Happy 212th Birthday, Nykredit Realkredit!

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’s.

$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.