The Danish and the American Mortgage System: A Comparative Analysis of Two Mortgage Systems

Alexander Berg Poulsen

Student thesis: Master thesis


The Danish and the US mortgage models have often been portrayed as similar, as theyboth provide homeowners with access to long-term housing financing. In an attempt toclarify the similarities and differences between the two models, this thesis seeks to‘Illustrate the differences between the Danish and the US mortgage system, andanalyze if the Danish mortgage model provides borrowers with a more optimal system’.A theoretical framework is presented in order to clarify the fundamentals behind amortgage system and the factors that make the two mortgage systems successful. Thetheoretical framework is based on theories on efficient markets, liquidity and interestrate determination. A historical introduction the Danish and the US mortgage market isprovided and the current mortgage market model for both systems is presented. In thecomparative analysis of the two models, it is found that the largest differences lie in theprepayment options, the securitization model, the standardized loan terms, and thebalance principle. Through the theoretical framework, it is argued that the Danishmodel provides the highest level of operational, and informational efficiency, while theUS model has the highest degree of market liquidity. The theory on interest rates is usedto assess the future development in interest rates between the two nations. It is foundthat inflation is expected to increase in Denmark over time, relative to the US. Further,it is found through an analysis of the spread between the 30-year FRM and the 10-yeargovernment bond that the US spread has decreased to such an extent that the premiumon US mortgage almost exclusively consists of a prepayment premium. The analysisstates that the narrowing of the spread is partly due to the large-asset purchaseprogram conducted by the Federal Reserve System of the United States. The discussionaddresses the idea of implementing the buy-back prepayment option of the Danishmortgage model into the US mortgage model. Further, the current state of liquidity onthe Danish mortgage market is discussed. It is concluded that despite the higher level ofliquidity of the US mortgage model and the narrower spread between the 30-year fixedrate mortgage bonds and the 10-year government bond, the Danish model still providesthe optimal system for mortgage borrowers. This conclusion is based upon the structuralsimplicity, the higher level of safety, the balance principle and the buy-back options that

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2016
Number of pages104