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More proof the interest rate cuts were intended to bail out financials, not help homeowners.
Covered bonds offer hope to the housing market
Might bring relief to mortgage-finance funk - but no send it back to heyday
By Deborah Levine, MarketWatch
Last update: 3:14 p.m. EDT Aug. 7, 2008
NEW YORK (MarketWatch) -- Investors and banks are looking to jumpstart a new form of mortgage debt to help the housing market just when it needs it most.
Analysts say the market for covered bonds, a form of debt used extensively in Europe and promoted by Treasury Secretary Henry Paulson last week, could grow to more than a quarter of a trillion dollars, giving a big boost to banks willingness to hand out more mortgages.
"If it catches on and works for the market, it will be a way of opening up the spigots for mortgage financing," said Jerry Webman, chief economist and director of fixed income at Oppenheimer Funds Inc., which manages about $225 billion.
Investors' hunger for mortgages has stalled since the credit crisis began last year, cutting off crucial financing for lenders and making it harder for would-be home owners to obtain mortgages.
"There will still be a lower volume than we saw in the first two-thirds of this decade," Webman said.
Paulson said Bank of America, Citigroup, J.P. Morgan and Wells Fargo intend to establish covered bond programs to kick-start the market.
"The investor is taking on the risk of the banks" and the mortgages, said Rob Corner, portfolio manager of the $400 million RidgeWorth Short-Term Bond Fund. "We're going to be looking hard at the banks, that they are industry leaders and have superior access to capital markets."
The banks that pledged to help fit that description, Corner said.

How we got here
Mortgage defaults have soared as falling home prices have made it impossible for many borrowers to refinance loans there were unable to afford. That's deterred many investors from buying mortgage-backed securities. In order to make bond yields attractive enough to investors, enabling banks to originate more loans, mortgage rates have had to rise. The rate on 30-year fixed mortgages averages 6.41%, according to the Mortgage Bankers Association. That's barely budged from 6.50% a year earlier despite more than 3 percentage points in interest rate cuts from the Federal Reserve.
Further crimping the market for mortgage bonds, many financial institutions that used to package mortgages no longer do, or are out of business, leaving the whole job to government-sponsored mortgage buyers Fannie Mae and Freddie Mac. That means far fewer loans are being offered to borrowers or packaged for investors. Issuance of mortgage-backed debt this year through July has dropped 83% from last year to about $119.6 billion, including offerings packaged by Fannie Mae and Freddie Mac, according to data tracker Dealogic. About $635 billion was sold in the first seven months of 2006.
With investors in those two government-sponsored agencies also shying away, the government and investment banks are looking to open a new avenue to draw investors, reversing the whole domino effect in order to get mortgage rates down.
The idea is to encourage banks to issue covered bonds: a secured debt instrument that provides mortgage loan interest and payments to an issuer, like a bank or depository institution.

Issuers hold it
Under the system that contributed to the current credit mess, banks were able to pass on the actual risks of mortgage loans to outside investors. But when issuing covered bonds, banks would be required to hold the mortgage assets on its books.
Having to hold the debt gives the issuer a very big incentive to only issue traditional, safer loans to borrowers with a down payment, income and credit history. The rules laid out by the Treasury effectively prohibit the kinds of subprime loans that precipitated the current credit crunch being allowed as collateral for covered bonds.
"With covered bonds, an originator who has to fund mortgages by keeping them on balance sheet has an immediate incentive to originate the highest quality mortgages," said Morgan Stanley analysts led by Michelle Bradley. "The originate-to-distribute model has been severely criticized in the wake of the subprime crisis, as it invokes moral hazard issues."
However, it limits the banks' ability to do what they've done in recent years: leverage the loans - sell off part of the amount, which enabled them to use that money to make more home loans to a wide range of borrowers.
"There will be less capital available in the market to make loans than there was a few years ago," Oppenheimer's Webman said. "But it will be more than now and that would be healthy. It would be a more sustainable kind of market."

Investors' double protection
The big difference to potential investors in covered bonds is that while their interest is paid from the issuer's cash flow, they have access to the actual mortgage assets as secured collateral if the issuer defaults. They also have other protections like if a mortgage in the pool of covered bonds becomes delinquent, the issuer has to replace it with a performing loan.
That should help bring mortgage bond yields closer to benchmark Treasury yields as investors become more comfortable that they have enough protection to hold the debt. Over several months, that should bring down mortgage rates and help the housing recovery, said analysts at Morgan Stanley.

