Securitization’s “Sole Survivor”?

“Before the crash, the Danish model [of real estate financing] was ho-hum to most bankers,” Bennett Voyles writes in an article for National Real Estate Investor.  “The system is so transparent and regulated, there isn’t the same opportunity to make money.”

But today, Denmark’s real estate financing market continues to chug away just fine, even as the U.S. and other European countries have suffered major disruptions.   Voyles’ story (Feb. 1) notes that Denmark’s biggest mortgage bank (Nykredit Realkredit) recently saw the AAA credit rating renewed on its $154 billion in commercial and residential mortgage bonds, despite a drop in the nation’s property values.

The Danish model differs from both traditional securitization and the typical covered bond structure.  As financier George Soros has explained in Op Ed pieces urging adoption of that model in the U.S. and elsewhere, in Denmark “[e]very mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times.  Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price.”

Voyles asks, “[c]an it happen here” in the U.S.?

He cites an NYU finance professor to the effect that the system is all well and good for a tiny country like Denmark but probably wouldn’t work in a big, diverse nation such as ours.   On the other hand, one mortgage bank in Mexico, Hipotecaria Total (HiTo), has already introduced Danish-style covered bonds there.  (Mexico is also trying traditional covered bonds.)

To understand more about Denmark’s distinctive covered bond system, read:

"Danish Covered Bonds"

'The Danish mortgage market'