Danish mortgage model is one to back

[BoyRacer]

Danish mortgage model is one to back - Kathleen Barrington → sbpost.ie/post/pages/p/story … qqqx=1.asp

There were no 100 per cent mortgages and no sub-prime loans. Indeed, the maximum loan-to-value ratio was 80 per cent, which meant that borrowers had to put up a deposit of 20 per cent of the value of their homes.
The result was that, while house prices declined in Denmark as a result of the downturn in the economy triggered by the international credit crunch, negative equity did not become a problem as most borrowers had substantial equity in their homes when the crisis struck.
‘‘This was a major reason why the rise in defaults in Denmark was small and manageable,” Guttentag said on his website.
In short, the Danish system appears to have served ordinary consumers pretty well. But the reason the Danish system has attracting so much attention at the moment is due to the resilience of its mortgage banks during the international credit crunch.
While the Danish economy has been contracting and several banks have been bailed out after making risky loans, the Danish mortgage banks did not require a bailout and have been doing business as usual on both the mortgage lending and fund-raising sides.

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[Rick_Flair]

Denamrk is the closest thing I am aware of of a country run for the benefit of its people rather than a small well connected and greedy elite.

[kerrynorth]

I lived in Denmark for a period, in Aalborg, North Jutland. Public services are fabulous, public transport is to die for. Never had to use the public health system but by all accounts it is fabulous and the term ‘waiting list’ is just not in their vocabulary. Also in Denmark there is no such thing as being on the dole for years on end, after 6 months on the dole they will find you a job or suitable training leading to a job. The flip side is of course the taxes, VAT is 25% on EVERYTHING, the pint (well half litre) is about €5-7 euro although the offie is much cheaper, tax on the minimum wage is about 35% although when I was there the minimum wage started at about €12/hour. You get what you pay for is the moral of the story I guess.

[BoyRacer]

Danish wise men urge more fiscal stimulus → forbes.com/feeds/afx/2009/10 … 30140.html

‘The outlook for recovery of the Danish economy is from a very low starting point,’ they said. ‘So there are quite many reasons to expect that the upswing will be relatively weak and that it will take several years before Danish production is back up at the level of before the crisis.’
The wise men predicted that the absolute number of unemployed would rise to around 170,000 in 2011 from around 100,000 this year – ‘a rise of nearly 125,000 in comparison with the historically low unemployment of summer 2008.’

PUBLIC FINANCES
Denmark, the first European Union member to slide into recession, is mired in its worst economic crisis since the Second World War. Falling tax revenues and increased social welfare outlays have pushed public finances into deficit from healthy surpluses.
**The wise men raised their estimates for the public sector deficit to 40 billion crowns this year from a previous 21 billion, and for the 2010 deficit to 89 billion from a previous 51 billion. Both forecasts are in line with government projections.
The expected 2010 deficit equals just over 5 percent of GDP – the biggest Danish shortfall by that measure since the early 1980s – and violates the EU limit of national public sector deficits of at most 3 percent of GDP.
** The wise men said Denmark’s public debt would reach about 700 billion crowns at the end of next year, or about 200 billion higher than estimated in the government’s EU convergence report in December 2008.
It would be ‘extremely difficult’ to get back on track for debt reduction by 2015, they said, adding that the need for structural reform seen before the crisis was heightened by the significantly higher debt level than seen in the government’s 2015 plan
The wise men called for a new medium-term plan to reinforce the sustainability of public finances.

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1.00 DKK = 0.134348 EUR (700 bn DKK = 94 bn EUR)

[BoyRacer]

Time for a new mortgage model - Kathleen Barrington → sbpost.ie/post/pages/p/story … qqqx=1.asp

But Ireland and Spain face the problem that their interest rates are set by the ECB, which has to consider the picture in the eurozone as a whole.
The Insider first drew attention to the problem of Irish consumers’ vulnerability to rising interest rates as far back as March 2006, when house prices were very high and interest rates very low.
At the time, we suggested that the authorities should encourage the supply of long-term, fixed rate mortgages, to protect consumers from the consequences of rising interest rates.
The beauty of the long-term fixed-rate mortgage is that it gives the borrower a more accurate picture of the true long-term cost of the mortgage and should, therefore, prevent the borrower from overpaying for houses when interest rates are temporarily low. But the authorities did little to encourage lenders and borrowers to protect themselves from the risk of rising interest rates, either through fixed-rate mortgages or other mechanisms.