Covered bond market size
How big the covered bond market may grow to is a matter of some debate. "It should begin within a year," Corner said. "The Treasury is pushing this and there's a need in the market for a funding alternative. It needs to be sizable enough to do some liquid deals and a large flow of information."
Based on the Treasury's stipulation that caps how much of an issuer's liabilities can be in covered bonds, the market may be no larger than about $340 billion, according to Credit Suisse.
Another way to calculate the potential size, based on the amount of mortgage loans that fit the Treasury's criteria and probable credit scores required by issuers, gets a smaller number. Also taking out the amount of loans already securitized, the maximum market size is around $228 billion, according to Morgan Stanley.
The European covered bond market is more than $3 trillion, and has weathered the financial market turmoil better than unsecured debt, said analysts at Credit Suisse. New bond issuance has remained strong and new issuers in new areas continue to join the market.
"This highlights that in the euro area, covered bonds continue to satisfy the needs of both issuers and investors as mortgage-backed security activity has slowed significantly," strategists led by Ira Jersey said in a research report.
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Deborah Levine is a MarketWatch reporter, based in New York.
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luv2read said:
Thank you Steady! Just what I needed! :D
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Luv2read,
It's time to set the sail and catch a different wind.

The Wind Cries Mary - was written for (and inspired by) Kathy Mary Etchingham. She was undoubtedly the most significant person in Jimi's life and they were very close before he was ever known. They met a day or two after he arrived in England (and shared the place together) and several months later he began recording some of the hits that made him a somebody. This was his third song - to hit the charts. Amazingly - what prompted this song was an argument that stemmed from Jimi implying Kathy was using dirty pots and pans to cook with.

"Hell has no fury like the wrath of a woman".

So she got mad, smashed some plates and stormed out. Was dressed in red - when she flagged a taxi and spent a few days at a friends. When she came back - he let her know "I'm sorry" and played her song.
 
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After a good night's sleep I was able to reflect on your concerns with a sharper mind and clearer head.

First, I'd say the more you uncover and add everything up: that's all the more we have grounds for a huge downfall and it will all the more make it appear we are right at the edge (barely hanging on)

What is the TRUTH? - That's the very hardest thing of all because deception is the ultimate means by which everything is acknowledged. The Banks do not disclose the Trillions they made out with - they only disclose the losses; Everything truly major is done in secret (often over a weekend) and then we find Bear Steans was bought out; Fannie/Freddie are saved...and it goes on and on.

I believe a MAJOR DOWNFALL is inevitable and there is no way to avoid it unless our country changes many of the practices which dominate the economy. But (by the grace of God) I don't believe it's now. Somehow - we managed to avoid the overwhelming worse and things should get better over the next year or 2.

Let's hope I'm right.
 
I remember the 10.5% interest rate (that was cheap!) on our first house in the late 70's early 80's...same situation as today, after years of rate cuts that helped financials but left mortgage rates unchanged, rates were raised to fight inflation and of course mortgage rates escalated ahead of the hikes. I think they reached 13-14% before peaking. Then came the oil bust and S&L crash.

This paper is a good summary of the Great Depression and S&L crash; the similarities to today's situation with all the government intervention is mind-boggling.

http://arapaho.nsuok.edu/~cundiff/SavLoan.doc

The primary cause of inflation is not an increase in commodity prices, but an increase in the money supply.
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We are building up towards our next big call. Certainly the next few months are likely to be tough, characterised, we suspect, by still heightened levels of volatility and low levels of earnings visibility. However, we will be looking, during Q2 2008 to introduce risk back into investors’ portfolios (this is not the sort of comment normally attributed to the pathologically bearish!). Whilst we see inflationary pressure we view it as more a function of yesterday’s problem than tomorrow’s problem.
The global deterioration in the credit markets is a function of tomorrow’s problem, rising deflationary pressure. We believe that the sectors and strategies which win heading into periods of volatility are rarely those which lead on the way out. Readers will be well aware of our strong preference for large cap defensive strategies over the past nine months. That period is coming to a close. We see more opportunities presenting themselves from the asset deflation argument than in the ongoing inflation argument. For a start we believe that investors should give serious consideration to reducing bond exposure (yields are either anticipating a serious deterioration in the global macro-economic environment, or they indicate that bonds are very expensive) and buying US equities over their European counterparts. Secondly, we are almost ready to start reducing exposure to defensive growth in favour, selectively, of the bombed out under-owned sectors of the market such as housebuilders.
We would add two words of caution. Firstly, Western macro economic activity is still trending downwards, led by severe pressure on the consumer. For this reason we continue to be very wary regarding apparent value on offer in the consumer facing sectors of the market. Secondly, accept that, for now, the banks might represent a “value trap” and that while the credit crisis rumbles on the “Moonstone” is likely to prove hard to track down.

http://www.moneyweek.com/file/43827/how-to-beat-the-crisis.html
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...
 
nasa1974 said:
We can put SB in charge of the FRTIB. Yeh, that's it the FRTIB. :D How about it SB???

L2R, Can I be in charge of NASA????
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L2R, this was too much fun the last time we were playing with it, so I bumped it to the top of your thread again. Hope you don't mind. Have you finished vetting your Vice Presidential list yet?

