On security of collateral in Danish mortgage finance: a formula of property rights, incentives and market mechanisms

Abstract

Specialized mortgage intermediaries in Denmark have for over 200 years provided owners and buyers of real property wide access to credit. The present paper sets out to explore the safeguards that nurtured development of a robust, market based financing system and a deep mortgage market. Observations are made on the nature of collateral performance in respect to property rights, mortgage law and market development in search of general features of required institutional arrangements. The robustness of the Danish mortgage finance system is largely accredited to the securitization model based on the balance principle that assigns risks and responsibility to market players in a self-disciplinary manner and protected the mortgage banks against cash flow mismatches even during deep crisis, as history attests. It is shown how property registers and effective enforcement have created transparent property rights and practically reduced legal risks of mortgaging to zero. Standardization and scale of economics supported collateral efficiency, as measured in terms of simplicity, transparency, rapidity and costs. The Danish mortgage finance system illustrates the critical role of government in insuring the quality and enforceability of mortgage collateral, and reducing uncertainty for market players throughout the entire process. The paper suggests that sound incentive structures of the securitization model, strong commitment mechanisms and the market mechanisms constituted a complex formula of safeguards that—rather than specific capital coverage requirements—created the preconditions required for a well-functioning mortgage market.