[olau]

Some background: In Denmark, mortgages for housing are handled by special real-estate lenders (realkreditinstitutter) who issue bonds and handles defaults.

These bonds are considered to be very stable, about the same quality as state bonds, as the lenders will only lend up to 80% of the value of the house (an ordinary bank loan must be used for the remaining fraction) so can usually recover most of the money through a forced sale. Also there's a fee on top of the bond rate to absorb the losses as far as I understand. The fee depends on the security percentage, so if the lender only has a security in the top 60-80% part of the value of the house, the fee is much higher, see the tables here:

https://www.mybanker.dk/sammenlign/bolig/bidragssatser/

The Danish central bank has had negative interest rates for some time, and these real-estate bond rates have also been falling.

When taking out a mortgage, you can either opt for a fixed rate for up to 30 years, or variable-rate bonds where the interest is redetermined periodically, e.g. once a year. The variable-rate bonds have been negative for some years now. The news here is that the rates have been falling even more lately, and that you can now get the negative rate fixed for up to ten years.

In any case, it's the bond investors who are losing money, not the real-estate lenders who apply a fee on top, both as a rate and a fixed fee when applying for the loan.

The rates are so low that I think that if you're in the low-risk category, you might end up with a small negative total rate. Of course, the fixed fees when obtaining the loan may eat that.

[opportune]

>These bonds are considered to be very stable, about the same quality as state bonds

>can usually recover most of the money through a forced sale

This exact line of thinking is what led to the US real estate crash in 2008/2009

[jjwhitaker]

It's a gross simplification, but with the volume that is Danish housing vs demand for said housing the risk is very low.

One of many issues leading into the 2008 crash was how Us mortgages were bundled, rated AAA, then resold as an investment tool. However, the ratings were falsely boosted to promote investment and when the underlying junk mortgages fell through and demand fell off a cliff with the rest of the economy there was no way to flip foreclosed housing to make up losses.

In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008. Current US auto loans may be much more similar than these Danish loans.

[kasey_junk]

> In this case, Danish mortgages are not bundled, rated falsely positive, and not sold as an investment tool like in 2008.

Danish loans are definitely securitized and sold as investment tools. They are a classic interest rate risk hedge.

It’s been a while since I was adjacent to them but the bigger difference in Danish mortgage backed securities were a) no governmental guarantee on them b) less protections for the borrowers than in the US c) no derivatives d) much smaller market & e) much longer history.

So credit risk, which is what ratings agencies nominally judge is likely not a problem.

Interest rate risk is though, but given its more straight forward, it’s what investors are looking for exposure to & there is low leverage it’s unlikely to cause systemic collapse.

[thedudeabides5]

low leverage in proportion to the total asset value

But what’s that total asset value if interest rates are 10% (vs -1%)?

[FelixGommen]

Well in principle yes, but in reality no. The Danish system for financing real estate have historically been extremely stable. Olau explains it above

[barry-cotter]

That’s true, except that you can only get a loan in Denmark if you have 20% of the purchase price to put down as collateral. That means sub prime mortgage lending doesn’t exist in Denmark and that combined with liar/NINJA loans was a substantial contribution to the US housing crash, together with securitisation. If it had been impossible to securitise mortgages with less than 20% down in collateral the housing crash would have been a non event in the financial markets.

[e_d_e_v]

> the lenders will only lend up to 80% of the value of the house (an ordinary bank loan must be used for the remaining fraction)

From olau's explanation, it seems that there is enough money flowing, that more than 80% can be financed (in some way) even if it is not in a single or collateral-backed loan.

[olau]

Indeed.

I think the situation currently is that you need 5% in downpayment yourself, then the bank can supply the 15% (at a much higher, individual rate) and the real-estate lender will provide the most secure 80%.

[olau]

This is not really my area of expertise, and it's unclear whether you're basing this comment upon an actual analysis or it's just a quick remark?

I was trying to explain how the bond rates can go so low.

The real-estate lenders have rigid policies in place as for who can get a loan.

Of course, enough correlated failures, and the system goes down.

But there was a crashing housing bubble in Denmark too in 2008/2009, and to the best of my knowledge none of real-estate lenders went down, although they did increase their fees to cover losses. Banks were crashing, though, until the bailouts started.

I personally think that the overall system would be more healthy if the real-estate lenders and banks in general did not protect their investors against losses, but just passed them on so you avoid this sure-everything-is-fine until it crashes. But again I don't know much about the banking world. Maybe that idea is too complicated.

[olau]

And yes, the negative interest rate at the Danish central bank does translate to negative interest rates for deposits. Not yet for consumers, but corporate accounts have negative rates.

[jackcosgrove]

Negative central bank rates are an attempt to spur consumption via all of the stimulus created since the financial crisis. Banks have been loath to pass on these negative rates to depositors because no one wants to be the first bank to do so, as depositors would flee that bank for another bank that was still eating the negative interest rate. However, the banks legally cannot coordinate actions as that would be evidence of cartel behavior. So they have just eaten the losses thus far.

This appears to be a first step to pass negative rates onto consumers, in this case onto borrowers where the first mover has an advantage.

[caseysoftware]

US banks have proven (to themselves at least) that they can get away with sub-1% savings rates for long term, regardless of what the Fed rate is.

The first one to do it will be a pariah (briefly) but the next 5 will be "just following the trend" - the question is who will be first?

[dfawcus]

That sounds similar to how Mortgages used to work in the UK in the 60s.

One would get a mortgage from a Building Society for around 75% of the property value, and had to get a Bank Loan for the remainder which they couldn't cover from savings.

[petre]

What has changed? How do mortgages work today in the UK?

[benjaminwootton]

We had 100% mortgages (no deposit) in the run up to the crises.

We even had 100%+ mortgages for a time which included a loan on top of your mortgage to modernise and furnish your property.

Nowadays, 5% deposit mortgages are available but 10% is more typical. We also have a popular government “help to buy” scheme which some think is reckless as it allows people to get into a more expensive new build home (which typically fall in value after first occupier) with a 5% deposit.

A loan for your deposit would not be acceptable as the mortgage company want to see you have skin in the game.

UK housing market is a complete mess and in my mind hugely overvalued. The can has been kicked down the road for over a decade now. If I didn’t have a family who needed secure housing situation I would sell to rent in a heartbeat.