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[Gilroy]

While our central bank mortgage lending restrictions have had some effect on reducing risks to banking stability from our propensity to borrow massive amounts of money for our homes, we haven’t seen fundamental changes to the system that crashed the country and required the taxpayer to bail out the depositors and the bondholders. I thought it worthwhile to bump this thread with a link to a good description of the Danish mortgage market model. 40% of all Danish mortgage covered bonds are held internationally. Note as well that a borrower is personally liable for the mortgage, all personal assets and future income is up for grabs.

LInk to Danish mortgage vs US mortgage comparison

Most importantly, the homeowner is personally liable for her mortgage loan; thus, the lender is protected both by the value of the collateral as well as the payment capacity of the homeowner. Control rights are also strongly enforceable; in Denmark a foreclosure is completed typically 6-9 months from the time the homeowner misses a payment. Even after a foreclosure is completed, the borrower remains liable for any debt that remains unpaid. These factors discourage mortgage delinquency and typically ensure that loss-given-default is low.
The creditor-friendliness of the Danish system in turn means that relatively more price risk is borne by the homeowner. This risk is however offset by an extensive social safety net, including a city obligation to provide rental housing to homeowners displaced by foreclosure. In this sense, some features of the Danish mortgage system reflect broader societal choices about social insurance and the role of government.

Mortgage banks keep bond series (each with a specific ISIN security identifier) on the run for three years and tap them on a daily basis to fund new lending. When a new bond series is started, it has 33 years to maturity. This allows the bank to fund loans with the maximum legal loan term of 30 until the bond goes off-the-run. No loan in the cover pool backing the bond series will have a maturity in excess of 30 years, but since the loan portfolio is constructed over time, the amortization profile of the bond will reflect the gradual build-up of the underlying cover pool. The long three-year on-the-run period makes it possible to build up large and liquid series of covered bonds.
Under the balance principal, the amount lent to the homeowner exactly matches the net amount raised by selling covered bonds in the capital market. Bond market funding for each loan is obtained on the day the loan is disbursed thus avoiding any pipeline risk for the bank.
The effective mortgage rate paid by the borrower will reflect the yield on the corresponding covered bond. Since bond prices fluctuate over time, different homeowners will not have the same yield-to-maturity despite being funded in the same bond series with the same coupon. Mechanically, this is achieved by adjusting the principal on the mortgage in a manner analogous to the U.S. practice of paying mortgage points. The simple example below illustrates the mechanics (for the sake of simplicity we exclude all fees etc.):
A homeowner needs 1 million DKK to purchase a house. The on-the-run 2% 30 year FRM-bond trades at 99.00. The bank will then make a loan offer with a principal of 1/0.99 = 1.01 million DKK. The homeowner is liable for the bond amount issued and will receive the proceeds of 1 million DKK. The quarterly interest payment will be 2%/4*1.01 million DKK and hence the homeowner’s effective loan rate will be slightly above the 2% coupon of the bond, reflecting the fact that the 2% bond is trading at a discount. Another homeowner taking out a loan the following day when the same bond series trades at 99.25 will be liable for a slightly smaller bond principal and pay a marginally lower effective interest rate.
Coupon rates are set at 50 basis point increments. At time of writing the Danish mortgage banks have bonds open for issuance with final maturity 1 October 2050 with coupons of 1.5%, 2.0% and 2.5%. Each homeowner will have her loan funded in the bond trading closest to par, thereby minimizing the number of points paid. If long-term interest rates for instance increased, mortgage banks will open new on-the-run bonds with higher coupons and start tapping them instead of the bonds with coupons below market rates. The end-date for the on-the-run period will be the same for all bonds of the same “vintage” irrespective of when in the 3 year period they begin to be on-the-run.