Posted on 07/29/2008 8:25:57 AM PDT by CRBDeuce
Treasury Secretary Henry Paulson on Monday outlined plans for the four biggest U.S. banks to issue new bonds to stimulate mortgage lending, the latest in a series of steps to aid the troubled housing market. Paulson outlined rules to issue so-called covered bonds backed by mortgage loans. The instruments are popular in Europe but had little appeal in the U.S. until demand for mortgage-backed securities plummeted because of soaring home loan foreclosures. C,JPM,BAC,WFC...have signed up to issue covered bonds, seen as less risky than mortgage-backed securities.
"Covered bonds have the potential to increase mortgage financing...
(Excerpt) Read more at biz.yahoo.com ...
Shouldn’t the last thing we do be to stimulate more lending?
Someone’s gonna have to fire up the old printing presses...
Please read the entire article...clearly shows the ‘safe’ way to lend to home buyers...unfortunately, the USA chose an unsafe path in 1) removing red-lining; 2) allowing the Congress’ buddies to infiltrate FNM, FRE, SLM to give ‘free government money to those buddies; 3) and as icing on the cake, provide ‘free government money’ to illegal aliens, drug dealers, and any other con-artists (think Clinton) who wandered in off the street! Oughta be a law against stupidity (specially in Congress)!
May take awhile, but as the (Euro-style $3trillion market) covered bond Mortgage industry takes over from FNM & FRE, the USA will be a much ‘safer’ place to live...and save our grandkids millions in taxes in the process. oh, and Slams the Congress revolving door shut at least to those 2 GSEs.
wow...are you guys paid to not read articles and make these tired old statements? or are you playing SKF this week? Any other shorts wanna comment?
I understand your frustration, but it’s a little-known secret that no one reads past the headline.
In contrast, the very different "mortgage backed securities" are debt instruments that banks can hold off of their own accounting books...allowing them to become extraordinarily leveraged.
What you don't want is a Zimbabwe printing press at one extreme, or a Depression-era "lend no money" at the other extreme.
You want that happy middle ground. You can't just shut off the entire real-estate market (unless you want to live in the Middle-Ages). So new loans need to be made.
Covered bonds are a good move...and if Paulson will just push Congress to make them tax-free like muni-bonds the Secondary Market will return to a level of robustness that is compatible with prosperity without a looming threat of a boom/bust hangover.
Very good point, mate.
This makes sense, so the Rats will try to stop it.
They'll never give up the tax revenue on such a huge chunk of the bond market.
I think it is one of the first semi-sound ideas by Paulson in this entire mess, but it doesn’t get us out of the current mess.
There are significant barriers to acceptance by the banking industry, however. Here’s a couple I can think of off the top of my head:
1. The accounting. In the German style of covered bonds (and most of the covered bonds in the EU are issued by German banks, last I looked), the bank has to keep the covered bond on their books. This runs counter to what banks have wanted to do over the last 10+ years here in the US — ie, move illiquid assets off their balance sheets into this “Level III” asset bucket that is off their balance sheet.
2. As a result of (1) above, the bank is keeping the risk, or at least some component of the risk. The all-too-common practice in the US markets just now has been to try to sell off risk through derivatives, or to offset it with thimblerigging, etc. Bankers have to be pimp-slapped and taught about risk, ie, that they minimize their risk by minimizing risky loans. (duh!). There can be no hiding from systemic risk posed by lending money to people who can’t/won’t repay said loan.
3. In terms of market perception, I see covered bonds as nothing more than the current RMBS with a wrap. The difference here is that the wrap depends on the bank, not a bond insurer. So now the credit ratings agencies have to work even harder at a function in which they’ve proven themselves incompetent, ie, rating the creditworthiness of the wrap.
Well, we know the monolines are screwed. And we know that most of the banks issuing RMBS paper are in very precarious shape as well. So... we’re going from a single wrapper failure to many banks needing to fail to induce the same problems as a single wrapper failing. OK, that’s an improvement in that we no longer have single points of failure as we have in the monolines just now, but the current market probably would see no upside because the banks are in such hard shape.
Net:net, I don’t see anything here in covered bonds that is going to help us right now, because so many components of our financial system are broken: the ratings agencies, the bond market, the derivatives on credit, bank accounting, bank liquidity, bank solvency, etc.
They *could* be a useful tool to migrate the mortgage market away from dependence upon Fannie/Freddie/FHA in the future, and for that reason, they deserve some thought and evaluation.
Absolutely agree. The size and magnitude of the RMBS market is such that talk of making them tax-free would amount to quite a tidy sum of tax revenue having to be offset.
Ain’t gonna happen, and if it does, it means that there some serious turdage that has hit the turbine blades.
Man, y’all are tough! Not even an “atta boy” for promoting the clever idea of doing to covered bonds what worked so well for munis (i.e. making them tax-free)?!
Promoting wasteful municipal spending was a good idea? :^)
Suddenly I’m channeling Rodney Dangerfield. Tough crowd!
“...worked so well for munis...”
Worked well for... whom? The issuers? Well, yes, it was a case of one bunch of political hacks bailing out another group of political hacks.
And there’s an accounting issue here — the muni’s, are after all, backed by the taxation authority of the issuing political sovereign and are paid off by the taxpayers - both principle and interest. Paying taxation upon the interest issuing from muni bonds would simply be paid by more taxpayers to fewer taxpayers (as a result of bond yields having to go up to compete with commercial/taxable debt issues), so there’s an argument for making them tax-free in the interest of the taxpayers of the issuing sovereign.
Not so in the case of mortgage backed securities. In that case, we would have a continuation of the a “tax subsidy” to the real estate market, and I think the tax code is riddled with enough goodies for real estate developers and financiers.
Ahem? See post 9.
D’oh!
Tough crowd, I tell ya! Tough crowd!
Of course...probably even a well-known secret, one I am as guilty as anyone...but as you say...w/r to Fannie Mae, any 'beginning to its end' is a good beginning. So Kudos to Paulson. He's gonna make good on his promise that the wacko 'Housing Bill (foreclosure prevention)' is just a 'backstop' and with any luck the taxpayer will not get dinged. On a side note, by highlighting C, BAC, WFC and JPM, he's given the onus to the 4 who can pull it off the fastest. Ironicly (if you look at BAC), looks like BAC was the biggest 'naked shorting' target as well, and its stock took off today! (when Cox mentioned he 'might address the nekkid shorts' today around 3:30pm).
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