Why fewer Danes default on loans

Part 2: Denmark escapes mortgage meltdown

My first column in this series pointed out that the Danish housing finance system, which is tightly regulated but completely private, has emerged from the financial crisis barely scratched. The Danish mortgage bond market where all new mortgage loans are funded has continued to function normally. In contrast, the private secondary market in the U.S. has shut down, leaving the system almost entirely dependent on the federally controlled secondary market agencies: Fannie Mae, Freddie Mac and Ginnie Mae.

The mortgage crisis that erupted in 2007 had its genesis in the prior bubble period, when home prices were rising rapidly. Price increases reduce the perceived riskiness of mortgages, encourage investors to accept mortgages that in a stable environment would be viewed as unacceptably risky, and induce lenders to increase loan volume by liberalizing their underwriting requirements.