The Danish mortgage system: Advantages, challenges, and lessons learned

Transcription

1 The Danish mortgage system: Advantages, challenges, and lessons learned 1 ICELAND PRESENTATION JULY 1, 2014 J E S P E R R A N G V I D P R O F E S S O R, C B S C H A I R M A N, D A N I S H F I N A N C I A L C R I S I S C O M M I T T E E

2 The best mortgage systems in the world? The Economist, 2007: One of the world's most robust mortgage systems may be exported to emerging markets. George Soros in Wall Street Journal, 2008: Denmark Offers a Model Mortgage Market. To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model. It remains the best performing in Europe during the current crisis. IMF, 2008: The Danish mortgage system is widely recognized as one of the most sophisticated housing finance systems in the world. UK Council of mortgage lenders, 2003: Denmark: Probably the best housing finance system in the world? 2

3 Or not? The Economist, 2014, April 19: Denmark s property market is built on rickety foundations. The culprit, as in so many other places, is the housing market. Wall Street Journal, 2014, April 22: Scandinavia Is Looking Scary Of 28 leading international economies, Denmark had by far the highest share of debt as a percentage of disposable income in It is far from clear that Denmark will be able to dig itself out of this debt problem without further ructions. Bloomberg, February 4, Owl Creek Said to Short Denmark Expecting Debt Crisis. 3

4 Advantages of the Danish system 4

5 Special features of the Danish model 1) Balance principle 1:1 ratio of bonds to debt. Mortgage institutions cannot take (large) speculative positions. Markets determine interest rates not banks. Market-based prepayment principle. 2) Strict lending rules secure responsible lending practices. LTV cap at 80% (residential housing). 3) Registration and foreclosure rules Borrower personally liable for the loan. Speedy forced sales. Effective mortgage restriction is key. 4) Sound supervision. 5

6 Danish mortgage institutions are huge Total lending (EUR bn) by Danish credit institutions, 2014Q1 6 Mortgage backed covered bonds (EUR bn), MCI NON-MCI Banks

7 Danish mortgage institutions did well during the crisis 7 Bubble burst but low arrears Continued selling bonds (DKK bn) ,00 1,80 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 0,00 Danish mortgage covered bonds European Jumbo covered bonds House prices Arrears

8 Danish mortgage institutions did well during the crisis 8 Kept on lending (EUR bn) Remained liquid Non-MCI banks MCI

9 So, what are the problems? 9

10 Challenges Household debt levels high and have increased significantly. 10 Interest rate sensitivity in households and firms has increased significantly. Refinancing risk in mortgage institutions has increased significantly.

11 Austria Belgium Canada Denmark Finland France Germany Italy Japan Korea Netherlands Norway Spain Sweden UK US Austria Belgium Canada Denmark Finland France Germany Italy Japan Korea Netherlands Norway Spain Sweden UK US Household gross debt in Denmark Debt to income %-point change in debt-toincome ratio:

12 Major change in lending patterns of MCIs DKK bn. 80% 70% Percentages % % % % % % % Fixed rate w. amort. Fixed rate IO Fixed rate w. amort. Fixed rate IO ARM w. amort. ARM IO ARM w. amort. ARM IO

13 Steps taken and to be taken 13 Danish mortgage system has some highly valuable features. Risk in system has increased significantly over last 10 years. Too much risk in the system, so some reigning in of risks necessary. Fewer ARMs and fewer IOs. Challenge to reign in these risks and at the same time avoiding that: Risks do not just migrate to other segments of financial system. Competition between non-mci banks and MCI does not change too much. Housing market and economy not hurt too much. Only gradual changes possible. Sudden large changes would have significant negative effects on housing market and broader economy. Nudging the system.

14 Steps taken and to be taken Rangvid-committee recommended Supervisory Diamond for mortgage institutions. Limits on amounts of ARM and IO a mortgage institution can issue. Rating agencies warn mortgage institutions. 14 Mortgage institutions try to get customers to take less risk. Seems to work wrt. ARMs but not IOs.

15 Lessons learned 15

16 Housing Financing Fund (HFF) government owned. Government bears the risk. HFF issued CPI indexed bonds. HFF has had significant looses during the crisis. HFF issues ISK and Euro bonds. Lessons for Iceland 16 Danish MCIs privately owned. Private investors bear risks. Danish MCIs issue nonindexed bonds. Danish MCIs have had only small looses. Danish MCIs primarily DKK bonds.

17 To get a Danish-like system, you need: Balance principle. Strict LTV rules. Lessons for Iceland Reputation needs to be build among investors: Danish MCIs never defaulted in 200 years. Iceland recently wrote down household debt. How to convince investors that this will not happen again? Start from scratch, i.e. only new loans. Cannot move bad loans from HFF to new system Danish bonds are highly liquid. Require bond issues of a certain size. Possible for Iceand? 17 If you go this route, do not forget the Danish lessons.