Mortgage Lending Institutions in Scandinavia: A study of risk for the period 2000-2013

Abstract: In the last 14 years there has been a major flux in the Scandinavian financial institutions and real estate markets. The increase in size and openness, in both the markets and the institutions allowed the sector to expand phenomenally, raising concerns about the potential rise of risks. Concerns regarding the health and state of the Scandinavian real estate and mortgage markets increased with the surge in residential housing prices between 2000 and 2013. However, during this period popular sentiments and media outcry was not met with sufficient academic inquiry into the subject. Hence, we conducted this study trying to bridge the gap between popular concern and academic inquiry by addressing the question: How are mortgage lending institutions affected by the risk emanating from residential real estate markets in Scandinavia between 2000 and 2013? In attempting to answer this question we developed a two-tiered approach by addressing two questions: What is the effect of selected factors on the delinquency rate of mortgagors in Scandinavia during the period 2000 to 2013? And does the change in institutional business models and mortgage lending businesses affect their distance to default? These questions give us an insight into the composition of the mortgage market and the effects of the market upon the institutional distress; thereby giving us a comprehensive understanding of the markets and institutions in line with our primary research question. We employed a deductive approach in line with our epistemological stance of positivism and ontological belief of objectivism. Thereby, we formulated a quantitative explanatory research employing the panel regression analysis tools in order to address our central question. The results of the research re-affirmed our earlier intuition as we discovered that interest rates, unemployment, outstanding mortgages and mortgage growth were significant predictors of the delinquency rates. Meanwhile risk weighted assets, mortgage revenue and mortgage share of total assets were significant predictors of distance to default. These findings highlighted that while individual delinquencies are affected by macro and mortgage business changes, the distress in institutions is characterized by capital adequacy and the flux in their mortgage businesses. Hence, the results of our two-tiered analysis confirmed that mortgage lending institutions have been affected by the risks emanating from the residential real estate markets between 2000 and 2013 and this effect has been characterized by changing models and rising influence of the real estate market in institutional portfolios.