BANKING, MORTGAGE, LENDER/SERVICER & RELATED INDUSTRY PARTICIPANTS

Mortgage Loan Securitization

USCoveredBondCouncil™

Relatively new to the United States, Covered Bonds have been used extensively throughout the world. On July 28, 2008, Treasury Paulson, the FDIC, and 4 major banks, announced their support to create a “covered bond” market that would help create liquidity. For more information visit: www.procouncil.com/Covered_Bond_Joint_PressRelease_FINAL__7_25_08__9a__3___2__1_.pdf

Treasury_Best_Practices_for_Residential_Covered_Bonds
Covered Bond Joint_PressRelease
TREASURY best practices covered bond FACT_SHEET
TREASURY_bestpractices_PR_Covered_Bonds_28JUL08

Commentary: Covered bonds are mortgage debt that remains on the balance sheet of the issuer (bank or special purpose entity). Covered bonds should attract more investment monies as they provide the investor dual recourse from the “cover pool” and the “issuer.” Also, interest (money flow) is paid from an identifiable projected cash flow, not just out of financing operations. Since, non-performing or prepaid loans must be replaced, the pool is always performing. Unlike the securitization method which is designed to transfer and shield credit risk, prepayment risks, great contractual, regulatory and governmental restrictions (Pooling & Servicing Agreement, IRC 860, Rev. Proc. 2008-28, Financial Accounting Standards Board Statement 140 (FAS 140), Financial Accounting Standards Board Statement 114 (FAS 114) (v. FAS 5, etc.), etc. are placed on the ability of the “securitization vehicle” (Trust/Conduit/REMIC, etc.) to replace or effectively modify mortgage loans. The new law, H.R. 3221: Housing and Economic Recovery Act of 2008, imposes a duty on servicers to maximize net present value for the securitization vehicle (investors’ interests). Moreover, although the new U.S. covered bond device is a critical part of the overall solution, private label securitization and/or new credit enhancement products must return or be introduced into the market for the real estate market to recover. The U.S. Treasury reports that during the 2005 to 2007HI private label securitization exceeded or was equal to funding by GSE (MBS). During such periods FHA remained fairly constant and insignificant. Balance Sheet Lending was about the same as the GSE (MBS) and private label securitization until 2007H2 and 2008Q1, where it decreased significantly. But private label securitization fell significantly in 2007H2 and almost ceased to exist by 2008Q1. This is the problem. Private label securitization or the liquidity that it supplied the mortgage finance industry has all but dried up. Investors are not willing to put money into the securitization vehicles as it exists today for fear that they will lose their money with little or no recourse. During 2005, 2006 and 2007H1, private label securitization exceeded $1 Trillion ($1.2T). Now it is almost non existent. Additionally, the new law, H.R. 3221: Housing and Economic Recovery Act of 2008, addresses this problem and supports as public policy increased securitization as follows: (1) securitization of mortgages by the enterprises (GSEs) plays an important role in providing liquidity to the U.S. housing markets; and (2) Congress encourages them to securitize mortgages acquired under the increased conforming loan limits established by this Act. Therefore, Covered Bonds will help add some important portion of needed liquidity (funds to loan borrowers), but the market desperately needs the return of securitization, both for agency (government sponsored entities (GSEs) such as Freddie Mac and Fannie Mae), non-agency paper (or private-label securitization loan funding), and overall new creative sources of mortgage funding and external and internal credit enhancements, including Covered Bonds (www.uscoveredbondcouncil.com).

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