Covered Bonds To Finance First Time Home Buyers Loan

It’s no mystery that the real estate market in the United States is quickly sliding downhill. While the fashionable television financial media are eager to declare that “the worst is behind us” after every negative news story on the topic, the evidence suggests that the conclusion is nowhere in sight. Prices of real estate continue to plummet, foreclosures continue to rise, it remains exceedingly troublesome to get approved for a first time home buyers loan, and the secondary mortgage market continues to hobble along in a terminal state, just scarcely operating.

Amidst all this doom and gloom, the United States Treasury Department is offering a flash of hope by actively promoting the development of a new type of debt called a "covered bond" to raise a new source of money for home mortgage lending. The Treasury Department can't assert credit for creating the procedure, as they are the primary fountainhead of mortgage-loan funding for European banks.

Covered bonds are a form of mortgage-backed security, but are very separate from the derivative-laced speculative packages that fueled the real estate boom that reached its peak in 2006. It was the inclusion of high risk derivatives in those packaged mortgage securities that got many Wall Street banks in this dilemma. They were utterly unregulated (and still are). These exceptionally speculative “investments” were off the balance sheets of financial institutions and were most of the time deliberately confusing. Investors had not only the claim to the mortgage payments but also the double risk of defaults and derivative failure, which turned out to be overbearing.

On the other hand, covered bonds are currently viewed as much safer investments because they're not packaged and sold to a third party but remain on a bank's balance sheet and the buyer of the bonds recieves double protection. First, the bonds are protected by a "cover pool" of high-quality mortgages that have to meet certain financial and regulatory, such as being in good standing. If the mortgages go bad, the bank must proactively take action to warrant bond holders get their interest payments.

Banks favor the notion because it provides a regular and dependable source of funding for making mortgages. The stature of the underlying loans translates into high credit ratings, which results in lower interest expense to borrowers.

Banks seeking money to make home loans also have the orthodox method -- garnering deposits from consumers. This method remains an influential spring of funding for mortgages, but deposits can be expensive to lure and less anchored than bonds sold to massive institutional investors.

Until mid 2007, lending institutions had little trouble obtaining the money to make mortgage loans. Lenders could handily package mortgages into assorted forms of securities, sell those packages and parlay the receipts to underwrite additional loans.

Currently, however, investors have become spooked by rising defaults and the inability to transfer structured financial instruments that contain unreliable derivatives and have absolutely lost conviction in mortgage-backed products originated by Wall Street firms. The sole mortgage securities still in favor with investors are the ones guaranteed by government-sponsored entities like Fannie Mae, Freddie Mac and the Federal Housing Administration.

Treasury Secretary Henry Paulson and other policy regulators discern covered bonds as a way to supply another fountainhead of funding for the housing market. The endeavor is being championed by Mr. Paulson, Federal Reserve Chairman Ben Bernanke, FDIC. Chairwoman Sheila Bair and other financial policy makers, who are mindful that the weak housing market will continue to drag the economy downward.

The Treasury Department is expecting to deliver a manuscript to furnish regulatory precision within the upcoming couple of months. A further hurdle in the U.S. is legal hesitation about the rights of investors in the event that a bank goes under. Under current provisions, the Federal Deposit Insurance Corporation has 90 days in the event of a bank failure to pay off the covered bonds. The reule helps the Federal Deposit Insurance Corporation minimize the cost of dissolving a bank while at the same time creates a holdup for investors as well as some uncertainty. The Federal Deposit Insurance Corporation has come out and proposed a new rule decreasing the time span to ten days. A final rule could be issued as quickly asa couple of months. This is no phase to be procrastinating. The mortgage and housing markets require all the assistance available.