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Nykredit has dug up a dead old idea in real estate mortgage financing: The two tier loan – and done unspeakable things to it. And as bankers are the same all over the world it might be of general interest.
The desperate manoeuvring contains some real information for the serious investor.
The general “idea” is that you take a typically insolvent house owner with an 80% senior mortgage with next to no interest and no service on principal plus the remaining 20% bank loan – the mortgage is turned into two mortgages where the 80% is paid down to 60% and the 60%-80% is refinanced with a long term fixed interest annuity. On top of the bank lending the last fifth of the purchase price.
On the surface and in the press it looks “responsible” and “intelligent” – and as if the management of Nykredit actually know what they are doing. The truth however is very much different, very complicated and a host of contradictions in terms – totally out of touch with reality!

Real estate prices have gone down.

From the top in – say 2007 – prices have dropped a third. Sales have since the top simultaneously fallen with a similar third. There are slight regional differences, but the overall picture is the same and the figures are precise enough for our purposes – and the inaccuracies immaterial to the principles.
The first part of the “idea” – paying down the mortgage to 60% of property value – sounds fine, but it quite overlooks the fact for the refinancing there has to be a new loan: A Flexible interest deferred mortgage is a completely different financial instrument that will require a reassessment of property value.

  1. If the original sales price was 2 mio. DKK financed originally with 1.6 mio. DKK in mortgage bonds and 0.4 mio. DKK in bank loan. Neither of which has paid off on principal. The current price is 1.33 mio. DKK
  2. The proposal reduces the original loan to 1.2 mio. DKK; but as the current value is 1.33 mio. DKK. Even the paid down loan is now 90% of property value. This means a new loan bases on current value cannot stay within legal limits as real estate mortgage loans are required to be less than 80% property value.
  3. The bank loan is – even without the new loan – in 90%-120% territory. For the new mortgage loan to stay within hailing distance of pretended legality the bank would have to yield seniority – on a loan that hasn’t been serviced? Admitted: Bankers haven’t excelled intellectually; but this strains credulity. I’ve met people fully convinced of the Immaculate Conception through divine intervention; but I have never even heard of bankers yielding seniority on a loan without collateral!
  4. Even if a miracle should occur, the new loan is clearly illegal, as real estate mortgage loans has to stay senior within 80% of property value – even that concept is dubious, as sales are so low that the idea  of a “fair market price” has lost all meaning, because there is no market.
  5. To follow this absurdity further: To whom do NyKredit intend to sell these new loans? They can’t even sell them to themselves as they already are overloaded with (the reason behind the initiative) their own junk. The Central Bank has clearly stated that own issues are unacceptable as collateral.

I promised information to the investor:

How much faith can you assign to a mortgage bank that can utter such nonsense – and nonsense that doesn’t even have the pretense of staying with in current legal limits?
There are some (few) Danish mortgage bank real estate bonds that are acceptable, but this tars the entire  Danish banking system – not that It has any reputation left as it is – with deliberate bad faith. We are talking the largest Danish mortgage bank! We are not talking some flopped marketing ploy – as this arrangement will have very little success.
The intention from NyKredit’s side is presumably that they have found out that their loan/value ratio is hopeless and then they want to carve out the bad part of the loss (where they should have cut deeper) and sell it off to the Central Bank.
Nykredit is not unknown for ineptitude in financial and legal matters. Some years ago they bought a smaller competitor (Totalkredit) and was allowed to do so with the proviso that administration fees could not be raised – which they have done never the less; but here legal restraints have braked Nykredit to a modest degree. They simply don’t know what they are saying – much less the law – and they really, really don’t care. If they cared they wouldn’t have compounded earlier mistakes by this proposal.
Dishonesty in money matters is nothing new nor even rare; but there are ways around that. You can make business deals with a Saddam Hussein and a Moammar Ghadaffi – it needs caution – and heavy artillery support; but it can be done.
One thing you cannot deal with is stupidity and incompetence on this scale. I’ve tried to find something sarcastic and funny to say – I simply can’t!

Nykredit? Investor stay away!