Danish mortgage system history
The Danish mortgage credit system dates back more than 200 years. Many of the original principles still apply.
The following sections describe the major historical evolution periods of the principles in the Danish mortgage credit system:
The earliest years
In 1795, a fire roared in Copenhagen and one fourth of the city was burned to the ground. To rebuild the city vast sums were needed. At that time, the maximum interest rate was fixed by law at 4%, and financing was traditionally granted as personal loans without security. The supply of credit was consequently scarce. The need for security became the most important element for the lenders.
In 1797, a group of wealthy citizens in Copenhagen founded the first Danish mortgage credit institution – Kreditkassen for Husejerne i København (or Husejernes Kreditkasse). The bank would provide loans secured by a mortgage on real property and with joint and several liability for the borrowers by issuing negotiable debt securities. A similar system had been introduced in Germany in 1769.
In 1849, Denmark got a new Constitution that included provisions for liberty-of-association (in Danish: foreningsfrihed). The first Danish mortgage act was passed in 1850, and soon after new mortgage credit institutions were established. In contrast to Husejernes Kreditkasse, the new institutions were associations (in Danish: Kreditforeninger) owned by the borrowers, however still subject to joint and several liability. Loans were secured on a first mortgage. Loans could not exceed 60% of the value of a property, the value of the bonds could not exceed the value of the mortgages, and the loans had to be amortized. Loans with a 60 year maturity were standard.
In 1861, the mortgage act was amended. The changes introduced reserve funds to be assigned to any issued bonds. Mortgages and bonds were divided into series so that the joint and several liability was limited to the members of the individual series. These principals continued to exist for the following 100 years.
In 1895, second-mortgage credit institutions (in Danish: Hypotekforeninger) were introduced. The limit on first-mortgage loans to 60% of the value of the property and the mutuality of the existing first-mortgage associations contributed to a very strict lending policy. The second-mortgage credit institutions were allowed to grant loans of up to 75% of the value of the property.
After World War II
In 1958, third-mortgage credit institutions (in Danish: Reallånefonde) were set up on initiative from the Danish government. The new institutions were set up as independent business foundations. One of these mortgage credit institutions was Byggeriets Realkreditfond (later BRFkredit), which was set up in 1959. The third-mortgage credit institutions were allowed to grant loans of up to 75% of the value of the property, but for specific purposes only.
In 1970, the Danish Parliament (in Danish: Folketinget) passed a mortgage credit reform. At that time, Denmark had 24 different mortgage credit institutions, and lenders had to take out mortgage loans with at least three different mortgage credit institutions to finance a home. The new Mortgage Credit Act introduced massive changes. The three-tier system was changed to a two-tier system, and all mortgage credit institutions were allowed to grant both first- and second-mortgage loans. Maximum lending maturity was reduced to 30 years. Lending limits were lowered to 40% for first-mortgages (i.e. ordinary loans), and second-mortgages were only granted for specific purposes.
The 1970-reform lead to a wave of mergers between Danish mortgage credit institutions. The first Danish mortgage credit institution Husejernes Kreditkasse merged with BRFkredit in 1975. By 1985, Denmark had three standard mortgage credit institutions: BRFkredit, Nykredit and Kreditforeningen Danmark (later Realkredit Danmark). And two specialised mortgage credit institutions: the agricultural Dansk Landbrugs Realkreditfond (DLR) and the industrial Industriens Reallånefond (IRF).
1980 and onwards
In 1980, a new series of amendments to the Mortgage Credit Act were passed. The two-tier system was finally abolished and standard mortgage credit came instead. Cash valuation and cash lending limits were introduced as general principles.
In 1982, the limit on lending for owner-occupied housing was raised from 40% to 80% of the value of the property.
Throughout the 1980’s the Mortgage Credit Act was amended (loosened or tightened) several times as part of general economic policy efforts to stabilise the Danish economy.
In 1989, the Mortgage Act was reformed in order for the legislation to meet the obligations of Denmark’s membership of the European Union and to adapt to EU directives. More importantly the reform removed the restrictions on establishing new mortgage credit institutions that had been in force since the 1970-reform. New mortgage credit institutions were to be public limited companies with a minimum solvency ratio of 8%.
Since then amendments to the Mortgage Credit Act has liberalised and deregulated different aspects of the original Act.
The current Danish Mortgage Loans and Mortgage Bonds Act
The Danish mortgage regulation was amended in 2003, and The Danish Mortgage Credit Act was replaced by the Danish Mortgage Loans and Mortgage Bonds Act (in Danish: Lov om realkreditudlån og realkreditobligationer).
Those provisions in the Danish Mortgage Credit Act that were not included in the new Danish Mortgage Loans and Mortgage Bonds Act are now included in the Danish Financial Business Act. These amendments came into force on 1st January 2004.
More on these Acts and consolidated Acts available here