{"id":26805,"date":"2019-09-11T14:37:11","date_gmt":"2019-09-11T21:37:11","guid":{"rendered":"https:\/\/www.itmtrading.com\/blog\/?p=26805"},"modified":"2021-01-04T10:39:18","modified_gmt":"2021-01-04T17:39:18","slug":"get-paid-to-buy-a-house-the-dirty-story-behind-negative-mortgage-ratesby-lynette-zang","status":"publish","type":"post","link":"https:\/\/www.itmtrading.com\/blog\/get-paid-to-buy-a-house-the-dirty-story-behind-negative-mortgage-ratesby-lynette-zang\/","title":{"rendered":"GET PAID TO BUY A HOUSE: The Dirty Story Behind Negative Mortgage Rates\u00e2\u20ac\u00a6By Lynette Zang"},"content":{"rendered":"\n

Getting paid to buy a\nhouse seems too good to be true. Yet negative interest rates have driven\nmortgage rates in Denmark into that Alice in Wonderland world. At first it was\njust for the banks, but now the public can get paid to take out a 10-year\nmortgage too. Isn\u00e2\u20ac\u2122t that awesome? But why would banks pay you to take out a\nloan?<\/p>\n\n\n\n\n\n

Because Denmark is home\nto six SIFIs (Systemically Important Financial Institutions) that depend on the\ncovered bond market for funding by repacking mortgage debt into covered bonds\nthat are then sold, mostly to other banks and the public through \u00e2\u20ac\u0153institutional\ninvestors\u00e2\u20ac\u009d investing for insurance and pension funds as well as other Funds. <\/p>\n\n\n\n

Denmark\u00e2\u20ac\u2122s covered bond\nmarket was first established 200 years ago and consists of fixed, callable\nbonds, which would allow a bank to reset the interest they pay on the bond if\ninterest rates fall (though the interest rate on the mortgage remains until\nrefinanced). Only roughly 4% of all variable rate Danish mortgages have a rate\ncap and interest only loans can be extended for up to 10 years. Denmark\u00e2\u20ac\u2122s\ncovered bond market, one of the largest in the world, has almost quadrupled\nsince 2000. The expansion must continue, even as property nominal values are at\nhighs. <\/p>\n\n\n\n

Easy credit and paying\npeople to buy homes (negative mortgage rates) should push real estate prices\neven higher, even as covered bonds transfer some risk from the bond originator\nto other banks and the public. But negative yields have a negative impact on\nbank earnings.<\/p>\n\n\n\n

Central banks need banks\nto transmit policy to the public, therefore, bank profitability is another ball\nbeing juggled in this insane rate environment. Traditionally, deposit funding\nwas cheaper for banks than market funding, but negative rates make that more\nexpensive, since most banks have not yet transferred negative rates through to\nthe smaller retail public. In addition, banks could generate income by interest\nrate derivatives that utilized the difference between higher, longer rate debt\nand lower, shorter rate debt. Inverted and flat yield curves killed those\nincome opportunities. What\u00e2\u20ac\u2122s a bank to do, that needs profits, to offset all of\nthose profit losses? Raise fees.<\/p>\n\n\n\n

Danske Bank has been\nexposed to negative interest rates longer than any other bank and have been\nrocked by yet another scandal as they drove retail customers to high fee\n\u00e2\u20ac\u0153investment\u00e2\u20ac\u009d products. \u00e2\u20ac\u0153By the time the higher fees were included, clients were\nlosing money. The bank nevertheless recommended the product and collected the\nfees.\u00e2\u20ac\u009d <\/p>\n\n\n\n

This scandal now\njeopardizes \u00e2\u20ac\u0153a significant part of fee income in many banks across Europe\u00e2\u20ac\u009d FSA (Financial\nSupervisory Authority) head Jesper Berg says. Further he stated that \u00e2\u20ac\u0153If that\nis threatened, there is a more generic issue across Europe.\u00e2\u20ac\u009d Yes indeed, if\nbanks cannot generate profits and only bleed losses through negative rates, how\nlong can that last?<\/p>\n\n\n\n

No one knows the answer\nto that, because there is no historic precedence. We are in unchartered waters\nwithout a lifeboat and sharks circling. No one knows when this bubble will pop,\nbut do you really think this can go on forever?<\/p>\n\n\n\n

Additionally, and\ncritically allowing the public to feel like they are participating in wealth\ngrowth has been a key tool in monetary regime transitions. Happy days are here\nagain!<\/p>\n\n\n\n

Last year saw central bankers buy the most gold in 50 years and accumulation has escalated even more this year. Denmark\u00e2\u20ac\u2122s central bank has begun to accumulate gold too. How about you?<\/p>\n\n\n\n

Slides and Links:<\/p>\n\n\n\n

\"\"
https:\/\/www.bloomberg.com\/news\/articles\/2019-08-18\/negative-mortgages-set-another-milestone-in-a-no-rate-world<\/a>
https:\/\/www.bloomberg.com\/news\/articles\/2019-08-07\/nordea-offers-20-year-mortgages-at-zero-interest-as-rates-plunge<\/a>
https:\/\/www.bloomberg.com\/news\/articles\/2019-08-05\/first-10-year-notes-at-negative-coupons-hit-covered-bond-market<\/a> <\/figcaption><\/figure>\n\n\n\n
\"\"
https:\/\/www.nykredit.dk\/globalassets\/asset-management\/pdfdokumenter\/nykredit_markets_covered_bonds_handbook_May_2019.pdf<\/a>
https:\/\/danskebank.com\/da-dk\/ir\/Documents\/Other\/Danish-Covered-Bond-Handbook-2016.pdf<\/a> <\/figcaption><\/figure>\n\n\n\n
\"\"
https:\/\/www.businessinsider.com\/negative-interest-rates-europe-property-prices-2019-5?r=US&IR=T<\/a> <\/figcaption><\/figure>\n\n\n\n
\"\"
https:\/\/www.bloomberg.com\/news\/articles\/2019-07-04\/danske-crisis-exposes-full-extent-of-damage-from-negative-rates<\/a> <\/figcaption><\/figure>\n\n\n\n
\"\"
https:\/\/tradingeconomics.com\/denmark\/gold-reserves<\/a>
http:\/\/www.nationalbanken.dk\/en\/about_danmarks_nationalbank\/Pages\/Danmarks-Nationalbank’s-gold.aspx<\/a> <\/figcaption><\/figure>\n","protected":false},"excerpt":{"rendered":"

Getting paid to buy a house seems too good to be true. Yet negative interest rates have driven mortgage rates in […]<\/p>\n","protected":false},"author":6,"featured_media":26813,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1712],"tags":[1021,1501],"class_list":["post-26805","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-insider-trading-report","tag-real-estate-market","tag-negative-interest-rates"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/posts\/26805","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/comments?post=26805"}],"version-history":[{"count":3,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/posts\/26805\/revisions"}],"predecessor-version":[{"id":29482,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/posts\/26805\/revisions\/29482"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/media\/26813"}],"wp:attachment":[{"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/media?parent=26805"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/categories?post=26805"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.itmtrading.com\/blog\/wp-json\/wp\/v2\/tags?post=26805"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}