An update to our recent article titled, Danish Banks Feel Pressure from Upcoming Basel III Requirements:
The mortgage banks claim a big victory, but the variable interest loan with annual interest fixing will have to go.
The mortgage banks are partially right, but only so far as the fixed interest, convertible annuities are concerned (22% of home owners mortgage loans). But that seems to have been the object of the exercise – to save them.
These loans fulfill all the conditions mentioned:
a) There will never be 40% of own assets – today the issuers hold none: They are where they are supposed to be: In the portfolios of the real investors – as the high quality investment object it is.
b) A fixed interest, convertible, real estate annuity IS as good as a sovereign bond – and quite a lot better than f.i. Greek sovereign bonds.
As there is a million greedy houseovners ready to buy them back (at a very small discount), you can always turn them into cash – on the spot.
c) As an annuity includes service on principal they automatically increase coverage over time. The actual loan-to-value is always better than the legislative requirement of 80%.
Are the mortgage banks saved? I doubt it very much!
First of all it has been no secret that the Danish Central Bank and the Economy Ministry has been very anxious to save the fixed interest, convertible, real estate annuities.
In my humble opinion it is the way to finance dwellings – be they rental, socially subsidized or plain old houses for “Joe Six-pack”.
1) The investor get a slightly better long term yield than from sovereign bonds -without the risks associated with sovereign bonds.
2) There IS no need for credit assessment of the debtor. If he doesn’t pay his house is foreclosed and sold off cheaply – end of story.
3) The debtor gets a cheaper loan with fewer administrative costs than in any other alternative.
4) The debtor need not play financial wizard – which only makes grief.
5) The housing market fluctuations are dampened.
I sincerely hope that type of dwelling financing gets more common – indeed the standard home financing.
The banks however: They were the ones starting the gambling – and they probably will die from it.
What is likely to happen?
Well in a coming reconstruction of the real estate mortgage banks these fixed interest, real estate annuities will probably be separated out in the classical good bank/bad bank way. The homeowners with flexible interest and/or deferred service (and their banks) will be left to 50 years in agony.
The state will probably step in and provide the very small guarantee capital needed – which can be paid off. If not the state, then the investors will – the pension funds are dependent upon good quality long term securities.
This to me seems like a deliberate well timed move to a butchers cutting up a road kill (big one though) and saving the bits that are all right. Damage control of the banking sector is always appreciated. If real estate financing could be wrung from the banks – things might be a lot easier.
Significantly enough there seems to have been a way of getting through to the EU on this small matter. Indeed this type of financing is clearly a candidate for imitation. F.i. a large part of the German housing finance stinks. The investment certificates a large part of the rental dwellings are financed by are – despite claims to the contrary – not liquid – at least not when you as an investor need them to be. There is definitely room for improvement.
And there is a lot of money out there looking for a safe heaven.