mortgage debt

Danish CB CEO Nils Bernstein’s parting words to the real estate mortgage bankers association.

Digested translation in extenso:

First of all the possibility to defer payment on principal has made it possible for debtors to borrow more with same service. This has contributed to large increases in housing prices and increased vulnerability of debtors and institutes.

Secondly the connection between the requirement for additional collateral in support of Specially Covered Bonds and lower real estate prices has given the mortgage banks an additional obligation. This can be a challenge to the extend that loans have been given up to the 80% limit, and especially if these loans have deferred payment. Simultaneously the rating agencies confront the institutes with demands for extra security.

The third concern is the violent increase in variable interest loans. I have not so much the variation in interest during the maturity of the variable interest loans in mind as the way they are constructed. It has created a refinancing risk because 30 year real estate mortgages are financed with short – often annual – bonds.

I think that we should set the common goal that within a short span of years to bring down the share of deferred payment loans and the share of the very short flexible interest loans significantly – especially in conjunction. The remaining short flexible interest loans should be refinanced equally at least three times annually.

Comment:

There is nothing new in the admonishments, but in the elaborations in the text the performance in these areas is considered: “Not satisfactory!”

The outstanding real estate mortgage debt is in total 2400 bio. DKK or 1 1/3 of Danish GDP. A figure that would make a Spanish finance minister wince.

danish real estate loans

The distribution of debt is:

Blue 20% or only 1/5 fixed interest rate annuities.

Green 7% or 1/15 fixed interest and deferred payment.

Yellow 15% or ¼ flexible interest with service on principal.

Red (and orange) 47% or approx. ½ are variable interest with deferred service on principal – and of this (the red) a staggering 34% of the total 2400 bio. DKK is refinanced annually.

A full third of all real estate debt is without service on principal and annually refinanced with 1 year bonds. In other words ½ of the Danish GDP is refinanced annually by debtors that do not service principal.

The first deferment periods expire next year.

Let’s be realistic: There is no way home owners can pay on principal when they have problems paying interests rates of less than ½% annually!

In fact the CB CEO is sounding the death knell over the mortgage banks – not to mention homeowners – of Denmark.

The final parting shot:

It is the opinion of the Danish Central Bank that the Danish real estate mortgage banking is “systemic important”.

One should note he is speaking of mortgage banks as a whole, which means that the banks of the mortgage banks are not necessarily required for the survival of the system.

Let’s face it about 1/3 of Danish home owners will never be able to move as the rent of a dwelling will exceed the payment of the distress interest on their debt. The flats and houses can’t ever be sold, as they can’t command a price on a market that will pay off the debt (not including the bank debt on top of the mortgage in the mortgage bank). The best scenario is the Japanese, where people haven’t moved in 25 years. But that is being overoptimistic because people die and rent flats are reasonably abundant.

This is bad enough, but the situation is far worse: The spokesperson for the governing Socialdemocrat Party, Benny Engelbrecht has another major and immediate concern.

The banks cannot provide credit for business for the investment so vital to improving the miserable productivity of the Danish work force.

In an unusually open blog in the Danish Daily Berlingske

He makes a point of stressing the urgent need for business finance, as investment loans in banks are called home or not issued. The banks are stuffed to the gills with bad house owner debt and their own variable rate real estate bonds. Not only that, but after years of losses banks are undercapitalised without any prospect of improvement as lending interest to distressed debtors are more than precariously close to deposit rate – deposits that end up in the Central Bank at a regular rate of 80 bio. DKK a year.

A figure that incidentally matches Danske Banks renewed petition for a Central Bank loan of 20 bio. DKK less than half a year since loaning 41 bio. DKK in the ECB.

In a not published (might come later, but I haven’t seen it) inspection report on Danske Bank from the Bank Inspection severe criticism is levelled at Danske Bank:

After yada, yada, yada Berlingske quotes:

 ”.. But the inspection found however, that the basis for decision in a number of cases – among other things description of the business and especially analysis and risk estimates are poorer than in other larger Danish banks, at that the rating of business clients in Sweden in several instances is incorrect.”

 The admonishment to board and management are:

To ensure that the basis for the decision to grant loans and the later control contain relevant analysis and risk assessment in order to ensure identification and handling of loans with elevated risks.

To ensure that the bank in Denmark continuously make adequate, current and prudent assessment of collateral of real estate.

Correctly rate the clients in the Swedish branch.

The other points as improper loans to management and a warning that further losses are to be expected in major markets as Ireland, Northern Ireland and Denmark – although not to be dismissed lightly – have less consequence.

The application for CB loans will demand collateral and as such the only relevant security is “good loans”. Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) is not likely to have any sovereign bonds left, nor any real estate mortgage bonds except their own. Seen in the context with the political concerns the granting of CB loans will give an indication of which clients can be freed from the vice.

The remarks about Sweden are particularly interesting in a broader context as banks are closing down foreign branches. To put it bluntly: They are told to leave other countries – especially euro-zone – and be the fool but in his own house (a paraphrase of Hamlets admonishment to Polonius).  We have seen several disengagements reversing the “globalisation” trend.  The next question is how the Swedish state owned bank Nordea is to leave Denmark?