Nykredit plans to implement five operational changes in preparation for future market conditions, it announced today (Tuesday). The changes include the introduction of two tier mortgage lending for retail customers to reduce overcollateralisation requirements in the event of declining property prices.

“To maintain a continued unequivocal stability of our operations to the benefit of our customers,” said Nykredit in a statement, “we must duly adapt our operations to the future business conditions.”

The factors Nykredit said had prompted it to take action include:

• Moody’s having placed a number of Danish mortgage lenders on review for possible downgrade as well as Nykredit

• Moody’s having raised the level of additional collateral required to maintain a rating by adjusting its assessment of the refinancing risk related to adjustable rate mortgages (ARMs)

• Nykredit is faced with a pending case with the Danish Competition Authority and the National Consumer Agency that has prevented Nykredit Realkredit from raising the administration margins paid by retail customers. Nykredit said its rating had been affected by this

• The Danish central bank has said that in the event of property price declines an increased overcollateralisation for covered bonds may lead to difficulty in selling the junior covered bonds, which fund the additional collateral

The five initiatives expected to be implemented sometime in the coming months are as follows:

• Funding of ARMs by way of bonds issued out of a special capital centre in order that these bonds may be given an independent, and possibly lower, rating leading to lower overcollateralisation requirements as a result of Moody’s announcement

• Introduction of two-tier mortgaging also for retail customers in H1/2012, so that part of mortgage loans – probably up to a 60% LTV ratio – will continue to be granted in compliance with the rules governing SDOs, while the top part of mortgage loans up to an 80% LTV ratio will be granted according to the rules governing the traditional mortgage bonds (ROs). This will reduce the additional collateral requirement in case of declining property prices. Nykredit launched two-tier mortgaging for commercial loans in 2009

• Nykredit will from the first half of 2012 grant retail mortgages through Totalkredit in line with Totalkredit’s partner banks

• The price of existing and new Totalkredit loans will be raised to generally ensure the best rating for Nykredit. Prices are expected to be raised as at 1 April 2012, reflecting the higher cost of mortgage lending. Totalkredit is not subject to the prohibition of the Danish Competition Authority and the National Consumer Agency against higher administration margins for retail customers

• The future price structure will mirror the risk relating to the loan type in question. ARMs and interest-only loans will be marginally more expensive than fixed-rate loans. The terms and conditions will be announced in detail later.