Download Securitisation

Securitisation and the Danish
mortgage credit system
Maria Jose Alvarez Pelaez
WPFS WORKSHOP ON
SECURITISATION
Madrid, 27-28 May 2010
We will talk about
• Securitisation: Definition(s)
– why the interest to compile statistic?
• Characteristics of the Danish
mortgage credit system (DMCS)
• Discussion: Should the DMCS be
considered as securitisation for
statistics purposes?
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Securitisation – OECD ”work” definition
1.
2.
3.
4.
3
Process whereby an institutional unit raises
funds by issuing securities and
enabling the investors investing in these
securities to buy directly parcels of specific
financial assets
Securities are issued to fund assets and the
cash flow of the underlying assets represents
the interest claims of the securities issued
Increasing complexity with the emergence of
financial intermediaries: special purpose
entities (SPEs)
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Securitisation- SNA93 11.75
• New negotiable securities are often
issued backed by existing assets such
as loans, mortgages, credit card debt, or
other assets.
• This repackaging of assets is often
referred to as securitisation.
• The creation of the new assets gives rise
to entries in the financial account.
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Securitisation
• It has been driven by different
considerations
– For non financial corporations: cheaper
funding cost than available through banking
facilities
– For financial institutions:
a) getting around the regulatory capital
requirements
b) risk transfer
c) diversification of funding
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Interest for compiling statistics
• Do the SPEs have a different risk
profile?
• Do the SPEs have high leverage?
• Securitisation makes the financial
system more unstable?
• Implies maturity mismatch?
• Increasing complexity of the loan
process: long intermediation chain
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Interest for compiling statistics
•
•
Impact on analysis of financial
flows and securities markets
It hampers correct analysis of the
growth in credit extended by credit
institutions within the framework
– of financial regulation policy (less
transparency)
– of monetary policy (as an activity
indicator)
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The Danish mortgage model
• More than 200 years of Danish mortgage
lending:
• It emerged after the Great Fire of
Copenhagen in 1795, when a number of
wealthy persons took the initiative to
establish the first mortgage association,
that granted loans based on the
issuance of bonds .
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The Danish mortgage model
• Mortgage institutions grant loans
secured by mortgages on real property,
having only one source of funding: bond
sales.
• Statutory loan-to-value limit: the loan can
not excess 80% of the value of the
property at the time of the sale. The
mortgage institution has priority.
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DMCS: properties
• Mortgage institutions do not retain
repayment risk due to regulation:
the “balance principle”:
– It restricts mortgage institutions
opportunities to take interest rate,
exchange rate, liquidity and option risk
 limits the institutes’ ability to
assume risk other than credit risks.
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DMCS: properties
• The balance principle requires
that mortgage banks fund their
lending activities by issuing
mortgage bonds with cash flows
that fully match those of the
underlying mortgage loans:
matching funding principle
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DMCS: properties
match funding principle ensures:
– transparent loan costs (interest + principal
payments + margin charged by mortgage
banks). Bonds listed on a stock exchange
– Market-based prices (current financial
market trends)
– Attractive prepayment options (by buying the
underlying bonds in the market at a price of
100 (par) or below
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DMCS: properties
• Innovations in mortgage loans will be
reflected on the funding side.
• Investors who buy the issued bonds do
not incur any default risk in practice
(almost all bonds are Aaa rated). It is a
secure product that has never led to
credit losses.
• It has a stabilizing effect on the Danish
economy and helps sustain financial
stability.
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DMCS: properties
• Many advantages for borrowers:
– interest rates are attractive (legal framework
and credit policy of mortgage institutions
make loans very secure)
– Everybody can monitor loan prices on a
current basis
– Borrowers may prepay their loans on
attractive terms
– Mortgage institutions cannot call loans
prematurely
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DMCD and financial stability
• The Danish mortgage bond market is one of the
largest in the world (absolute and relative to size of
the economy)
– nominal outstanding amount of Danish mortgage bonds
of EUR 300 bn, 72% of the total Danish bond market and
approximately 1.4 times Denmark’s GDP
• It is more than four times larger than the Danish
government bond market
• The DMCS has survived all economic downturns
thanks to a strong foundation
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DMCS and financial stability
• This foundation has contributed to
stabilizing the Danish economy
– Mortgage lending continues during
crises (Figure 1)
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Figure 1. Bank and mortgage lending to households
and NFI
Bn DKK
Bn DKK
650
1.800
600
1.700
550
1.600
500
1.500
450
1.400
400
1.300
350
1.200
300
2005
2006
2007
2008
2009
1.100
Bank lending to NFI
Bank lending to households
DM lending to NFI
DM lending to households (right)
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DMCS and financial stability
• Homeowners may benefit from falling
interest rates: with fixed rate loans, there
is protection against housing price
declines:
– housing prices drop when interest rates
increases, which implies a drop in bond
prices.
– As mortgage debt is linked to bond prices, it
will decrease
– Fixed rate loans are about 35% of stock
(Figure 2)
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Figure 2. Mortgage lending to households
Pct.
70
60
50
40
30
20
10
0
2001
2002
2003
Adjustable rate within a year
Adjustable rate loans
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2004
2005
2006
2007
2008
2009
2010
Interest only loans
Floating rate loans with interest rate cap
Securitization – OECD ”work” definition
1. Process whereby an institutional unit
raises funds by issuing securities and
(TRUE)
2. enabling the investors investing in
these securities to buy directly parcels
of specific financial assets (TRUE)
3. Securities are issued to fund assets
and where the cash flow of the
underlying assets represents the
interest claims of the securities issued
(TRUE)
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DMCS as securitisation
• The system reflects securitisation
process characteristics, but
– historical characteristics: not part of
the recent development of the
securitisation process
– Very short intermediation process
– There are not special purpose entities
(SPEs) in the system
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DMCS as securitisation
– Mortgage institutions take the risk if
payments of the mortgage are not realized
– No getting around the regulatory capital
requirements
– No risk transfer
– From ECB point of view is not securitisation
since statistical information is included in
monetary financial institutions (MFI) statistics
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DMCS as securitisation: it depends…
… on statistical targets:
- If the aim is capture new information
on securitisation: getting around capital
requirements, long intermediation chain
and so on  DMCS should not be
considered as securitisation
- If the aim is statistics on assetbacked securities (comparison
between countries)  DMCS should
be considered as securitisation
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