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Quarterly Update of the SPV Service - First Quarter 2005
In this release we examine the market effects of the introduction of the new loan types in the Danish mortgage market.
In late October 2004, Realkredit Danmark announced the introduction of a new type of loan, a floating rate loan which, at a specified level of the short interest rate is converted into a standard callable mortgage backed bond. The news, and subsequent announcements of the competitors, had a tremendous impact on the prices of the existing bonds because large prepayments are expected. In this release of SPV we treat the introduction of the new type of loans from two sides:
An analysis of the pricing of the new group of adjustable rate mortgage bonds issued by the Danish mortgage credit institutions.
Upon the introduction market participants expected that a large number of borrowers in the current fixed rate callable mortgage backed bonds would prepay their loans and prices declined. This issue of SPV deals with the effects from the announcements and we try to quantify the price impact using a model for mortgage backed bonds.