Will Covered Bonds Help the Mortgage Market?
One of the many solutions being put into play to help the mortgage market is the encouraged issuance of covered bonds. Covered bonds, issued to large banks, are supposed to add liquidity to the credit market, and help make it easier for mortgage lending to take place. Treasury Secretary Henry Paulson considers covered bonds essential to his plans to ease the mortgage market crisis.
What are covered bonds?
Covered bonds are mortgage back securities that stay on banks’ balance sheets (rather than being moved off, like their riskier cousins). The bonds use a pool of higher quality mortgages as collateral. The mortgages in the pool are often those that are made to people who can afford them. They are often prime mortgages on which regular payments are being made. Another feature of covered bonds is that the issuer must cover losses if the mortgage borrower defaults.
Investing in covered bonds
Covered bonds are not likely to offer huge returns, but they are considered somewhat “safe” (although no investment is really safe). Here is what Felix Salmon says about covered bonds on Portfolio.com:
And as it happens, covered bonds tend to be very safe things. What’s more, because they’re collateralized, a bank failure doesn’t necessarily imply that there’s going to be a taxpayer-financed bailout of covered bonds as well as senior unsecured debt, since the bondholders should be able to rely on their collateral.
Adding another layer of protection is the fact that the government is encouraging and enabling covered bonds from large institutions — institutions like Bank of America and Citi that are often thought of as too big to be allowed to fail, similar to Bear Stearns. The assumption is that the government would arrange a bailout like what it arranged for Bear Stearns should things go further south.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.
Tags: covered bonds, mortgage market, investing blog, mortgage market crisis,
economy, investments, Henry Paulson
