Bloomberg News

Denmark Split Over Mortgage Risks as $90 Billion Auction Starts

November 23, 2011

Nov. 22 (Bloomberg) -- Denmark’s mortgage-bond industry is split over the risks facing its lenders as the country tries to attract investors to a $90 billion auction in the securities starting this week.

Denmark’s Mortgage Bankers’ Federation is urging lenders to phase out one-year bonds used to back home loans, arguing the financing is too risky. Its members include Danske Bank A/S’s mortgage unit, Realkredit Danmark A/S. The Association of Danish Mortgage Banks, which represents Europe’s biggest issuer of covered bonds backed by home loans, Nykredit A/S, rejects the criticism.

“Our point is that we have seen that we could sell our bonds throughout the credit crisis, so what’s the problem?” Ane Arnth Jensen, director of the Association of Danish Mortgage Banks, said in an interview. “We need to fight in the coming years so that one-year bonds are considered stable funding.”

The division threatens to trip up Denmark’s efforts to persuade European regulators to ease rules set by the Basel Committee on Banking Supervision, which wants banks to back long-term lending with stable financing, or funds unlikely to be withdrawn within one year. About $55 billion of the mortgage notes sold this month and next will have a maturity of one year, making them a cornerstone of Denmark’s home-loan market, said Jacob Skinhoej, chief analyst in fixed-income research at Nordea Markets in Copenhagen.

“It would be better if the Danish mortgage federation and the association could get together and agree on one thing,” Skinhoej said. “Most Danes love the one-year adjustable-rate mortgages, and most investors do too.”

Super Tanker

According to Klaus Kristiansen, executive vice president of asset liability management at Realkredit Danmark, the country’s second-biggest mortgage lender after Nykredit, the one-year notes should be replaced by securities with longer maturities to reduce refinancing risks for issuers.

He estimates that one-year notes finance about 60 percent to 70 percent of new home loans in the Nordic country.

“A mortgage bank that is about to fund itself 70 percent with one-year bonds, that wouldn’t be stable and that is where we are heading,” Kristiansen said. “We are a little bit of a super tanker. It will take some time to change direction.”

Moody’s Investors Service in June warned that Denmark’s adjustable-rate mortgage market faced risks due to its use of short-term borrowing to finance 20- to 30-year home loans. The mismatch in funding and lending maturities prompted Moody’s to cut the so-called timely payment indicator on some Danish mortgage bonds to “high” from “very high.” The rating company also told lenders to boost the collateral backing their bonds or risk downgrades.

Moody’s Criticism

Moody’s criticism has been echoed by Denmark’s central bank, which says the departure from traditional fixed-rate mortgage lending is infusing the country’s housing market with risk. Lenders including Nykredit counter that the industry’s financing model has weathered the financial crisis, proving its resilience to shocks.

“It’s not a problem: it’s a theoretical problem, because it goes tremendously well every time,” Soeren Holm, group managing director for finance at Nykredit, said in an interview. “I think we can convince regulators.”

In auctions that run until mid-December, mortgage banks will sell about 303 billion kroner ($55 billion) of one-year so- called F1 bonds, according to Nordea Bank AB. That’s down from 342 billion kroner last year, as the industry spreads sales over more auctions throughout the year.

Haven Rates

Lenders will sell a total of about 500 billion kroner to finance adjustable-rate mortgages, including three- and five- year maturities, compared with about 530 billion kroner last year, said Christian Heinig, chief economist at Realkredit Danmark. The Copenhagen-based lender will sell 170 billion kroner, about 85 percent in one-year notes.

Refinancing risks have so far done little to dent investor appetite for Denmark’s mortgage securities. The auctions are attracting buyers eager to flee Europe’s debt crisis, and that may help push yields on short-term Danish mortgage notes down as low as 1.15 percent, Heinig said.

Yesterday’s first auction in the one-year series yielded 1.33 percent, compared with 1.52 percent last year, Realkredit Danmark said.

The Nykredit Danish Mortgage Bond Index rose to a record on Nov. 16, and has gained 5 percent this year. An index of German government bonds with maturities longer than one year rose 7.9 percent in the period, according to Bloomberg data.

Danish lenders sold 148.5 billion euros ($200 billion) in mortgage-backed covered bonds last year, nearly twice the amount sold in neighboring Sweden, which ranked second, according to the Brussels-based European Covered Bond Council. Overall, Denmark’s covered-bond market is the third-largest in Europe after Germany and Spain.

--With assistance from Jim Brunsdeb in Brussels. Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net or Angela Cullen at acullen8@bloomberg.net


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