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Reforming Housing Finance - Perspectives from Denmark

  • Mikkel Svenstrup

    ()

    (ScanRate Financial Systems, Denmark, Gustav Wieds Vej 10, 8000 Aarhus C, Denmark)

  • Soren Willemann

    ()

    (Aarhus School of Business, Department of Accounting, Finance & Logistics, Fuglesangs Alle 4, 8210 Aarhus V, Denmark)

Registered author(s):

    This paper investigates the effect of adding a distinct feature of the Danish mortgage market to the market in the United States. This feature, a buyback option, enables mortgagors to buy back their share of the mortgage-backed security at market price. Extending a standard referenced pricing model, the findings indicate that the introduction of the buyback option reduces the credit spread required by the financial intermediary by 23%, potentially reducing the contingent liability of the U.S. government. Furthermore, the buyback option protects households against the risk of being locked in after an increase in interest rates. This could be of particular benefit to low-to-middle income households.

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    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol28n02/01.105_130.pdf
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    Article provided by American Real Estate Society in its journal journal of Real Estate Research.

    Volume (Year): 28 (2006)
    Issue (Month): 2 ()
    Pages: 105-130

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    Handle: RePEc:jre:issued:v:28:n:2:2006:p:105-130
    Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
    Web page: http://www.aresnet.org/
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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    1. Jerry Green & John B. Shoven, 1983. "The Effects of Interest Rates on Mortgage Prepayments," NBER Working Papers 1246, National Bureau of Economic Research, Inc.
    2. W. Scott Frame & Lawrence J. White, 2005. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 159-184, Spring.
    3. Dennis R. Capozza & Dick Kazarian & Thomas A. Thomson, 1998. "The Conditional Probability of Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 259-289.
    4. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    5. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series 2003-64, Board of Governors of the Federal Reserve System (U.S.).
    6. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 24(1), pages 5-29, August.
    7. Lawrence J. White, 2002. "Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance," Working Papers 02-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
    9. Richard Roll, 2003. "Benefits to Homeowners from Mortgage Portfolios Retained by Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer, vol. 23(1), pages 29-42, February.
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