On security of collateral in Danish mortgage finance: a formula of property rights, incentives and market mechanisms

Abstract

Specialized mortgage intermediaries in Denmark have for over 200 years provided owners and buyers of real property wide access to credit. The present paper sets out to explore the safeguards that nurtured development of a robust, market based financing system and a deep mortgage market. Observations are made on the nature of collateral performance in respect to property rights, mortgage law and market development in search of general features of required institutional arrangements. The robustness of the Danish mortgage finance system is largely accredited to the securitization model based on the balance principle that assigns risks and responsibility to market players in a self-disciplinary manner and protected the mortgage banks against cash flow mismatches even during deep crisis, as history attests. It is shown how property registers and effective enforcement have created transparent property rights and practically reduced legal risks of mortgaging to zero. Standardization and scale of economics supported collateral efficiency, as measured in terms of simplicity, transparency, rapidity and costs. The Danish mortgage finance system illustrates the critical role of government in insuring the quality and enforceability of mortgage collateral, and reducing uncertainty for market players throughout the entire process. The paper suggests that sound incentive structures of the securitization model, strong commitment mechanisms and the market mechanisms constituted a complex formula of safeguards thatrather than specific capital coverage requirements-created the preconditions required for a well-functioning mortgage market.

Portfolio Optimization and Mortgage Choice

“…Danish homeowners are only allowed to fund a maximum of 80% of their house purchase with a mortgage bond. In addition to this, the Danish mortgage market is based on pass-through securities, by which there are only administrative costs in addition to the market price of interest risk and diminishing credit risk (see [12]). This is in contrast to many other countries where mortgages carry an additional loading, which reflects the credit risk of the individual consumer.…”

“…This study is motivated by this discrepancy, and we wish to determine the characteristics of a mortgagor who optimally chooses an FRM in contrast to the predictions of the aforementioned studies. Recent significant changes in the Danish mortgage market have led to a greater variety of products, including the introduction of adjustable rate mortgages and interest-only mortgages (see [11,12], for an introduction to the Danish mortgage system), and the new products accentuate the complexity of the financial decisions faced by household investors and encourage research on what defines a good mortgage product. We seek to contribute to this discussion by capturing the characteristics of the mortgagor who optimally chooses the two most common contracts offered in the market today, hereby providing an outset for the development of new and better product designs.…”

Saga og eiginleikar danskra íbúðalána

“…Í Danmörku er sagt að þegar einstaklingur lendir í greiðsluþroti get uppboðsferli hafist eftir 6 mánuði en þessi tími geti verið 7 ár í Frakklandi (Haldrup, 2014). Þetta skýri að nauðungaruppboð og gjaldþrot séu ófýsilegur kostur fyrir Dani (Haldrup, 2014). Campbell (2013) rekur ýmis atriði varðandi veðlán og húsnaeðiskaup í ýmsum löndum.…”

“…Campbell telur að í endurkröfuréttarfylkjunum gangi kröfuhafar í Bandaríkjunum haegar fram í innheimtu en almennt í Evrópuríkjum. Danir hafa hefð fyrir harðri framgöngu í innheimtu við gjaldþrot (Haldrup, 2014 Sá sem skuldar 30 ára fastvaxtalán og vill endurfjármagna á laegri vöxtum þarf að taka á sig viðskiptakostnað, þjónustugjöld til fjármálastofnana og stimpilgjöld (og fleiri skatta) til ríkisins. Með tilkomu nýrra afurða á fjármálamarkaði má segja að markaðsaðilar víki sér undan skatti (stimpilgjaldi) með því að skilgreina endurfjármögnun ekki sem nýtt lán.…”