A model mortgage market

Part 1: Denmark escapes mortgage meltdown

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Editor's note: This is Part 1 of a two-part series. Read Part 2. In 2002 I wrote a column contrasting the housing finance systems of Denmark and the United States. Recently, both systems have been stressed by the worldwide financial crisis, prompting me to take another look. I was interested in whether the impact of the crisis on the two systems revealed anything further about their relative strengths and weaknesses? The core of the Danish system is eight specialized mortgage banks that originate all home mortgages, and a mortgage bond market where the loans are funded. There are bonds with fixed and adjustable rates, and within each category there are separate bonds for different terms. Each new loan is immediately sold in the market for the equivalent bond. If the new loan is a 30-year fixed-rate mortgage (FRM), for example, it will be sold to investors as an increase in the balance of the 30-year fixed-rate bond. The Danish system makes it easy for borrowers to shop for ...