t be able to afford the interest-only loans they took out a decade ago once amortization requirements kick in this year. Borrowers are also struggling as a deepening property slump drives house prices down to 2005 levels.

“Eighty percent of homeowners under 35 years of age are under water. That’s a lot,” Curt Liliegreen, head of the Center for Housing Economics in Copenhagen, said yesterday in a telephone interview. “This is a problem that threatens the Danish economy.”

Denmark’s housing crisis, which started when the nation’s property bubble burst in 2008, is showing signs of deepening. Prices sank 2.8 percent last quarter from a year earlier, the two mortgage groups said yesterday. More than 100,000 households will need to have special terms negotiated if they are to meet their loan obligations, according to a February study by the University of Southern Denmark.

‘Rough Time’

“The housing market is still having a rough time,” Steen Bocian, chief economist at Danske Bank A/S, said today in an economic report. “Even though the pace of declines slowed last year, it’s too early to talk about a turn-around.”

House prices may start to rise this year, though at a slower rate than inflation, Bocian said. He forecast a 1 percent increase in home prices this year and 0.6 percent in 2014.

Denmark’s $590 billion mortgage industry -- which is about twice the size of Denmark’s economy -- in 2003 started giving borrowers the option of deferring amortization for as long as a decade. The interest-only mortgages were popular, and have since grown to account for 56 percent of all outstanding home loans, according to the Association of Danish Mortgage Banks. The central bank has criticized the loans, arguing they inflated a housing bubble that plunged Denmark into a recession.

The mortgage industry wants the government to approve a plan that would allow homeowners to treat their property debt as two separate loans. The move would give lenders the freedom to let borrowers roll over debt within an 80 percent loan-to-value threshold into new interest-only loans. Only debt exceeding that limit would be amortized. Without the proposed change, borrowers would need to start amortizing the whole amount.

‘Dramatic Increases’

“There will be very dramatic increases in monthly payments for many families and it’s happening at a time with relatively high unemployment,” Liliegreen said. “That’s a dangerous cocktail.”

Denmark’s property prices have dropped more than 20 percent since their 2007 peak, triggering a regional banking crisis that’s wiped out more than 12 lenders. Gross domestic product shrank 0.6 percent last year, the biggest annual decline in three years, prompting economists at Sydbank A/S to characterize 2012 as Denmark’s “annus horribilis.”

While the nation’s unemployment rate, including people in vocational training courses, has hovered close to 6 percent, the number of people outside the workforce rose to its highest last quarter since at least 1996, as record numbers stopped looking for work, Jan Stoerup Nielsen, senior analyst at Nordea Bank AB, said Feb. 13. The economy lost as many as 8,000 jobs last year, according to Danske Bank.


Foreclosures increased as much as fivefold after Denmark’s housing bubble burst in 2008. Last month, they declined to 361 from 481 a year earlier, according to the statistics agency, after interest rates on mortgages refinanced yearly fell to below 0.5 percent in November and December auctions.

The risk of higher interest rates now poses a threat to the housing market’s recovery, Nordea said today. The Stockholm-based lender forecast a 0.9 percent increase in house prices this year and 1.9 percent in 2014.

The Danish central bank, which defends the krone’s peg to the euro, will raise rates as part of a gradual normalization of monetary policy that “we expect will push financing costs higher,” Nordea said.

The central bank raised its benchmark interest rates in January after investor appetite for AAA rated assets waned amid an improved outlook for southern Europe. Even after that increase, the bank’s deposit rate remains below zero at minus 0.1 percent. The lending rate is 0.3 percent.

‘Facing Customers’

The mortgage industry has already signaled to banks, including Nykredit A/S and the home-loan arm of Danske Bank A/S, to start following its recommendations, even before winning government backing.

The banks “have to react,” Karsten Beltoft, director of the federation, said in an interview last month. “They’re facing customers right now.”

Denmark’s Financial Supervisory Authority has declined to comment on the legality of the measure, leaving it to Vilhelmsen to decide whether banks are in fact violating the law by breaking up the loans.

Vilhelmsen said Feb. 20 the approach risks “weakening mortgage bonds’ security.”

Interest rates on home loans plunged last year to record lows as investors fleeing Europe’s sovereign debt crisis sought the safety of Denmark’s top-rated covered bonds.

Cause of Collapse

Danish mortgage banks aren’t allowed to grant loans that exceed 80 percent of a property’s value. Any shortfall caused by house price declines is filled by the banks, which must provide extra collateral to maintain their credit ratings.

A government-appointed committee examining the causes of Denmark’s 2008 housing collapse is due to report its findings within months. The central bank has urged the industry to phase out interest-only lending, while the FSA, as of May 1, may impose fines on banks that don’t ensure new borrowers can afford to repay their principal. The agency also said in November it was looking into the option of requiring depositors to make larger down-payments before gaining access to mortgage financing.

“There is a moral hazard problem,” Liliegreen said. “But the question of what happens to society, to the economy, is more important.”

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