Danish mortgage model is one to back

Danish mortgage model is one to back - Kathleen Barrington → sbpost.ie/post/pages/p/story … qqqx=1.asp

Denamrk is the closest thing I am aware of of a country run for the benefit of its people rather than a small well connected and greedy elite.

I lived in Denmark for a period, in Aalborg, North Jutland. Public services are fabulous, public transport is to die for. Never had to use the public health system but by all accounts it is fabulous and the term ‘waiting list’ is just not in their vocabulary. Also in Denmark there is no such thing as being on the dole for years on end, after 6 months on the dole they will find you a job or suitable training leading to a job. The flip side is of course the taxes, VAT is 25% on EVERYTHING, the pint (well half litre) is about €5-7 euro although the offie is much cheaper, tax on the minimum wage is about 35% although when I was there the minimum wage started at about €12/hour. You get what you pay for is the moral of the story I guess.

Danish wise men urge more fiscal stimulus → forbes.com/feeds/afx/2009/10 … 30140.html

1.00 DKK = 0.134348 EUR (700 bn DKK = 94 bn EUR)

Time for a new mortgage model - Kathleen Barrington → sbpost.ie/post/pages/p/story … qqqx=1.asp

While our central bank mortgage lending restrictions have had some effect on reducing risks to banking stability from our propensity to borrow massive amounts of money for our homes, we haven’t seen fundamental changes to the system that crashed the country and required the taxpayer to bail out the depositors and the bondholders. I thought it worthwhile to bump this thread with a link to a good description of the Danish mortgage market model. 40% of all Danish mortgage covered bonds are held internationally. Note as well that a borrower is personally liable for the mortgage, all personal assets and future income is up for grabs.

LInk to Danish mortgage vs US mortgage comparison

Most importantly, the homeowner is personally liable for her mortgage loan; thus, the lender is protected both by the value of the collateral as well as the payment capacity of the homeowner. Control rights are also strongly enforceable; in Denmark a foreclosure is completed typically 6-9 months from the time the homeowner misses a payment. Even after a foreclosure is completed, the borrower remains liable for any debt that remains unpaid. These factors discourage mortgage delinquency and typically ensure that loss-given-default is low.
The creditor-friendliness of the Danish system in turn means that relatively more price risk is borne by the homeowner. This risk is however offset by an extensive social safety net, including a city obligation to provide rental housing to homeowners displaced by foreclosure. In this sense, some features of the Danish mortgage system reflect broader societal choices about social insurance and the role of government.

Mortgage banks keep bond series (each with a specific ISIN security identifier) on the run for three years and tap them on a daily basis to fund new lending. When a new bond series is started, it has 33 years to maturity. This allows the bank to fund loans with the maximum legal loan term of 30 until the bond goes off-the-run. No loan in the cover pool backing the bond series will have a maturity in excess of 30 years, but since the loan portfolio is constructed over time, the amortization profile of the bond will reflect the gradual build-up of the underlying cover pool. The long three-year on-the-run period makes it possible to build up large and liquid series of covered bonds.
Under the balance principal, the amount lent to the homeowner exactly matches the net amount raised by selling covered bonds in the capital market. Bond market funding for each loan is obtained on the day the loan is disbursed thus avoiding any pipeline risk for the bank.
The effective mortgage rate paid by the borrower will reflect the yield on the corresponding covered bond. Since bond prices fluctuate over time, different homeowners will not have the same yield-to-maturity despite being funded in the same bond series with the same coupon. Mechanically, this is achieved by adjusting the principal on the mortgage in a manner analogous to the U.S. practice of paying mortgage points. The simple example below illustrates the mechanics (for the sake of simplicity we exclude all fees etc.):
A homeowner needs 1 million DKK to purchase a house. The on-the-run 2% 30 year FRM-bond trades at 99.00. The bank will then make a loan offer with a principal of 1/0.99 = 1.01 million DKK. The homeowner is liable for the bond amount issued and will receive the proceeds of 1 million DKK. The quarterly interest payment will be 2%/4*1.01 million DKK and hence the homeowner’s effective loan rate will be slightly above the 2% coupon of the bond, reflecting the fact that the 2% bond is trading at a discount. Another homeowner taking out a loan the following day when the same bond series trades at 99.25 will be liable for a slightly smaller bond principal and pay a marginally lower effective interest rate.
Coupon rates are set at 50 basis point increments. At time of writing the Danish mortgage banks have bonds open for issuance with final maturity 1 October 2050 with coupons of 1.5%, 2.0% and 2.5%. Each homeowner will have her loan funded in the bond trading closest to par, thereby minimizing the number of points paid. If long-term interest rates for instance increased, mortgage banks will open new on-the-run bonds with higher coupons and start tapping them instead of the bonds with coupons below market rates. The end-date for the on-the-run period will be the same for all bonds of the same “vintage” irrespective of when in the 3 year period they begin to be on-the-run.