IMF Urges Denmark to Drop Risky Mortgages as Losses Loom
Source: Bloomberg
The International Monetary Fund is urging Denmark to phase out interest-only mortgages or risk destabilizing its housing market, as lawmakers and lenders debate whether to aid borrowers unable to pay their loans.
In many countries, this type of loan is forbidden, so it wouldnt be given in the first place, Yingbin Xiao, senior economist at the Washington-based IMF, said in a telephone interview. Given that this is an option in Denmark, we think it would be prudent for them to phase them out gradually because of the risk. The Danish market already has experienced a correction.
The IMF is now adding its voice to a growing body of critics, including the central bank and Standard & Poors, arguing the interest-only loans have weakened Denmarks $500 billion mortgage market. Though the model helped keep mortgages affordable during recessions, failure to amortize has underpinned growth in private debt to a world-beating 322 percent of disposable incomes, S&P estimates.
Danish mortgage banks started offering borrowers a decade- long deferment option on principal payments in 2003. The interest-only loans now make up 56 percent of outstanding mortgage debt, the industry estimates. More than 100,000 homeowners may need help, according to a February study by the University of Southern Denmark.
Read more: http://www.bloomberg.com/news/2013-04-01/imf-urges-denmark-to-drop-risky-mortgages-as-losses-loom.html
The credit rating for Denmark is AAA. It will be difficult to maintain that rating with this issue lurking in the background.
geek tragedy
(68,868 posts)And I thought our mortgage practices were screwed up in 2007--they never fixed theirs.
Yo_Mama
(8,303 posts)This is indeed a huge problem. IO mortgages past 15% of the market are quite dangerous - at over 50%, OMG.
Of course, the problem is that once you get into this you can't get out! If you terminate new IOs, then property values will fall further and the IO borrowers will be worse off. And Canada's worried about household debt at 165% of income!
At 322% of income, it's obvious that a lot of these loans will never be paid off. What happens? Are the kids going to inherit the debt and the house? Wait for inflation to slowly diminish the debt relative to income?
This is actually what is causing the current discussion of the problem:
Mortgage banks arent allowed to give bond-backed loans that exceed 80 percent of a propertys value. Loans already on the books that have breached that threshold since house prices sank must be written down if interest-only terms are extended, according to existing legislation.
The Danish banking industry has plenty of problems already, but if they aren't allowed to roll these loans into bond pools again, then their capital will be eroded further.
Video:
http://www.bloomberg.com/video/85248896-danish-banks-may-have-solvency-problems-fsa-says.html
The whole thing has been snowballing for years. This is from 2008:
http://www.creditwritedowns.com/2008/09/danish-banking-crisis-worst-in-europe.html
This is from Feb 2012:
http://www.valuewalk.com/2012/02/danske-bank-more-serious-problems-in-paradise-denmark/
Note the debt to GDP ratios.
FSA now is under fire because it clearly has not been making the banks tell the truth about their loan portfolios:
http://www.businessweek.com/news/2012-11-05/latest-danish-bank-failure-shows-risks-hidden-in-profits
Banks have been going steadily bust, often with little warning of the impending collapse on the their official financials. So far I think Denmark is on its FIFTH bank bailout package, and it looks like there may be more to come.
By the time you get to over 45% IOs, it is obvious that banks have been rolling bad loans to keep themselves solvent on paper. Many of the IO loans began as amortizing mortgages. Basel III regs were supposed to kick in this year, but it is obvious that the Danish banking supervisor can't implement them.
http://www.bis.org/press/p121214a.htm