Realkredit Danmark (Danske Banks mortgage bank) announces that they will not lend out more on variable interest real estate mortgages – at least not the annually adjusted.
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That is not difficult to understand:
According to the Mortgage Banks Association (RKR) the variable real estate interest rate is ¾%, this has to be compared with the interest rate of the ECB, which is 1%. This explains why Nationalbanken (Danish Central Bank) lends out at 0.7% – on otherwise similar terms.
This means that even under the best of circumstances Danske Bank (and other banks) cannot borrow money to finance their own issues – not without crying all the way to work. Even a bond of so short a maturity as one year has to be refinanced several times on the inter-bank market.
This distress is all the more painful as even Realkredit Danmark sees it as very likely that the upcoming Basel III rules for increased financial stability will exclude these variable interest bonds from being counted in the liquidity of banks. Very likely: When the majority of them are bought by the issuer – and cannot be sold without great loss in a pinch – they defy the definition of liquidity.
Meltdown in progress?
There is seems to be a general consensus among the mortgage bankers that a meltdown of the Danish mortgage banks is in progress – though this is old news to reasonably qualified finance observers in the country – but that the mortgage banks are forced to admit it – although obfuscating – that is news .
The main competitor, Nykredit, has suggested a two layer mortgage, where the slice between 0-60% of property value is kept as variable interest deferred service; but the 60-80% slice has to be a fixed rate annuity. This suggestion has not met with enthusiasm by Danske Bank.
There are reasons for that:
- The home owner not only pays interest, but also an administration fee – originally supposed to cover the cost of foreclosure (and yes administration) – this fee is calculated on a sliding scale according the loans position relative to property value. Thus an average administration fee of – say 0.6% (changes all the time –upwards) – will have a marginal value of 1¼ % for the slice 60-80% of property value.
- Mortgage loans are only legally permitted up to 80% property value (not that has ever affected the mortgage banks in the slightest). They writhe as a sidewinder snake under way – with a very bad case of hiccups.
- This means the marginal interest rate for the home owner is 2%. Now Danske Bank has sold a very large proportion of Realkredit Danmarks loans against a guarantee for the 60-80% slice for which Danske Bank gets the administration fee. So Danske Bank doesn’t really care which part of the business gets what. You can say what you want about incest; but it stays in the family!
Nykredit on the other hand has only very limited consumer banking and would dearly love to get their talons on the fat slice as well.
But that won’t work:
- You see the original mortgage deed will have to pay down the original loan to 60% and a new loan registered above that on the slice 60-80%. It is not very likely that the bank (that has the loan on top of the 80% also) will yield to the mortgage bank without a fuss.
- Furthermore with a new loan the property value will probably (if the sale is more than 5 years back) have to be reassessed as it otherwise will get into conflict with the original mortgage deed – and with property prices/values down with 25% it will mean that the new loan will be taken solidly into the 60-107% slice of the property value. Believe me: The bank won’t accept that, not only will they have to yield and loose the fee; but it will have to cough up the extra cash to meet the new loan – it isn’t going to happen.
This is typically Nykredit! They don’t think! They have lots of suggestions about situations that are not going to occur unless several natural laws are violated – after it is to late anyway.
It is very hard to see a future for the Danish mortgage banks – some of the older fixed rate annuities might be reconstructed in a new company – but in their present form? Hardly.
As to Realkredit Danmark and Danske Bank: It is hard to imagine that a home owner that cannot pay neither instalment nor 2% interest (including administration fee) on their loan can pay 3-4% for a longer term fixed rate.
With house prices still unrealistically high and without prospect of finance the future of the housing market is very bleak indeed.