How the U.S. mortgage market differs from the Danish mortgage market. Danish mortgage rates and defaults are lower than the U.S.. and unlike the U.S., the Danish government is not involved in protecting investors against mortgage defaults. This episode also explores how the mortgage broker industry has evolved since the housing crash.
In this episode you’ll learn:
- How mortgages are securitized in the U.S. by government-sponsored enterprises and investors are protected against default.
- How the Danish mortgage market works and differs from the U.S. market in terms of much less government involvement.
- How the mortgage broker industry has evolved in the U.S.
Show Notes
Yes, Venezuela Is a Socialist Catastrophe – Bret Stephens – New York Times
Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market – A CBO Study
Almost Daily Grants – January 8, 2019 edition
The US homeownership rate has lost ground compared with other developed countries – Urban Institute
U.S. mortgage rates – Freddie Mac
U.S. mortgage delinquencies – FRED
Why Are Consumers Leaving Money On The Table? – Freddie Mac
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Episode Summary
Socialist ideas can arouse a multitude of feelings. They have failed some economies miserably, as in the case of Venezuela, but it seems to be working well for others, such as Denmark. It may be surprising that even the U.S. has some socialist aspects and is actually quite unusual when it comes to home mortgages. Why is it that a market economy such as Denmark’s actually better represents a free market in their home financing system? Host, David Stein, compares the home mortgages of Denmark and the U.S. in this surprising episode.
The balancing act of the Fannie Mae and Freddie Mac
Home financing has a long history in the U.S., starting with the Federal National Mortgage Association (Fannie Mae) in 1938 and the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970. David explains that these began as private institutions sponsored by the government. Their goal was to provide affordable and secure residential mortgages – even to those with little income. Because they were backed by the government, they could borrow money at an extremely low rate and be exempt from taxes. After the 2008 housing market crisis, the government took over complete control of Fannie Mae and Freddie Mac, allowing them to borrow from the U.S. Treasury in return for the profit.
This conservatorship allows Fannie Mae and Freddie Mac to stay under the umbrella of the government, securing them against default. If they were to return to the private sector, they would have to raise additional capital. Investors, however, want the federal wrapper and security of having the U.S. government guarantee Fannie Mae and Freddie Mac’s debt obligations.. Currently, the U.S. government ensures the performance of the mortgages that are bought by Fannie Mae and Freddie Mac from banks the secondary market and packaged into mortgage backed securities. 90% of U.S. home mortgages are explicitly or implicitly guaranteed by the federal government.
Denmark’s unique use of mortgage securitization
Denmark’s government, however, does not guarantee the lender against default. The mortgages are, instead, securitized. The originating bank issues, funds, and monitors each mortgage – even taking on the foreclosure procedures. Even though the mortgages are sold as mortgage-backed securities, the banks still hold the credit risk. The credit risk, however, is the only risk taken by the originating banks, because the mortgage-backed security market is the one that takes the interest rate and prepayment risks. Banks are incentivized to help households refinance with lower rates because even though a lower rate may hurt the mortgage-backed security holder, it lowers the risk of default for the bank because of lower payments. To learn more about Denmark’s practice of mortgage securitization and how it works, listen to the full episode.
Who holds the loan liability? You or the government?
In Denmark, the homeowner is personally liable for their loan. There isn’t any government guarantee backing the mortgage, and even if the home was foreclosed, the debt would still have to be paid off by the borrower. In the U.S., however, the government protects the bank and the investors, allowing the borrower to drop liability in case of foreclosure and bankruptcy. David explains that this government backing is essentially a subsidy. While the mortgage market in Denmark is more private, the U.S. market protects its investors through government backing.
Why you should be considering using a mortgage broker
David shares why you should look for the help of a mortgage broker when deciding which bank to work your mortgage. Mortgage brokers are now licensed, registered, and usually compensated by the banks. This compensation is no longer tied to the interest rate paid by the borrower. Mortgage brokers can help navigate the multiple mortgage quotes and terms that households and individuals should seek when purchasing a home
Even though the U.S. is more socialist in term of home financing, borrowers should consider the benefits received when taking on a mortgage in the U.S. The liability isn’t entirely on their shoulders, and they are being subsidized by the government. If the worst should happen, they can simply turn in the keys and walk away from the house. In Denmark, homeowners are still liable for the outstanding debt if there is a shortfall after selling the house as part of foreclosure proceedings.
Episode Chronology
- [0:23] The socialist catastrophe of Venezuela
- [1:42] Who is the most socialist in housing finance? Denmark or the US?
- [2:50] Meet Fannie Mae, Ginnie Mae, and Freddie Mac.
- [11:26] Danish mortgage securitization.
- [15:42] Why Danish borrowers actually pay less.
- [19:32] Who’s liable for the loan and why it makes all the difference.
- [22:09] Why do mortgage brokers exist, and should you use one?
Learn More About Housing
44: Should You Pay Off Your Mortgage?
238: The U.S Is More Socialist Than Denmark Regarding Home Mortgages
258: How Financialization Pushes Up Home Prices
317: How To Buy In A Hot Housing Market
349: Forward and Reverse Mortgages: When To Take Them Out and When to Pay Them Off
389: Is Airbnb Intensifying the Housing Crisis?
