A cross-country study of market-based housing finance

The possibilities to improve households' eligibility for long-term housing loans at fixed interest rates has been a current topic of public discussion.Yet, credit institutions have difficulties in granting such loans, unless they themselves can acquire fixed-rate funding.In many cases, the only feasible way for them to raise such funding is to issue bonds.In a number of countries, such arrangements are already in use. In this paper we present a cross-country study of housing finance by mortgagebacked bonds.The paper describes and analyses mortgage credit markets in Denmark, Sweden and the United States of America with respect to the institutional structure, loans and bonds characteristics, legal framework and the security underlying the system.We have found that all three markets differ and that these differences originate from the respective countries' national characteristics and financial histories.In Sweden and the United States in particular, the public sector has been involved in developing the system. Generally, long-term credit is offered in all three countries through relatively well-functioning, efficient markets. However, certain problems are common to all.First, the number of outstanding bond series is relatively large.Second, in many housing loans, the borrower has the option to repay the debt prematurely.In these cases, the credit institution may have to avoid maturity matching problems by issuing bonds with unknown maturity. We briefly review the history and present circumstances of Finnish bond issuing credit institutions to elucidate why such institutions play a marginal role.Long ago, bond-issuing mortgage institutions were an essential part of the Finnish financial market, but legislative obstacles to their operations almost killed the industry after World War II.The tax system favoured ordinary banks, and bond emissions were restricted by government regulations.Now, these legal obstacles have been abolished.In the light of both foreign and past domestic experience, such institutions have a market niche.Finally, we discuss some of the problems related to setting up a bond- financed mortgage credit market in Finland. Key words: Housing loans, bonds, mortgage banks