Denmark: A Land of Good Policy

Some links on Denmark all via Justin Fox. First, they have excellent energy policies in Denmark, which I already knew. Second, Denmark combines high taxes and general social welfare benefits with a good climate for business ventures, which I also knew. What I didn’t know what that they also have a smart mortgage finance system described thusly by George Soros:

Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market. Indeed, the spread on Danish mortgage bonds is similar to the option-adjusted spread on bonds issued by the GSEs, although they carry no implicit government guarantees.

Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every 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. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.

To be sure, these policies may be partially responsible for Denmark’s relatively low homeownership rate:

That said, even though it’s become a dogma in American politics that more people owning homes is a sign of economic progress, I don’t see any real reason to believe that to actually be true. Especially in a large country like the United States, it would arguably be beneficial to encourage people to be as flexible as possible in terms of where they live—i.e., to rent and to be prepared to follow labor market opportunities where they may take you.