Denmark's Genius Housing Fix

I found the writing style of this article grating. The Danish system can be summed up in one sentence.<p>&quot;Let home owners buy their mortgage from the bank for the net present value of the loan instead of the remaining principle&quot;.

In the Danish system, each mortgage is backed by a matching bond. Thus, mortgage holders have two ways to pay off their mortgage: 1) pay the monthly payments or 2) buy the matching bond and, in effect, extinguish the mortgage. The latter option is valuable because when interest rates rise, the price of mortgages fall.

If I already have a Fannie&#x2F;freddie loan - why not allow me to maintain the same rate for the remaining loan and have the new interest rates for any delta. This would encourage movement without all the complexity of this scheme.<p>The money is already owed to the these entities at that rate. Allow folks to keep the rate on that amount even if they move.

This is brilliant.<p>But I needed to go find out a better description for my luddite self<p>Heres how using a bond backed mortgage causes the mortgage to become cheaper during interest rate rises<p>----<p>* How Interest Rates Affect Present Value *<p>The interest rate is a key factor in calculating present value. A lower interest rate means future money is almost as good as money today because you can’t earn much interest. A higher interest rate means future money is worth a lot less because you could earn more interest with today’s money.<p>* Example *<p>1. Initial Mortgage Calculation:<p>- You have a $500,000 mortgage.<p>- You are paying it back over 30 years with a fixed monthly payment of $2108.<p>- The interest rate is 3%.<p>2. Interest Rate Change:<p>- Suppose the interest rate goes up to 6%.<p>3. Impact on Present Value:<p>When interest rates increase, the present value of those fixed monthly payments decreases. This is because if you were to invest money today at a 6% interest rate, you’d earn more on that investment than at 3%. Therefore, future payments are worth less because you’re missing out on that higher interest.

This document explains the Danish system in some detail: <a href="https:&#x2F;&#x2F;finansdanmark.dk&#x2F;media&#x2F;raim0hhz&#x2F;den-klassiske-realkreditmodel_uk_2021_final.pdf" rel="nofollow">https:&#x2F;&#x2F;finansdanmark.dk&#x2F;media&#x2F;raim0hhz&#x2F;den-klassiske-realkr...</a>.<p>Toward the end of the document, there is a discussion of how the Danish mortgage system has fared in the various financial crises of the past 50 years starting with the twin oil shocks of the 1970s. Evidently it has been much more stable than the US system during that era. If for no other reason, the US should look at this system seriously.

It does sound like a good system since it gives the homeowner more flexibility. But call options aren’t free, so I wonder if it also makes getting a mortgage a little more expensive?<p>The mortgage becomes a bond that’s less valuable to the investor, so they would want a higher interest rate up front to make up for it.

My DK friends say that housing prices in København are outrageous. Did the genius fix work only locally?

Another description, from 2023: <a href="https:&#x2F;&#x2F;marginalrevolution.com&#x2F;marginalrevolution&#x2F;2023&#x2F;03&#x2F;in-praise-of-the-danish-mortgage-system.html" rel="nofollow">https:&#x2F;&#x2F;marginalrevolution.com&#x2F;marginalrevolution&#x2F;2023&#x2F;03&#x2F;in...</a>

In New Zealand, a fixed rate mortgage is very much linked to the bond. If you repay early, what happens depends on what has happened to the interest rate - there is an early repayment penalty if the interest rate drops.<p><a href="https:&#x2F;&#x2F;www.bnz.co.nz&#x2F;support&#x2F;home-loans&#x2F;managing-your-loan&#x2F;early-repayment-charges" rel="nofollow">https:&#x2F;&#x2F;www.bnz.co.nz&#x2F;support&#x2F;home-loans&#x2F;managing-your-loan&#x2F;...</a>

Etrade offered portable mortgages in 2003: <a href="https:&#x2F;&#x2F;www.nytimes.com&#x2F;2024&#x2F;05&#x2F;06&#x2F;opinion&#x2F;portable-mortgage-loans-housing.html" rel="nofollow">https:&#x2F;&#x2F;www.nytimes.com&#x2F;2024&#x2F;05&#x2F;06&#x2F;opinion&#x2F;portable-mortgage...</a>

&gt; <i>Fewer sellers means buyers compete for a smaller pool of available homes, driving up prices</i><p>Uh? This is just moving the tokens around. Those sellers are still going to live somewhere, so they&#x27;re either going to buy again or enter the rental market. So the &quot;pool of available homes&quot; is not improved by this maneuver, like, at all. At best the buyer and seller for a given transaction end up just trading places and renting-vs-owning availability wobbles transiently by a minor amount.<p>There is another tried and true method for increasing the pool of available homes though. It&#x27;s called building more homes.