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Lakshmi
Cherry Bomb


Joined: 12 Dec 2007
Posts: 195
Location: Coral Gables, Fl

Will Covered Bonds Replace The Private Label MBS Market?
PostPosted: Mon Jul 28, 2008 11:19 pm Reply with quoteBack to top

The mortgage backed securitization market for non-GSE loans may never return as previously structured. The moral hazards of placing questionable assets into a securitization trust that is bankruptcy remote from the issuer with the blessing of an incompetent rating agency may be too great for investors to overcome.

Finance companies could not compete against the securitization alchemy of turning junk into AAA.
Yield and overcollateralization (low LTVs) are a necessary requirement for profitabilty in subprime. Both were eliminated by drinking the Wall Street Kool Aid.

The residential finance subsidiaries of insurance companies were a successful business model for many years. As these were portfolio loans and hence they had to eat their own cooking, the covered bond structure may be able to bridge the existing credibility gap between issuers and investors.

Covered Bonds have wide usage in Europe. Since the assets never leave the issuer's balance sheet and non-performing loans can be replaced within the bond, this may be the way forward for mortgage companies in the US.

PIMCO has an article which describes the basics:

http://europe.pimco.com/LeftNa.....Basics.htm


The FDIC issued a Policy Statement on April 15 which places major constraints on investments by banks in covered bonds. As this does not limit non- depositories, this may be the ideal structure for a private equity firm or hedge fund to leverage a subprime loan portfolio:

http://www.mofo.com/docs/pdf/0.....ngTalk.pdf

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