Investors says Danish mortgage plan would boost, not ease, lending risks
COPENHAGEN Nov 28 (Reuters) - A Danish government attempt to reduce risks for mortgage lenders could backfire, making it harder for borrowers and lenders to predict their costs and increasing the risk of a financial crisis, bond investors say.
Denmark has Europe's second-largest market in bonds backed by mortgage loans and the government bill put forward on Thursday aims to reduce the risk mortgage lenders face when they refinance adjustable-rate bonds at large annual auctions.
Investors have been keen to buy the bonds, helping keep borrowing costs for homeowners low.
Even so, credit rating agencies say Danish mortgage lenders are at risk should international debt markets freeze up.
But investors say the government proposal, intended to make the market safer by preventing a sudden surge in lenders' financing costs, is too complicated and would deter investors.
The government is proposing that if a refinancing auction fails, or produces an interest rate more than 5 percentage points higher than the rate the bond originally offered, then the bond would be extended by 12 months at a time.
The aim is to reduce the amount of capital that mortgage lenders have to put aside to cover their obligations to bondholders in order to satisfy credit-rating agencies and planned European regulations.
"The overall objective of the bill is to secure the future of the Danish mortgage model," Business Minister Henrik Sass Larsen said in a statement on Thursday.
However, Danish asset manager Maj Invest said the bill had very few, if any, positive elements. "In turn it increases the complexity and opacity for both borrowers and investors".
"Furthermore it increases the systemic risk for the financial sector in the event of a crisis and increases in interest rates," Maj Invest said.
The Danish Bankers Association predicted the bill would deter potential investors by making the bonds too complex.
The Danish Insurance Association, which represents some large investors in Danish mortgage bonds, called the bill unclear, hasty and potentially damaging.
However, Denmark's central bank said that the bill would create a "robust system", and credit rating agency Fitch said it would "greatly reduce liquidity risk associated with concentrated refinancing via bond auctions".
Credit rating agencies Moody's and Standard and Poor's have not yet commented on the bill. Standard & Poor's lowered its outlook for Danske Bank's rating to stable from positive in July due to the funding risks at the auctions.
Refinancing auctions at Denmark's largest mortgage lender Nykredit resulted in a record-low interest rate of 0.25 percent on Wednesday. Stockholm-based Nordea is also among the largest mortgage lenders in Denmark.
The minority centre-left government will now seek parliamentary support for the bill, which was first announced on Nov. 7, but has since been amended. The bill is intended to come into force on April 1. (Additional reporting by Erik Matzen; Editing by Ruth Pitchford)