Owner-occupier risks and foreclosures - over three downturns in the Danish housing market since 1979

The existence of a foreclosure system is a presumption for an efficient mortgage system with high loan-to-values (LTV). Denmark is among the countries with the highest debt among owner-occupiers and other mortgage borrowers. Since 1979 Statistics Denmark has published data on foreclosures, monthly. In this paper, the connections between the owner-occupier risks of owning and borrowing, their capital structure, their interest payments, the shape of the housing market and entire economy, and foreclosure frequencies are drawn out. For the single owner-occupier with negative equity, a foreclosure will be the definite result of coming into arrears. For a society, mass foreclosures appear as a result of correlated risks, when many owners default at the same time. Not only are the frequency of foreclosures multiplied, but the characteristics of the repossessed properties and the families involved seem to change. Since 1979, Denmark has been through nearly three housing market cycles. The first two downturns, 1979-1983, and 1987-1993, resulted in mass foreclosures with more than 10,000 houses and flats being repossessed annually. The price drop from the housing market peak in 2006-7 was twice as fast as in the former housing market downturn but only took 2/3 of that fall, before house prices stabilized in 2009. The number of foreclosures has grown but remains far below the former mass foreclosure level. Obviously the low interest regime from the autumn of 2008 has worked. Moreover the Danish owner-occupiers’ interest expenditures had been reduced significantly since 1993. In the meantime, the interest rate risk at mortgage borrowing has changed character. Until around 2000, fixed interest mortgages dominated but now 69% of Danish mortgages are adjustable rate mortgages. Formerly falling interest rates could release foreclosures. The possibility for a new mass foreclosure is worrying, when monetary authorities return to more ‘normal’ interest rates over the coming years. In addition, half of all outstanding mortgage loans are interest-only mortgages and as their interest-only period lasts 10 years, these borrowers will experience some automatic payment additions from 2013 onwards, and some of them might meet higher interest rates when remortgaging.