The Economic Populist - Speak Your Mind 2 Cents at a Time Sat 2009-10-10 12:53 EDT

Proposal: A New Mortgage Finance System

Our mortgage finance system is broken. It needs some serious restructuring or a complete overhaul. We can learn a lot about a new structure from the Danes. The Danish mortgage system is one of the oldest and most sophisticated housing finance markets in the world...Danish mortgage system is a pass-through system that allows mortgage borrowers to benefit from close to capital market financing conditions. In the Danish system, borrower/homeowner don't obtain a mortgage from a mortgage loan originator such as a bank or mortgage lender. They borrow from investors in a transparent and standardized bond market through a mortgage credit institution (MCI). MCI issues bonds in the bond market that match as much as possible the amount and maturity of the borrower's mortgage. The beauty of this system is that a mortgage is exactly matched and balanced with an actively traded bond. MCIs play the vital roles of advisors to the borrower/homeowner and bearer of the credit risk of the mortgage -- they remain ``on the hook'' in the event of delinquency or default. They are mortgage credit insurers. The MCI originator bears full responsibility for timely payments from the borrower/homeowner. So, MCI has an incentive to make sure borrower/homeowners obtain a mortgage loan that is affordable for that family. Meanwhile, bond investors worry about only interest rate risk, with complete insurance on the mortgage that backs the their bond investment. This makes for a highly efficient system.

economic populist; Mind 2 Cents; New Mortgage Finance System; proposed; speaking; Time.