Post by Sapphire Capital on Jul 29, 2008 2:25:21 GMT 4
July 28 (Bloomberg) -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. threw their support behind Treasury Secretary Henry Paulson's effort to spur covered bonds as a new source of mortgage financing.
``We look forward to being leading issuers as the U.S. covered bond market develops,'' the banks said in a joint statement in Washington. They applauded Paulson's release today of guidelines for issuers of covered bonds, which detail the types of loans that should go into the securities and how their payments ought to be made.
The banks stopped short of announcing specific plans for issuing the bonds, illustrating how the market may be slow to take off in the U.S. in the aftermath of the mortgage meltdown. Even in Europe, where covered bonds are a market in excess of $3 trillion, investors are shunning the debt amid a collapse in appetite for investments in housing.
``Mortgage-backed securities investors are not in the mood right now to buy bonds with anything less than government backing,'' Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in an interview, referring to debt guaranteed by Fannie Mae and Freddie Mac.
While the market is ``not yet'' ready for covered bonds, ``the concept is certainly more interesting now than it has been in a very long time,'' he said.
`Ready to Go'
Paulson said the four U.S. banks are ``ready to go'' and that sales by the largest banks can help encourage smaller mortgage lenders to proceed. ``Covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions,'' he said.
Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.
The Treasury's guidelines exclude riskier types of mortgages that contributed to the crisis of the past year, including loans made without documenting the borrower's income and those involving higher debt compared with property value.
Bank of America, based in Charlotte, North Carolina, and Seattle-based Washington Mutual Inc. are the two U.S. issuers of covered bonds so far.
Take Time
``We will look to amend our program to make sure it's fully compliant'' with the guidelines, Paul Baalman, a structured finance executive at Bank of America, told reporters at the Treasury in Washington today. He declined to comment on when the bank may next sell the bonds, adding that it will take some time to adapt to the new regulations.
Shannon Bell, a Citigroup spokeswoman, and Melissa Murray, a Wells Fargo spokeswoman, declined to comment beyond the statement. Joseph Evangelisti, a JPMorgan spokesman, didn't return a call for comment.
Paulson said covered bonds will help provide financing to a U.S. mortgage market that now depends on Fannie Mae and Freddie Mac and other government-linked institutions for more than 70 percent of funds.
Fannie and Freddie slid to their lowest levels in more than 17 years this month on concern they lacked sufficient capital to offset losses and writedowns. Fannie Mae and Freddie Mac buy mortgages and package them into securities sold to other investors. They also borrow to invest in home-loan debt.
Higher Ratings
Covered bonds achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.
While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.
The Treasury's guidelines spell out a formal definition for covered bonds. The bonds should have maturities of at least one year and no more than 30 years. Home loans in covered-bond pools would have a maximum loan-to-value ratio of 80 percent.
Today's announcement is part of Paulson's strategy of pushing banks to proceed with sales without waiting for legislation to be enacted by Congress. In Europe, which has a covered-bond market of more than $3 trillion, many countries have laws spelling out the ground-rules for issuance.
Collateral at Fed
Federal Reserve Governor Kevin Warsh backed Paulson's plan to support covered bonds, highlighting that the central bank would accept them as collateral at the discount window for direct loans to commercial banks.
``Highly rated, high-quality covered bonds would generally fall within that broad range as eligible collateral,'' Warsh said in a statement.
The Federal Deposit Insurance Corp. already has issued new regulations on how covered bonds would be handled in the event of a bank failure. FDIC Chairman Sheila Bair said Paulson's best practices augment the FDIC's efforts to lay out clear guidance for the industry.
``Covered bonds can be a useful tool to help restore confidence and stability to the housing industry, as well as to the mortgage finance system,'' Bair said today.
The success of Paulson's strategy of pursuing issuance without legislation depends on how well the guidelines prove to have been written, said former FDIC general counsel John Douglas, now with the law firm Paul Hastings in Atlanta.
`Plenty of Comfort'
``Certainly a law is better than a regulation, but regulation seems to be plenty of comfort in a lot of areas,'' Douglas said. ``The real issue is if it's substantive enough for the market, not the form in which it comes.''
Treasury officials held discussions with almost 60 market participants, including investors such as Pacific Investment Management Co., Blackrock Inc. and TIAA-CREF, the retirement annuity provider.
In Britain, Prime Minister Gordon Brown's government this year put in place legislation on covered bonds, joining Germany, France and Spain among European countries setting rules on how the securities are issued.
``It needs a very strict and very clear legislation. Otherwise I don't think the investors will buy it,'' said Louis Hagen, executive director of the Berlin-based Association of German Pfandbrief Banks. Covered bonds are known as pfandbrief in Germany.
Europe's covered market was started by King Frederick the Great of Prussia in the 18th century to help rebuild after the Seven Years War, according to the Web site of the German association of pfandbrief banks. Rules for the securities differ by country, including the amount of capital required to back the bonds.
