Denmark’s mortgage lenders may offer new kinds of securities to reduce refinancing risks after being hit by downgrades from Moody’s Investors Service last month.
Lenders in the world’s third-largest mortgage bond market are looking into the possibility of phasing out adjustable-rate mortgage bonds with maturities of one year and introducing five- year securities with yearly adjustments to the interest rate, Karsten Beltoft, the head of the Copenhagen-based Danish Mortgage Bankers’ Federation, said in a phone interview yesterday.
“We have to develop loan products that can give the variable interest rate but not the refinancing,” Beltoft said. That would help lenders to “avoid the huge refinancing every year,” he said.
The industry is searching for ways to avoid further downgrades after Moody’s June 10 warned a surge in adjustable- rate debt is infusing the market with risk.
The bonds have doubled since 2008 to about $233 billion this year, or half the market, the central bank estimates. The ratings cuts have come as Denmark tries to persuade the European Union to soften rules set by the Basel Committee on Banking Supervision that question the liquidity of the securities.
Beltoft, whose federation represents the home-loan units of Danske Bank A/S and Nordea Bank AB, said the new bonds would allow issuers to reduce a refinancing risk that Moody’s in June warned may hamper timely repayment. Lenders would only need to tap debt markets to finance mortgages every five years instead of as often as every year.
‘MORE EXPENSIVE’
The new securities would be “more expensive and less flexible” for the homeowner, Beltoft said. “But it could be a way of reducing the proportion of adjustable-rate mortgages.” Lenders need to explore new products in the event that ratings cuts and political pressure make the current adjustable-rate structure untenable, he said.
The central bank in May warned that the country’s mortgage lenders face refinancing risks that have yet to be addressed. The European Commission also raised concerns in a June report.
“If the ratings companies, the central bank, the ministry the European Union, if all these stakeholders think we have a problem, then we have to look at it,” Beltoft said.
The difference between yields on Realkredit Danmark’s 5 percent 2041 bond and Germany’s 30-year bund widened three basis points to 177 basis points today, the widest this month.
THE RIGHT PRICE
Bonds with longer maturities and regular interest-rate adjustments already exist in the commercial mortgage market. Residential loans account for 80 percent of all mortgage lending in Denmark, according to the Association of Danish Mortgage Banks, which represents Nykredit A/S, the country’s biggest.
Still, the existing model for adjustable-rate bonds works well because “investors have to have money out of their pockets to buy these bonds every year,” said Jacob Skinhoj, chief analyst at Nordea Markets in Copenhagen. “So both borrowers and investors are sure that it is the right price and interest rate.”
In the past 15 years, Denmark’s mortgage-bond market has moved away from traditional fixed-rate, callable-at-par securities into more varied debt instruments. Adjustable-rate mortgages were introduced in 1996. Interest-only loans, which the central bank has criticized for exacerbating volatility in the country’s property market, were sold from 2003. So-called capped floaters, which offer a floating interest rate with a ceiling on how high borrow costs can rise, came in 2004.
MISMATCH
Moody’s argues that Denmark’s adjustable-rate mortgage bonds represent a bigger refinancing risk because they, unlike other Danish covered bonds, don’t match the maturities on the loans linked to them. The adjustable-rate bonds tend to have maturities of one to three years compared with an average loan maturity of 20 to 30 years.
Danish lenders typically hold three adjustable-rate bond auctions a year, with the biggest sale taking place at the end of the year. Issuers in December refinanced $97 billion in the securities.
Moody’s last month lowered the so-called timely payment indicator on some mortgage bonds, including those issued by Nykredit A/S and Realkredit Danmark A/S, to “high” from “very high.” The rating company also raised the over- collateralization rates on some covered bonds that it said are needed to avoid downgrades on the debt.
“They changed a parameter in the model, the timely payment indicator. No one knew the indicator,” Beltoft said. “We got a bit anxious about what change might come again in a month or two with dramatic consequences for the Danish mortgage companies.”
‘WE HAVE A CHALLENGE’
Realkredit Danmark, the mortgage unit of Denmark’s biggest lender Danske Bank, said June 23 it is dropping Moody’s after the rating company told it to cough up an extra $6.14 billion in collateral to keep its covered debt graded Aaa.
Nykredit, Europe’s biggest issuer of covered bonds backed by mortgages, on June 21 separated its funding for adjustable- rate debt into a separate capital center to protect the credit grades on its fixed-rate bonds. It said the move meant it may have to accept a lower rating on adjustable-rate securities.
Beltoft said the new bonds would incorporate aspects of products already available, namely capped floaters. Totalkredit A/S, now a unit of Nykredit, offered mortgage bonds in the late 1990s that had floating rates on longer maturities.
“We have a challenge in the refinancing in that we’re going to sell many more bonds every year,” Beltoft said. “And we’re working on that. ”
