Danish Mortgage - in its 4th Century

Danish mortgage is in its 4th century. Bonds have been used for the funding always. Debt services just pass through the mortgage bank to the investors, at one of the biggest bond markets compared to GDP. The Danish capital market and the interest level are close connected to Euro land. Yet, national investors and especially pension funds dominate the market, where all types of owners raise mortgages for all properties. Economies of scale mean only few mortgage banks operate. Danish mortgage loans have low adjusted spreads. Traditionally, Danish mortgages have fixed interest with a prepayment option and debtors pay for the call option through a higher fixed interest rate. Over the decades, the market has experienced large amounts of gainful prepayments, latest and most significant in 1993-94. Prepayment activities occur after interest drops, while interest increases lead to re-buying of the bonds and refinancing at higher coupons. Since 1996, the fixed interest regime has been broken with a sudden violence by introduction of interest-adjusted mortgage loans, typical with fixed interest rates for 1, 2÷5 years and similar to US ARM- loans. Many debtors have refinanced fixed interest with adjusted interest rate loans. However, Danish debtors seem to ride the yield curve by raising loans in the short end, even at a very low interest level. This is opposite normal economic thinking. This development has changed interest risks and its consequence for credit risk. Especially newer owner-occupiers have a tense capital structure, also when mortgage debt is compared to property value. Therefore systemic risk and security for mortgage banks are important.