Posts Tagged ‘commercial loans’

Happy 212th Birthday, Nykredit Realkredit!

Tuesday, March 31st, 2009

The CMBS market is anything but rotten in the state of Denmark. While the American mortgage securitization system crumbles, the Danes are successfully securitizing commercial and residential loans exactly as they have since 1797.  That’s when Nykredit Realkredit – Denmark’s largest mortgage bank – was established.  And, there hasn’t been a single Danish mortgage bond default since 1795.

American mortgage bankers could learn a valuable lesson from their Danish counterparts.  Even though Copenhagen’s home prices have fallen 14 percent over the last two years, Standard & Poor’s recently reissued its AAA rating on Nykredit’

$154 billion in mortgage bonds.  The Danish system is tightly regulated and extremely transparent; their bonds also earn minimal profit.  To illustrate, Nykredit earned a meager 2.1 percent on its new mortgages during 2008.  In hindsight, small risk and small reward have their appeal.

Denmark’s mortgage model is extremely simple.  Each mortgage bank handles the entire securitization process, from origination to servicing.  The difference with the American system is that the Danes sell the bond upfront, and then fund the loan.  The American process is the reverse of Denmark’s.

This way, the bank never gets caught short by a change in interest rates between the time the loan is issued and when it is sold.  Danish loan-to-value requirements are strictly enforced at 80 percent for residential and 60 percent for commercial properties.  Additionally, most Danish mortgages are long-term and fixed-rate.  The relatively few subprime borrowers receive governmental mortgage insurance support to maintain the quality of credit.

The Truth About Sub-Prime

Thursday, March 20th, 2008

With all of the bad news about the housing market and the impact of sub-prime loans, its worth putting this in a historical context.  The U.S. mortgage market totals $12 trillion. Of that, $2.4 trillion is sub-prime loans.  Of this 20% of the debt will go bad — about $400 billion.  That equates to 3% of our GDP which is a striking number but less than half of the impact that the S&L crisis of the 1980s.  What’s more significant is the indirect cost of subprime. For those of us in commercial real estate, sub-prime is important because of the commingling of commercial and residential mortgages by the CMBS market (60% of CMBS loans were interest only) which caused that market to decline by 50%. Even though, subprime was contained to residential, Wall Street’s appetite for real estate in general was dulled by these movements (even AAA rated mortgage bonds were hit). So, the impact of subprime has been to affect the risk profile and pricing — for one increasing equity requirements for commercial loans from 10% to 35%.