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98% of Danish mortgages are securitized to mortgage-backed securities and sold by the mortage originators. Securitization is a financing process in which a corporate entity moves assets to an ostensibly bankruptcy-remote vehicle to obtain lower interest rates from potential lenders--because the assets cannot be seized in a bankruptcy proceeding, the risk is less for lenders and they are willing to offer a lower... A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. ...
Proponents of the Danish system say that its leaner and more efficient than any other system, with costs around 0.5% of the interest on the loans. Compared to the United States system of originators and GSEs which cost 1.25% - 1.5% of the mortage interest. The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. ...
Hans-Joachim Dübel, a Berlin-based financial services consultants, says that it would be difficult to apply the model to the rest of Europe because it would reduce the profit margins in the mortgage industry. "I don’t believe that other European mortgage lenders would like to be as tightly regulated or as constrained in terms of risk taking as the Danish mortgage credit institutions are. For example, the strict cover principle implies that Danish institutions have to pass on all interest rate risk to investors, a significant source of income and profit for mortgage lenders elsewhere." Interest rate risk is the risk that the relative value of a security, especially a bond, will worsen due to an interest rate increase. ...
Also, a very detailed credit check isn't done on the borrower; the loan is based more on the property than the borrower. To support this approach and to protect the investor, the foreclosure process is speedy. In contrast with France, say, where it can take several years to foreclose, Danish properties can be repossessed in less than six months. Foreclosure is the legal proceeding in which a bank or other secured creditor sells or repossesses a parcel of real property (immovable property) due to the owners failure to comply with an agreement between the lender and borrower called a mortgage or deed of trust. Commonly, the violation of...
The mortgage borrowing segment is by far the largest of the borrowing segments that the GSEs operate in.
The GSEs have created a secondary market in these loans through securitization so that the primary market debt issues can be bought and—most importantly—traded by investors.
Proponents say that this secondary market in consumer loans gives household borrowers cheap fixed rate loans (low fixed rates on long term loans), removes credit risk from banks' balance sheets and provides standardized instruments (securitized securities) for investors.
Homeowners and other owners of real estate rely on the mortgage credit system for cheap funding of their assets, and the confidence of and security for the mainly domestic investors such as credit institutions, insurance companies and pension funds in the mortgage bonds is of the highest importance.
In addition, the regulation of placement of funds of mortgage banks, the balance principle and the lending limits contribute to a limitation of the risks that mortgage banks are allowed to assume.
For mortgage banks the rating is among other things based on ratios related to solvency, growth in outstanding loans, market risks and share of loans granted to high risk types of property.
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