Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Paulson's Covered Bond Proposal to Rescue US Housing Market

Interest-Rates / US Housing Jul 29, 2008 - 09:09 AM GMT

By: Mike_Shedlock

Interest-Rates Many people are asking about Treasury Secretary Paulson's Covered Bond Plan .
Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. threw their support behind Treasury Secretary Henry Paulson's effort to spur covered bonds as a new source of mortgage financing.


"We look forward to being leading issuers as the U.S. covered bond market develops," the banks said in a joint statement in Washington. They applauded Paulson's release today of guidelines for issuers of covered bonds , which detail the types of loans that should go into the securities and how their payments ought to be made.

Even in Europe, where covered bonds are a market in excess of $3 trillion, investors are shunning the debt amid a collapse in appetite for investments in housing.

"Mortgage-backed securities investors are not in the mood right now to buy bonds with anything less than government backing," Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in an interview, referring to debt guaranteed by Fannie Mae and Freddie Mac.

Paulson said the four U.S. banks are "ready to go" and that sales by the largest banks can help encourage smaller mortgage lenders to proceed. "Covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions," he said.

Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.

Covered bonds achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.

While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.

The Treasury's guidelines spell out a formal definition for covered bonds. The bonds should have maturities of at least one year and no more than 30 years. Home loans in covered-bond pools would have a maximum loan-to-value ratio of 80 percent.

First off, I like the idea of covered bonds. Over time they could allow for a somewhat graceful unwinding of Fannie Mae and Freddie Mac. See Nature of the Fannie Mae Bailout for more on this idea.

In addition, forcing banks to keep responsibility for the loans will encourage far sounder lending practices than the current originate and securitize model, especially after the debacle we are in with Alt-A and subprime loans.

However, note that the maximum LTV is 80%. How many people have 20% down payments? The second problem is that banks are capital impaired and selling off assets. How likely is it for those same banks to be taking on additional debt? The answer is not very.

Finally, the credit crunch is not going away anytime soon. The general idea at many banks right now is We're Saying No To Almost Everybody .

So while covered bonds are a reasonably good idea in a sea of horrid ideas, they simply are not going to do much to alleviate any problems in the mortgage markets, anytime soon. What politicians should do is give this market time to develop but politicians never want to wait.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in