Research Discussion Papers, Bank of Finland
Kaare Andersen and Karlo Kauko
A Cross-Country Study of Market-Based Housing Finance
Abstract: 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
mortgage-backed 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.
Keywords: housing loans; bonds; mortgage banks; (follow links to similar papers)
47 pages, April 16, 1996
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