Foreign Exchange: Peas in a Pod? Comparing the U.S. and Danish Mortgage Finance Systems

Jesper Berg
Morten Baekmand Nielsen
James Vickery

The way mortgages are designed, financed, and regulated varies strikingly across countries. Although this variation reflects adaptation to international differences in social, economic, and legal conditions, it likely also stems from historical accidents and path dependence. As the United States considers further reform of its mortgage finance system, it is useful to examine what can be learned from the experiences of other countries and whether any international practices could be adapted to improve the institutional design of the U.S. mortgage market.

With that goal in mind, this article compares and contrasts the U.S. system with that of Denmark. The Danish mortgage finance system is a salient reference point because, in several respects, it is the international model most similar to the U.S. system. In particular, Denmark relies very heavily on capital markets for funding residential mortgages, transferring interest rate risk and prepayment risk to fixed-income investors in a way that is similar to U.S. mortgage securitization. Unlike the U.S. system, however, the Danish mortgage finance system remained stable and solvent during the 2007-09 financial crisis and did not require government funding or capital injections, despite experiencing a fall in home prices of similar magnitude to that in the United States during this period.