Transforming the mortgage system and challenging the Zombie Economy

By developing stable mortgage finance institutions that do not require government bailouts we can break the “doom loop” between the financial sector and the British state.

James Wood
29 July 2016

Flickr/woodleywonderworks. Some rights reserved.

Since the 2010 election, “austerity” measures have been introduced to reduce government spending in Britain. The main aim of the introduction of austerity was to reduce the budget deficit to generate confidence to markets and stimulate an economic recovery in light of the Global Financial Crisis. Whilst the implementation of austerity measures has reduced the budget deficit, there has been little economic growth in Britain as a result of these measures. The social consequences of the cuts in social services implemented as a result of the austerity plan, combined with a poor economic recovery, has seen the poorest in Britain hit the hardest.

Such an experience of austerity contrasts greatly with the fortunes of the financial sector, which has been thriving since receiving £107.6bn in government support in light of the financial crisis. The large financial institutions were bailed out by the British government after the crisis as they were considered “too big to fail” due to the systemic risk they pose to the economy. This relationship between large financial institutions and the British state has been identified as a “Doom Loop”, as the need for the government to act as a safety net provides a perverse incentive for large banks to engage in greater lending risks than they otherwise would.

Many of the large financial institutions required a bail out as they were overly exposed to risky investments in the real estate sector through excessive lending on mortgages. Mortgage lending has become increasingly attractive for British banks as the loans offer a strong rate of return and property as collateral. Mortgage lending is a key aspect of the increasing financialisation of the British economy, which has seen the level of mortgage debt relative to GDP increase from 56% in 1992 to 86% in 2012. Although reducing mortgage lending may be seen as a way to make banking more stable, that would not be ideal as being able to access mortgage finance is important for many families in Britain to access homeownership. Therefore, an alternative solution to breaking the “Doom Loop” between the financial sector and the British state could be to develop stable mortgage finance institutions that do not require government bailouts.

A solution from Denmark

Danish mortgage finance institutions are very different from British banks, and were established in 1797 after the Great Fire of Copenhagen in 1795 to provide housing finance to rebuild the city. Traditionally, Danish mortgage institutions have been established as non-profit co-operatives that are owned by their members who are borrowers that take on mortgages from that institution.

Danish mortgages are funded by covered bonds and are based on a “match-funding” balance principle, where the mortgage institution acts as an intermediary between investors and borrowers. Mortgages are only granted once the borrower has provided a detailed and fully documented account of their financial position, which makes all loans “prime” mortgages. Once a borrower is approved for a loan, the mortgage institution sells a bond to a third party investor, and then provides the proceeds from that bond sale to the borrower for a mortgage. However, the balance, duration, and the interest rate of the bond and the mortgage are identical.

For example, the mortgage institution could sell a DKK 1m 30-year bond with a 3% interest rate, and then issue a DKK 1m 30-year fixed mortgage with a 3% interest rate. Therefore, the mortgage firm does not make any profit on an interest rate margin between the bond and the mortgage. The mortgage institutions generate revenue by charging an annual “mortgage arrangement” fee that amounts to approximately 0.5% of the outstanding loan amount, which is significantly lower than interest rate margins charged by British banks. As non-profit institutions, any profits made at the end of the year are redistributed to all of the borrowers.

The cash-flow on the mortgage is equal to the cash-flow on the bond and the mortgage is held on the balance sheet of the credit institution throughout the entire duration of the loan. The mortgage firm holds the credit risk, which acts as an incentive for the lender to maintain a robust credit policy to ensure the borrower is able to make the mortgage repayments that are passed onto the investor. Therefore, in contrast to the originate and distribute model of mortgage funding using mortgage backed securities in Britain, the Danish mortgage system can be thought of as a distribute and hold model that is funded externally.

Investor Stability

Denmark’s total outstanding mortgage debt is approximately 130% of GDP, which is much higher when compared to Britain’s, which is close to 86% of GDP. Although Denmark has a much higher total mortgage debt burden than the UK, no Danish mortgage institution has defaulted on a covered bond or has ever gone bankrupt. This is despite facing a series of severe economic challenges since 1797, such as the bankruptcy of the Kingdom of Denmark in the early 19th century, the Great Depression in the 1930s, German occupation during World War II, the inflation crises of the 1970s, and the Global Financial Crisis of 2008. Furthermore, the Danish financial regulator stated that the Danish mortgage system “has never led to credit losses” since it was instigated over 200 years ago.

Implementing a Danish-style mortgage system in Britain could result in the absence of credit losses in the mortgage market, which could break the “doom loop” relationship between large financial institutions and the British state. Removing the fiscal burden on the state from bank bailouts could relieve the financial pressures on state spending in other areas, which could lead to the reversal of the austerity policies in Britain. Although it would be too late to reverse the current austerity policies, adopting a Danish-style mortgage system could prevent austerity measures being implemented on future generations.

Such a mortgage system would compete for “prime” mortgage loans with British banks by offering access to cheaper credit with longer and more stable lending terms. Banks would then be forced to offer second position loans that are not guaranteed by the use of the property as collateral, which could encourage banking investment away from real estate and into other areas of the British economy, where it is desperately needed.

The Danish mortgage model is also able to fund a variety of different housing tenures in Denmark, such as co-operative housing. However, in Britain, there is a relatively narrow set of tenure options such as private rentals, social rentals, and private homeownership. Increasing the supply of housing is an important part of solving Britain’s housing crisis, however, an increase in the housing supply could also be supported by introducing a wider variety of housing tenures, which could be funded using the Danish mortgage model. Additionally, this mortgage model is also used by different municipalities in Denmark to build social housing and there have been calls for more social housing to be built in Britain. Therefore, adopting the Danish-style mortgage model may be a way for local British councils to provide for the social housing needs of their communities.

Establishing mortgage institutions in Britain that are based on the Danish mortgage model could challenge the logic of the Zombie Economy by breaking the “Doom Loop” that sees the British state repeatedly bail out large financial institutions. The absence of mortgage credit losses could relieve fiscal pressures on state spending, which could further remove the threat of austerity policies being implemented in the future.


This contribution was part of the Beyond the Zombie Economy conference hosted by the Political Economy Research Centre at Goldsmiths, University of London, and funded by the ESRC, for more details visit

Part of the Anti-Austerity and Media Activism series with Goldsmiths.

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