Safe and Liquid Mortgage Bonds: Evidence from the Danish Housing Crash of 2008

This paper shows that conservative loan-to-value ratios combined with strict matched pass-through funding is sufficient to ensure safe and liquid mortgage bonds. Despite a 30% drop in house prices during the 2008 global crisis Danish mortgage bonds remained as liquid as the government bonds in both Denmark and other EU countries. The very low credit risk meant that funding liquidity was the main driver of mortgage bond market liquidity which created communality in liquid across markets and countries. These findings have implications for how to design a robust mortgage bond system and for the regulatory treatment of mortgage bonds. JEL classification: E43, G12, G21.