``We look forward to being leading issuers as the U.S. covered bond market develops,'' the banks said in a joint statement in Washington. They applauded Paulson's release today of guidelines for issuers of covered bonds, which detail the types of loans that should go into the securities and how their payments ought to be made.
The banks stopped short of announcing specific plans for issuing the bonds, illustrating how the market may be slow to take off in the U.S. in the aftermath of the mortgage meltdown. Even in Europe, where covered bonds are a market in excess of $3 trillion, investors are shunning the debt amid a collapse in appetite for investments in housing.
``Mortgage-backed securities investors are not in the mood right now to buy bonds with anything less than government backing,'' Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in an interview, referring to debt guaranteed by Fannie Mae and Freddie Mac.
While the market is ``not yet'' ready for covered bonds, ``the concept is certainly more interesting now than it has been in a very long time,'' he said.
`Ready to Go'
Paulson said the four U.S. banks are ``ready to go'' and that sales by the largest banks can help encourage smaller mortgage lenders to proceed. ``Covered bonds have the potential to increase mortgage financing, improve underwriting standards and strengthen U.S. financial institutions,'' he said.
Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay.
The Treasury's guidelines exclude riskier types of mortgages that contributed to the crisis of the past year, including loans made without documenting the borrower's income and those involving higher debt compared with property value.
Bank of America, based in Charlotte, North Carolina, and Seattle-based Washington Mutual Inc. are the two U.S. issuers of covered bonds so far.
Take Time
``We will look to amend our program to make sure it's fully compliant'' with the guidelines, Paul Baalman, a structured finance executive at Bank of America, told reporters at the Treasury in Washington today. He declined to comment on when the bank may next sell the bonds, adding that it will take some time to adapt to the new regulations.
Shannon Bell, a Citigroup spokeswoman, and Melissa Murray, a Wells Fargo spokeswoman, declined to comment beyond the statement. Joseph Evangelisti, a JPMorgan spokesman, didn't return a call for comment.
Paulson said covered bonds will help provide financing to a U.S. mortgage market that now depends on Fannie Mae and Freddie Mac and other government-linked institutions for more than 70 percent of funds.
Fannie and Freddie slid to their lowest levels in more than 17 years this month on concern they lacked sufficient capital to offset losses and writedowns. Fannie Mae and Freddie Mac buy mortgages and package them into securities sold to other investors. They also borrow to invest in home-loan debt.
Higher Ratings
Covered bonds achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.
While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.
The Treasury's guidelines spell out a formal definition for covered bonds. The bonds should have maturities of at least one year and no more than 30 years. Home loans in covered-bond pools would have a maximum loan-to-value ratio of 80 percent.
Today's announcement is part of Paulson's strategy of pushing banks to proceed with sales without waiting for legislation to be enacted by Congress. In Europe, which has a covered-bond market of more than $3 trillion, many countries have laws spelling out the ground-rules for issuance.
Collateral at Fed
Federal Reserve Governor Kevin Warsh backed Paulson's plan to support covered bonds, highlighting that the central bank would accept them as collateral at the discount window for direct loans to commercial banks.
``Highly rated, high-quality covered bonds would generally fall within that broad range as eligible collateral,'' Warsh said in a statement.
The Federal Deposit Insurance Corp. already has issued new regulations on how covered bonds would be handled in the event of a bank failure. FDIC Chairman Sheila Bair said Paulson's best practices augment the FDIC's efforts to lay out clear guidance for the industry.
``Covered bonds can be a useful tool to help restore confidence and stability to the housing industry, as well as to the mortgage finance system,'' Bair said today.
The success of Paulson's strategy of pursuing issuance without legislation depends on how well the guidelines prove to have been written, said former FDIC general counsel John Douglas, now with the law firm Paul Hastings in Atlanta.
`Plenty of Comfort'
``Certainly a law is better than a regulation, but regulation seems to be plenty of comfort in a lot of areas,'' Douglas said. ``The real issue is if it's substantive enough for the market, not the form in which it comes.''
Treasury officials held discussions with almost 60 market participants, including investors such as Pacific Investment Management Co., Blackrock Inc. and TIAA-CREF, the retirement annuity provider.
In Britain, Prime Minister Gordon Brown's government this year put in place legislation on covered bonds, joining Germany, France and Spain among European countries setting rules on how the securities are issued.
``It needs a very strict and very clear legislation. Otherwise I don't think the investors will buy it,'' said Louis Hagen, executive director of the Berlin-based Association of German Pfandbrief Banks. Covered bonds are known as pfandbrief in Germany.
Europe's covered market was started by King Frederick the Great of Prussia in the 18th century to help rebuild after the Seven Years War, according to the Web site of the German association of pfandbrief banks. Rules for the securities differ by country, including the amount of capital required to back the bonds.