Friday, October 10, 2008

Another task for a Commission on the Financial Crisis

A little while ago, I posted on an Australian perspective on the US housing market, and how Australian rules differed from the US's.

Today comes an article from George Soros on the Danish housing market, and the lessons it has to offer the US:

To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. It remains the best performing in Europe during the current crisis. First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements. There are no GSEs enjoying a quasimonopolistic position.

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...

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.

I wouldn't pretend to know whether Soros's proposals make sense. What I DO know is that we should take a long look at how other nations that have successful housing markets have done it, which is one more great task for the staff of A COMMISSION.

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