Feargal Quinn (Independent) | Oireachtas source

Yes; we have all been educated so often and no more so than today. I first learned about Denmark in the 1950s in the context of their folk schools. Their system of education and of involving people in traditional folk schools is wonderful. My father became involved in that and I found it very interesting, way back then. In the 1970s I went to Denmark because it was the first country with a supermarket that put barcodes on its products. Denmark has led the way in many areas but I was unaware of the nykredit system until Senator Barrett brought it to our attention.

The crisis has set off a search for the best possible mortgage financing system and many economists have praised the Danish model, which I had not heard about until now. It has been in operation since 1797 and since then, not a single Danish mortgage institution has defaulted, gone bust or had to be bailed out. As Senator Barrett explains in this Bill, the Danish system features specialised mortgage lenders that observe strict loan-to-value limits, along with a system of matched funding in which each mortgage is financed by a specific bond with the same maturity and cashflow characteristics. Unlike Ireland, losses in Danish mortgage banks have remained low during the crisis and there has been plenty of liquidity in those institutions. Indeed, it is a very secure system, and Danish mortgage bonds differ in essence from the widely distributed mortgage-backed securities, MBS. The regulations for Danish mortgage bonds are laid down by law, which means they continue to constitute on-balance financing and are therefore more similar to savings deposits with a general bank than to an MBS, which constitutes off-balance financing. The issuing body continues to carry the risk if a home owner is no longer able to fulfil his or her obligations. With an MBS, on the other hand, the risk rests solely with the investor.

We need to break the linkages between the State and the banks. As the Bill points out, Ireland is unattractive to foreigners but access to credit for mortgages is determined by the ability of our existing pillar banks to obtain credit on the international capital markets. The bank guarantee further undermined this situation.

Danish mortgage lenders compete on their ability to distribute and service loans. This specialised competition has helped to drive down costs for the consumer. The Danish system also protects borrowers from interest rate risks by offering long-term fixed rate mortgages. Such a system would greatly benefit consumers in Ireland, compared to the floating rate mortgages which expose borrowers to risks of payment shocks when interest rates rise. Regulations in Denmark limit the amount that can be loaned to homeowners to no more than 80% of the value of a home. We fell into that trap to a great extent in Ireland. Policymakers should be concentrating on this issue.

Several years ago I was invited by then Senator Maurice Hayes to have lunch with George Soros, the billionaire financier and philanthropist, who certainly educated me on these matters. He established a joint venture in Mexico based on this model and argued that a similar system should be adopted in the United States. He has stated in regard to the Danish model: ?If you need systemic change ... you may as well go for something that is vastly superior."

We cannot speak about mortgages in a vacuum. There are lessons to be taken from the way Iceland dealt with the crisis and is now recovering strongly. I do not suggest, however, that we should have moved in that direction, given that we do not have our own currency. We must look at mortgages, but we must also push harder than ever for a debt write-off. The IMF is coming round to the idea that Iceland did the right thing by burning bondholders and that recession is made worse when there is no restructuring of household debt. It has stated: ?Key to Iceland?s recovery was ... [a] program ... [which] sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses?.

Overall, this is a positive proposal to tackle a fundamental part of the banking system. If people start to default on their mortgages on an even larger scale, they are also likely to have trouble paying off their credit cards and the resulting credit crunch is going to be even greater. The major lesson we must learn from the recent past is that leverage by banks in property is usually lethal. This system would help to prevent that happening. While there are some drawbacks, the system offers many benefits, including low and competitive prices of loans against mortgages on real property; transparency in prices and repayment terms for loans; market based pricing; availability for all owners of real property; and a system that supports overall financial stability. There is much to be said for these alternatives and we should look around to see who else can offer advice.

Notwithstanding the selective views of ratings agencies, there is strong market demand for Danish mortgage bonds. Nykredit, Europe?s biggest issuer of covered bonds backed by mortgages, has seen its international investor base grow to almost 20%, compared to 13% just one year ago. The bonds are seen as a safe haven which offers investors no credit risk and plenty of liquidity. We also want to be regarded as a safe haven. Perhaps the Danish model might help us in this respect. Realkredit Danmark, the mortgage lending unit of Danske Bank, terminated its contract with Moody?s after it had issued a credit warning because it argued that the agency did not understand Denmark?s mortgage market. Perhaps our own banks would do well to sever their links with some of the ratings agencies.

The economist, Professor Joseph Stiglitz, describes Danish mortgage bonds as a good innovation which helps to improve risk management and lower transaction costs. However, the financial system has resisted many beneficial financial innovations which improve the efficiency of economies. We should move to a model in which people lose their homes only as a last resort. Although Denmark is still in the middle of a slump in its real estate market, foreclosures account for just 0.2% of the total housing stock. The economic and financial crisis has only affected 1% of mortgage holders in Denmark. Any homeowner in Ireland would see the benefits of such a system. During the worst months of the financial crisis and the subsequent eurozone crisis, it was business as usual in the Danish mortgage bond market. This model would not solve all of our problems, nor is it the only solution, but it is worth considering. I urge the Minister not to reject the Bill before it receives the attention it deserves.