Denmark’s Mortgage Banks’ Federation (Realkreditforeningen) is calling for the use of one year bonds to refinance adjustable rate mortgages (ARMs) to be scaled back, citing pressure from a range of bodies for its break from a previously united front that the Danish industry has presented.

The Federation’s members are Danske Bank subsidiary Realkredit Danmark, Nordea Kredit, and LR Realkredit.

Karsten Beltoft

“We think that when the EU Commission, the Danish central bank and a rating agency tell us you have a problem issuing so many one year bonds every year, then we have to think about this and look at our market,” Karsten Beltoft, director of the Mortgage Bankers’ Federation, told The Covered Bond Report.

He said that the Federation is advising that the system be examined.

Moody’s increased refinancing margins and downgraded Danish covered bond programmes after re-evaluating refinancing risk related to ARMs in June, although some of the rating changes were linked to issuer downgrades. Realkredit Danmark initially responded to Moody’s changes by terminating its relationship with the rating agency, citing fundamental disagreements over its rationale.

The position of the Mortgage Bankers’ Federation differs from that of the Association of Danish Mortgage Banks (Realkreditrådet), which remains confident that the bonds are a stable funding source. Ane Arnth Jensen, the Association’s managing director, said that the bonds have been sold throughout the crisis without interruption.

“We think we have a very cheap and very stable funding source here,” she said, “and we wish to exclude any discussion of refinancing risk.”

The Association represents Denmark’s largest covered bond issuer Nykredit, with its subsidiary Totalkredit, as well as DLR Kredit and BRFkredit.

Beltoft at the Mortgage Bankers’ Federation said that the system is not what it used to be because ARMs have a much larger percentage of total offerings than traditionally. ARMs account for roughly 50% of the Danish mortgage bond market, while one year ARMs account for 35% of the overall market.

Jensen at the Association acknowledged that even though they have been able to issue throughout the crisis, the Danish mortgage market does have a large concentration of bonds that need to be sold at the end of the year. She said their answer to this is to continue to spread out sales of the bonds – which have already been significantly spread out this year, to auctions in September and March.

“We have already moved a high proportion of bonds,” said Jensen, “but we’re still keen on continuing, so that’s our answer to dealing with this challenge.”

All Danish market participants are concerned about the introduction of a Net Stable Funding Ratio (NSFR) as part of CRD IV in 2018, which will deem all bonds under one year as not stable. This is one of the reasons why the Mortgage Bankers’ Federation is advocating a gradual move away from one year ARMs, said Beltoft.

“Nobody knows how the rules are going to be implemented in 2018,” he said. “This is not our main reason, but it’s playing a role.”

Beltoft also noted that the system would take a long time to change, so it is important to have these discussions now.

“It’s kind of a big ship to slow down,” he said. “This is why we say to do this now and not wait.

“Even if we stopped issuing one year ARMs today, there would still be many of them for years to come.”

Beltoft proposes potentially moving one year loans into three year loans as a possible solution, but said each mortgage bank would have to come up with its own solution.

The Association of Danish Mortgage Banks is fighting to get one year ARMs recognised as a stable funding source. The European Banking Authority will monitor Danish covered bonds before determining the structure of the rules, and the Association is lobbying for fair monitoring of ARMs.

“We expect they will be proven to be a stable funding source,” said Jensen.