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Soros is Wrong About Danish Mortgage Market

Bloomberg recently ran a story about the Danish mortgage market, which stated:

Billionaire George Soros’s assertion that Denmark’s $480 billion mortgage credit system can weather any crisis better than any country where mortgages are bought and sold is proving the rule for international investors.

Bloomberg also quoted Alan Boyce, a former bond trader at $25 billion Soros Fund Management LLC as stating that:

“The Danish mortgage system works as advertised under very special conditions as the rest of the world shuts down.”

Below is our rebuttal:

It is correct that the “balance principle” in principle should protect the investor from everything but the risk from variations in interest. But that was 10 years ago. The variable interest and no amortization loans have totally destroyed that fantasy.

Secondly there is confusion between the creditworthiness of the Danish state and their sovereign bonds and real estate bonds. The Danish sovereign bond is solid enough; the real estate bonds are divided – even within the same building society!

The old fashioned fixed rate annuities should be solid enough; but the variable interest (especially the “postponed” amortization type) is junk. When a rating agency is hammering a Danish Bank – they generally stop using that agency – which happened last year for Danske Banks society Realkredit Danmark.

The investor should be protected against defaults and repossession losses. In theory – yes. But the truth is quite different:

1)      The debtors pay an “administration fee” – according to how much their loan is in relation to the property value. This fee has on the 60-80% marginal reached 1.2% on that slice at BRF – they and the other building societies continually raise that fee. In fact the marginal fee is now getting higher than the interest rate on the bond.

This fee should cover the default and repossession losses, which it can’t.

So the way out is not to re-posses! As all of the building societies are associated with banks debtors in distress reaches an “understanding” with the said bank. We can see this in the following graph:

1)      Now housing sales are down with a third and prices are down with a quarter from the top. 2/3 times ¾ is generally accepted to be ½.

The inclination ratios of the green and the red regression lines is .59 – which fits with the reduced sales; but it also implies, that home owner do not amortize their loans, neither in the bank nor the building society.

2)      The building societies are limited to carry 20% of equity as “property in temporary possession” – which is a euphemism for repossessed property. So far they have been able to “sell” (fully financed of course) to what the CB director has publicly termed snakeoil salesmen (my translation of “platugle”). That keeps the property off the balance and avoids losses; but there is generally a sale back guarantee to the building society at the sale price – called parking agreements.

3)      The problem with the loan/value ratio of these loans is the value. For the first 5 years the value is the latest sales price; but after that it will be the public assessment (originally made for tax purposes). Now we have 2012 minus 5 which is 2007. This means that the inflated prices of that period are going out style – and the building societies have to exchange the sales price with current assessments. Now that matters little with sales before 2003 which were jerked up – they just go down again; but the trade in 2006 will have to be assessed at lower value in the annual report.

Not only that, but the prices dropped again in Q3 2011 after having been granted a period grace in two years.

The “jobless” figures are very well massaged – and here we feel the damp hand of mr. Beltoft from Realkredit Danmark (of the Danske Bank ilk). Danske Bank has been severely criticized for their model to asses depreciation – which has “jobless” as a major feature.

1)      Please note that the ongoing loss of jobs is in the age groups where the household budgets are liable to be strained due to mortgage.


1)      There is not value in the loan/value fraction of the variable interest fraction. Thus there is no collateral behind the variable interest Danish real estate bonds.

2)      The ability to pay interest – let alone amortize – housing loans isn’t there.

3)      It remains unclear which body part “Soros” is communicating form; Mr. Boyce is clearly involved in the marketing of products from long writhing things. Spokespersons from the buildings societies have been publicly humiliated by the major investor on primetime TV around Christmas 2010.

There is not a shred of evidence to support the headline from Bloomberg.