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Breaking the "Doom Loop" using the Danish mortgage system
- 1. A SOLUTION BASED ON THE DANISH MORTGAGE MODEL Beyond the Zombie Economy - 01/06/2016 @PERC James Wood - King’s College London BREAKING THE DOOM LOOP IN BRITISH MORTGAGE FINANCE
- 2. THE DOOM LOOP IN BRITISH MORTGAGE FINANCE
- 3. THE “DOOM LOOP” IN BRITISH MORTGAGE FINANCE MORTGAGE DEBT AND THE DOOM LOOP ▸ Bank/State relationship identified as a “doom loop” ▸ State bails out large “Too Big To Fail” banks ▸ Due to systemic risk to the economy ▸ Incentivises risk-taking investments ▸ UK domestic mortgage lending increased dramatically ▸ 53% of GDP in 1992 86% by 2012 ▸ GFC resulted in several nationalisations; e.g. Northern Rock, RBS 3 Source: Martin and Ryan-Collins, 2016; Ryan-Collins, 2016
- 4. A POTENTIAL SOLUTION DANISH MORTGAGE FINANCE
- 5. THE DANISH MORTGAGE MODEL DANISH MORTGAGE FINANCE INSTITUTIONS ▸ Established in 1797 ▸ Historically co-operative lending associations ▸ Member (borrower) owned ▸ Non-profit ▸ Revenue from annual “arrangement” fees ▸ Approximately 0.1% of loan amount 5
- 6. THE DANISH MORTGAGE MODEL THE DANISH MORTGAGE MODEL ▸ Covered bonds ▸ Balance Principle – Match Funding ▸ Sell DKK 1m 30-year bond with at 5% ▸ Issue DKK 1m 30-year fixed mortgage at 5% ▸ Cash flow on loan = cash flow on bond ▸ Loan held by mortgage institution ▸ Originate to hold but funded externally 6
- 7. BENEFITS OF THE DANISH MORTGAGE SYSTEM
- 8. BENEFITS OF THE DANISH MORTGAGE SYSTEM INVESTOR STABILITY ▸ DK Mortgage debt to GDP ratio = 130% ▸ No Danish mortgage institution has ever defaulted on a covered bond ▸ Bankruptcy of the Kingdom of Denmark ▸ Great Depression ▸ German occupation during WW2 ▸ Global Financial Crisis ▸ No Danish mortgage institution has ever gone bankrupt ▸ “Has never led to credit losses” (Finanstilsynet, 2010, 2) 8
- 9. BENEFITS OF THE DANISH MORTGAGE SYSTEM BENEFITS TO THE BORROWER ▸ Transparent market-based pricing ▸ Stock exchange for mortgage bond investors ▸ Low cost access to long-term stable housing finance ▸ Fees & interest rate are the same for different borrowers ▸ Low default rate ▸ DK = 0.21% ▸ UK = 0.96% 9
- 10. BENEFITS OF THE DANISH MORTGAGE SYSTEM HOUSING TENURES ▸ Mortgage institutions fund a variety of tenures in DK ▸ Private housing ▸ Single family homes ▸ Multi-family units ▸ Co-operative housing ▸ Social Housing 10
- 11. BENEFITS OF THE DANISH MORTGAGE SYSTEM WHY IMPLEMENT THIS IN BRITAIN? ▸ Absence of credit losses could break the “doom loop” ▸ Compete for conservative mortgage loans with UK banks ▸ Offer cheaper credit with conservative lending criteria ▸ Push riskier loans onto banks ▸ Force them to take second priority liens ▸ Encourage banking capital away from real estate ▸ Could fund alternative housing structures in the UK 11
- 14. IMPLEMENTATION CHALLENGES SOURCES OF INVESTMENT 14 Source: Danske Bank, 2014
- 16. BENEFITS OF THE DANISH MORTGAGE SYSTEM DANISH BOND DEMAND ▸ Non-perfect substitutes for government bonds ▸ Added security of property as collateral Source: Danske Bank, 2014 16
- 17. CONCLUSION
- 18. BREAKING THE “DOOM LOOP” IN BRITISH MORTGAGE FINANCE CONCLUSION ▸ “Doom Loop” as the state bails out large financial firms ▸ Danish mortgage system offers a potential solution ▸ Absence of credit losses negates need for bailout ▸ Provides cheap credit access for borrowers ▸ Fund variety of housing tenures ▸ Offers competition to UK banks for conservative loans ▸ Encourage investment in other areas of the economy ▸ Economic and political challenges to implementation 18
- 19. BREAKING THE “DOOM LOOP” IN BRITISH MORTGAGE FINANCE REFERENCES ▸ DANSKEBANK 2014. Danish Covered Bond Handbook: The covered bond handbook of mortgage banks in Denmark. Danske Bank. ▸ FINANSTILSYNET 2010. Danish Mortgage Credit and International Regulation. Copenhagen: Finanstilsynet. ▸ IMF 2014. Denmark: Systemic Issues In Mortgage Loans And Covered Bond Finance—Technical Note IMF Country Report No. 14/349. International Monetary Fund. ▸ MARTIN, A. & RYAN-COLLINS, J. 2016. The Financialisation of UK homes: The housing crisis, land and the banks. New Economics Foundation. ▸ PANNELL, B. 2003. Denmark: Probably the best housing finance system in the world? London: Council of Mortgage Lenders. ▸ REALKREDITRAADET. 2012. The traditional Danish mortgage model. Copenhagen: Realkreditraadet. ▸ REALKREDITRAADET. 2016. Mortgage bank is an intermediary [Online]. Realkreditraadet. Available: http:// www.realkreditraadet.dk/Danish_Mortgage_Model/The_balancing_principle/ Mortgage_bank_is_an_intermediary.aspx [Accessed 05/12 2016]. ▸ RYAN-COLLINS, J. 2016. UK Housing: Fixing The ‘Doom Loop’ Between Land Value, Inadequate Supply And Insecure Financing [Online]. OXPOL: Oxford University. Available: http://blog.politics.ox.ac.uk/11946-2/ [Accessed 12/05 2016]. 19