L2R for President!​

I may even get a button made! :cheesy:​

Lady, aka the HHS Secretary designate​
 
You've got a tough list to vet for certain, what with Tom, Nnut, Spaf, Fundsurfer, 12%, Steady, SB, Kar Crazy, CorePuncher, Show-Me, IM4U, Jayhawk, Merlin, SugarandSpice, Option, GGal..and well that list can really get long...quite an impressive list..

But IMHO, Birch for Sec DOD...No one tougher...Semper Fi...:D:D:D

FS
 
Luv2read,
You have a knack for finding worthy tid-bits. My general view is hugely shaped by your insights, and I appreciate that.

I hope these storms haven't damaged your home or property and the sun is drying things out.

OK - now I'm heading to lunch.
 
Let's see if you can deliver me some precious negative reputation points for this: The Woods Charitable Fund of Chicago. This is the charity that overlapped with Sen. Obama for three years with the association of William Ayers, a 1970s radical turned college professor, whose tenure as a director put him in direct contact with Obama. Ayers was a lieutenant in the Weather Underground group, an organization that advocated acts of anarchy as a way to end the Vietnam War. You know all this right? Ayers is accused of taking part in a bomb making exercise that blew apart a Manhattan townhouse and killed three members of the group. Ayers and his wife Bernardine Dohrn, also of the Weather Underground, went into hiding for about a decade, later turning themselves in. Why is the liberal press not looking at the relationship between Ayers and Obama - you know the answer to that, right? Obama stayed with him for three years for the same reason he stayed with his anti-American Afrocentric, black nationalist church - poor judgement on his part.
 
Birch,
All this crap is beneath you - surely you can't be this low in real life.

Please don't pollute her house with all this garbage.

If someone gave you Negative Feedback - just ignore it. That happened to me over and over. Despite the numerous wonderful comments I'd received from the general MB - still the one time I may have offended someone they give me a "1 Star" and so quite a few wanted to get even.

I can tell you in all sincerity - You'll get a lot more NEGATIVE comments and FEEDBACK posting stuff like this.
 
Birchtree said:
Let's see if you can deliver me some precious negative reputation points for this: The Woods Charitable Fund of Chicago. This is the charity that overlapped with Sen. Obama for three years with the association of William Ayers, a 1970s radical turned college professor, whose tenure as a director put him in direct contact with Obama. Ayers was a lieutenant in the Weather Underground group, an organization that advocated acts of anarchy as a way to end the Vietnam War. You know all this right? Ayers is accused of taking part in a bomb making exercise that blew apart a Manhattan townhouse and killed three members of the group. Ayers and his wife Bernardine Dohrn, also of the Weather Underground, went into hiding for about a decade, later turning themselves in. Why is the liberal press not looking at the relationship between Ayers and Obama - you know the answer to that, right? Obama stayed with him for three years for the same reason he stayed with his anti-American Afrocentric, black nationalist church - poor judgement on his part.
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To the best of my knowledge I have not given anyone "negative" reputation. When I use the rep icon, I get only a green "I approve" button and a blank for a comment, thats why I asked about it on another thread. I've previously stated that I would like to keep my "house" free of politics and the strife and discord that generally accompany it. I've already made my position know...I'm not voting for ANY OF THEM. There is not ONE instance of me stating support for Obama on the MB so your post here is unjustified. I have a lot of respect for your financial acumen and military service and generally enjoy our discussions. This however, is an attack. Your first appearance back on the MB after an absence and you are already stalking me. Please stop.
 
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L2R,

I was actually trying to interest you in doing some reseasrch on this issue. No way following you around. Thanks for the pm.
 
Steady,

Actually someone gave me positive reputation points for post #153 - go figure. The best things happen when least expected. Thanx.
 
Birchtree said:
Let's see if you can deliver me some precious negative reputation points for this:
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luv2read said:
To the best of my knowledge I have not given anyone "negative" reputation. When I use the rep icon, I get only a green "I approve" button and a blank for a comment, thats why I asked about it on another thread. I've previously stated that I would like to keep my "house" free of politics and the strife and discord that generally accompany it. I've already made my position know...I'm not voting for ANY OF THEM. There is not ONE instance of me stating support for Obama on the MB so your post here is unjustified. I have a lot of respect for your financial acumen and military service and generally enjoy our discussions. This however, is an attack. Your first appearance back on the MB after an absence and you are already stalking me. Please stop.
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Birchtree said:
L2R,

I was actually trying to interest you in doing some reseasrch on this issue. No way following you around. Thanks for the pm.
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Let this be an end to the topic of who did what. Note the times of the 2 posts below. First you post on Corepuncher's thread accusing ChemEng of setting him up as giving you negative reputation and acknowledging that you know only moderators can give negative reputation. Shortly thereafter, you come on my thread and accuse ME of giving you negative reputation, all the while knowing only mods can do so and having already stated that on CP's thread. Please cease and desist these games, and dragging the innocent into them. It's disruptive to the harmony and family atmosphere of the MB, and unworthy of you, Birch.

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