Monday, July 28, 2008

Covered bonds vs. mortgage-backed securities

That's a gripping title, Spot.

Don't be impertinent, grasshopper; just read the post:

From MarketWatch: Four big banks to kick-start covered bond market:

    Appearing alongside Treasury Secretary Henry Paulson, representatives of the four largest U.S. banks agreed Monday to kick-start a market for covered bonds - an alternative way to provide mortgage loans - in the United States.
    Under the practice, a bank borrows funds to lend to homeowners and holds the mortgages on its books. It uses the proceeds of the mortgages to repay investors.
    Covered bonds are considered more secure than mortgage-backed securities (MBSs) because the purchasers of the bonds have a direct claim on the issuer's balance sheet.

A thump of the tail to Calculated Risk.

This may have some promise, boys and girls It would get the real parties at risk back closer together, and it would certainly encourage the bond issuers to appraise and monitor credit risks more carefully.

It is a little like one of the fictitious advertisers on A Prairie Home Companion: Bob's Bank. Bob wouldn't loan money against collateral that took longer than fifteen minutes to go and visit.

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