Bloomberg News

Danish Housing Recovery Frees Up Bank Collateral: Nordic Credit

August 27, 2012

Denmark’s mortgage banks will probably need less collateral to cover bonds financing home loans as the country’s house prices recover, the head of the Mortgage Bankers’ Federation said.

“It’s a good development for all parties, for the mortgage banks that need to provide supplementary capital, for the present homeowners,” Karsten Beltoft, director of the Copenhagen-based federation, said in an interview. House prices are now “leveling off,” he said.

“Extraordinarily low interest rates are stabilizing the housing market,” Economy Minister Margrethe Vestager said yesterday. The government estimates house prices will rise 2.5 percent next year, after falling 3.5 percent in 2012. The figures, which are yearly averages, imply a 2.1 percent increase in property values from April through December, said Lise Nytoft Bergmann, Nordea Bank AB’s housing economist.

Denmark’s mortgage lenders have to put up 246 billion kroner ($41 billion) in extra collateral to comply with demands from regulators and ratings companies, the central bank said in June. The industry has come under pressure to set aside bigger cover pools to reassure investors their holdings are backed even after house prices slumped 25 percent from their 2007 peak through this year.

Loan Ratios

Nykredit A/S, the biggest issuer in Denmark’s $460 billion mortgage-bond market, plans to reduce sales of junior covered bonds, which it had used to bolster collateral levels, as loan- to-value ratios “flatten,” Chief Financial Officer Soeren Holm said in an interview last week. Declining property values since 2007 had inflated loan ratios, requiring banks to set aside more collateral.

Europe-wide covered bond legislation, adopted by Denmark in 2007, requires banks to provide extra collateral if a loan exceeds 80 percent of a property’s value. In Denmark, mortgage banks have an additional requirement that debt issued equals loans outstanding. As a result, lenders can’t buy back bonds if the 80 percent cap is breached.

Since adopting the covered-bond legislation, Danish lenders have provided 122 billion kroner in supplementary collateral to meet the law and a further 124 billion kroner to meet rating companies’ demands, the central bank said in June.

The government’s latest property-market forecasts support estimates that the collateral needed to fulfil those requirements will decline.

‘Historically Low’

“House prices have stabilized and are expected to rise from a low level starting next year,” the Economy Ministry said yesterday. “This is the effect of a long-term price adjustment following the housing bubble and because both short- and long- term mortgage rates have fallen to historically low levels.”

Denmark, which pays less than Germany to borrow thanks to its low government debt level, has charged investors to hold its two-year debt through most of July and August as the country attracts capital fleeing the crisis-stricken euro area. The nation’s haven status has also sent mortgage rates down to record lows, with borrowers able to get three-year home loans at rates below 1 percent.

The yield on Nykredit’s 2 percent benchmark mortgage note maturing April 2013 was at 0.33 percent yesterday, Nykredit prices on Bloomberg show. Bid yields on 2 percent notes due January 2014 sold by Realkredit Danmark A/S, the mortgage arm of Danske Bank A/S (DANSKE), traded at 0.35 percent.

Haven Dynamics

Nykredit’s index of the most-traded mortgage bonds reached a record last week. The index’s gains this year have outperformed U.S. Treasury debt with maturities of more than one year. Bonds in the Nykredit index returned 3.1 percent since the end of December, including re-invested interested. That compares with a 1.9 percent return on Treasuries in the period.

The yield on Denmark’s two-year government note was little changed yesterday at minus 0.2 percent. The nation’s 10-year benchmark yield was at 1.08 percent. That’s about 27 basis points less than similar-maturity German bunds.

The government of Prime Minister Helle Thorning-Schmidt yesterday announced a 29 percent drop in 2013’s domestic borrowing need compared with 2012. The budget deficit will narrow to 1.9 percent of gross domestic product in 2013, from 4 percent in 2012. The country’s debt burden will be less than 30 percent of GDP this year and next.

Denmark’s low borrowing costs mean that home owners on average are saving about 4,000 kroner a year in interest costs, the Association of Danish Mortgage Banks said yesterday, basing its estimate on figures provided by the central bank.

The number of homes for sale in Denmark last month fell an annual 10.7 percent, the mortgage association said Aug. 13. The latest data from the association show a 1.4 percent house-price decline in the three months through March from the fourth quarter, easing from a 2.6 percent drop the previous quarter.

“For the rest of the year, we expect more or less unchanged prices,” Beltoft said. “That is still an improvement compared to last year’s increasing need for supplementary capital.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at

To contact the editors responsible for this story: Tasneem Brogger at; Christian Wienberg at

Toyota's Hydrogen Man
blog comments powered by Disqus