Jack Guttentag: Denmark's Mortgage Funding System Trumps U.S.

In an article for Covered Bond Investor™ last year, Tim Skeet of Bank of America Merrill noted the Danes' distinctive place in the world of covered bonds:

"Although the Germans have a documented historic claim to having invented the product in the first place (as a result of one of those ugly little local wars of the late 18th century), Denmark is entitled to stake a claim to a parallel development.  In their case a version of covered bonds was devised to fund reconstruction of Copenhagen in 1795, following a great fire that laid waste to great tracts of the old medieval wooden city."

The distinctive Danish "version" of mortgage funding has won influential present-day admirers.  One is George Soros, who helped create an organization to promote its use in other countries.  Another prominent admirer is Jack Guttentag, a syndicated columnist and former Jacob Safra Professor of International Banking at Wharton, who is also popularly known as "The Mortgage Professor."

In a recent newspaper column (published May 29 in Chicago's Daily Herald),  Guttentag argues that even before the financial crisis brought the private U.S. home funding market to a virtual halt, that market "was markedly inferior to the Danish model, which could easily be transplanted here."

Guttantag describes three aspects that give the Danish model its appeal:

(1) The system is extremely stable.  "During the very worst months of the financial crisis, it was business as usual in the Danish mortgage bond market.

(2) In contrast to the multi-step U.S. mortgage funding process, in Denmark "each individual borrower is  funded directly by the secondary market."

(3) Homeowners in the Danish model have a distinct advantage in mortgage refinancing over their U.S. counterparts when housing prices decline.  (Guttentag gives a detailed example.)

One advantage the Danish model lacks is political momentum in the U.S.  Although a comprehensive covered bond bill is currently pending in Congress, it does not incorporate the Danish model's distinctive features.

The good news: at a time when the current U.S. mortgage funding system is in flux (and some say in crisis), newspaper columns such as Guttentag's at least help raise public awareness of alternatives.

Related:

• Alan Boyce Testimony for Covered Bonds Hearing

• "The Traditional Danish Mortgage Model"

• Association of Danish Mortgage Banks - Annual Report 2009 (released May 5, 2010)

• "Danish Covered Bonds"

• 'The Danish mortgage market'

• Securitization’s “Sole Survivor”?

• NyKredit Presentation on Danish Covered Bonds