In 2002, I wrote an article contrasting the housing finance systems of Denmark and the US. Recently, both systems have been stressed by the worldwide financial crisis, prompting me to take another look. I was interested in how the crisis impacted the two systems, and whether this affected an assessment of their relative strengths and weaknesses. The core of the Danish system is 8 specialized mortgage banks that originate all home mortgages, and a mortgage bond market where the loans are funded. Each new loan is immediately sold in the bond market as an add-on to the balance of an equivalent bond. If the new loan is a 30-year FRM for 1 million K, for example, it will be sold to investors as a 1millionK addition to an existing 30-year fixed-rate bond. There are bonds with fixed and adjustable rates, and within each category, there are separate bonds for different terms. Shopping for a mortgage in Denmark is easy. On a given day, all borrowers pay the same interest rate on a given type of loan. (Borrowers either meet the credit and other requirements, or they don’t.).

The interest rate on a new mortgage is the current market yield on the specific bond that will fund the mortgage, plus the mortgage bank’s markup. Bonds are traded on the Copenhagen stock market, with yields readily available to everyone. Danish mortgage banks do not adjust the interest rate for points, nor do they tack on a series of fixed-dollar charges to cover their expenses, as they do in the US. All borrowers in Denmark pay the same upfront fees: 1/10 of 1 percent of the loan amount plus a small fixed charge. The strength of the Danish system is thus its transparency and low origination costs. Its major weakness, as it appeared to me in 2002, was that it did not serve as large a segment of the population as the US system. Loans are not priced for risk, so borrowers who have poor credit or who cannot make a down payment of 20%, are not served. In the face of a financial crisis, however, this “weakness” turned out to be a source of strength. Both countries were afflicted by the loss of confidence in financial institutions, which was world-wide. Both governments responded by guaranteeing the liabilities of banks and other financial firms, including mortgage banks in Denmark.