Nykredit will today (Monday) start two tier retail mortgage lending, designed to reduce the amount of capital the group is required to add to cover pools in the event of a decline in property prices. Meanwhile, Danske Bank is adding Norwegian assets to its cover pool “C”.

Nykredit’s new capital centre I is one of two cover pools that Nykredit Realkredit will use for the issuance of covered bonds to fund mortgage loans covering the higher loan-to-value (LTV) range of mortgage loans with a LTV exceeding 60%. Capital centres E or H will be used to issue covered bonds funding mortgage loans with an LTV of up to 60%.

Nykredit, Copenhagen

Danske Bank analysts said that loans with LTVs exceeding 60% are typically granted in connection with home purchases, the refinancing of existing loans or supplementary lending.

The Nykredit group has been implementing two tier mortgage lending for commercial clients for some three years, but is rolling out the system for retail clients for the first time.

“As of today anyone walking into a Nykredit branch or the branch of one of our partner banks, if they have an 80% LTV mortgage loan, will get two mortgages,” said Morten Bækmand, head of investor relations, group treasury and funding, “one for LTVs of 0-60% and one for LTVs of 60%-80%.”

All retail mortgage lending will be under the Totalkredit brand. The Nykredit group will continue to fund this mortgage lending through covered bonds issued out of the parent mortgage bank Nykredit Realkredit.

Issuance of covered bonds (særligt dækkede obligationer, SDOs) out of capital centres E or H will fund loans with LTVs of up to 60%, while capital centres I or G will be used to fund loans with LTVs in the range of 60%-80%, via issuance of mortgage bonds (realkreditobligationer, ROs).

In contrast to SDOs, ROs do not have to comply with continuous LTV limits so that overcollateralisation does not have to be increased if the market value of the collateral declines.

Bækmand said that Nykredit expects the majority of issuance funding the “top layer” (second-lien mortgage loans) to come out of capital centre G, reflecting retail customers’ preference for adjustable rate mortgages. Capital centre I will be used for issuing ROs funding fixed rate callable loans, to retail and commercial borrowers.

“Issuance for the 0%-60% part is currently more or less evenly split between capital centres E and H,” he added.

Issuance associated with the two tier mortgage lending is unlikely to start today, added Bækmand, because any customer offered a loan today would still need to obtain a mortgage registration. However, he said that the first covered/mortgage bonds will probably be issued by the end of this week.

Standard & Poor’s on Friday assigned a preliminary AAA rating, on stable outlook, to capital centre I and two RO issues out of the centre, and said that it would expect the ratings on the ROs issued out of Capital Centre I to be more reliant on the issuer’s active management of the overcollateralisation to support the assigned ratings.

“We understand that Nykredit Realkredit typically funds new mortgage lending by issuing SDOs,” it said. “However, the issuer will use this capital centre to fund fixed rate mortgage loans via ROs to support its two-tier mortgage lending model.”

According to S&P, the mortgage assets in capital centre I will consist of loans secured by commercial and residential properties, the majority of which are located outside Copenhagen.

“We expect issuance of ROs from Capital Centre I to accelerate should the value of Danish properties decline, resulting in higher LTV ratios,” it said. “Issuance volume from Capital Centre I may also increase if Danish mortgage borrowers generally move toward fixed interest rates.

“Reflecting Nykredit Realkredit’s two-tier lending model, the collateral in this capital centre shows higher than average LTVs compared with similar property types refinanced with SDOs.”

All else being equal, continued property price declines could further increase LTVs, which could negatively affect S&P’s assessment of the mortgage assets’ credit quality, added the rating agency. This could lead it to increase the target credit enhancement levels it deems commensurate to support the AAA rating assigned to the covered bonds issued out of capital centre I.

S&P has assigned a asset-liability mismatch (ALMM) measure of “low” to capital centre I, which combined with a category 1 programme classification means that issuance out of the centre could be rated up to seven notches higher than the issuer.

According to Fitch, as of today (25 June) Danske Bank intends to gradually add Norwegian assets to its cover pool C, which has hitherto included commercial and residential mortgages from Sweden. Affirming the programme’s AAA rating on Friday, the rating agency said that Norwegian assets can initially represent up to 20% of the total cover pool C balance.

The Norwegian commercial portfolio analysed by Fitch is highly concentrated, it said, with top 10 borrower concentration representing 22% of the Norwegian assets.

“The inclusion of the Norwegian commercial mortgage portfolio has some positive impact on the concentration overall, but given its relatively small size, it does not have significant impact on the expected loss of the portfolio and supporting OC,” said Fitch.

The Norwegian move had previously been flagged by Danske.