Should we do mortgages like the Danes do?

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This blog has been falling down lately on its pledge to be America’s Leading Source of News About the Danish Economy™. I failed to link to Bryan Walsh’s excellent TIME article on Danish energy policy. I failed to bring to your attention an Economist story that ranks Denmark as one of the world’s top countries for entrepreneurs. I failed to report promptly this morning’s exciting news that there are now 12 (up from 10) restaurants in the Copenhagen area with Michelin stars.

But then I got an e-mail in my inbox this afternoon inviting me to an upcoming American Enterprise Institute discussion on the topic “Can Elements of the Danish Mortgage System Fix Mortgage Securitization?” I had to post on that, pronto. Even the conservatives want to be like the Danes now! Although some lefty named George Soros had the idea (of imitating the Danish mortgage system) first.

Here’s Soros’s accounting of the strong points of the 214-year-old Danish set-up:

First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements. There are no GSEs enjoying a quasimonopolistic position.

Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market. Indeed, the spread on Danish mortgage bonds is similar to the option-adjusted spread on bonds issued by the GSEs, although they carry no implicit government guarantees.

Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.

Wow, that sounds really smart. And extremely Danish.

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