Amerisave at the world mortgage market
Since the financial crisis, covered bonds, traditionally European instrument, became in high demand all over the world. For example, in the United States since 2010 developed a special legal framework and in Canada since the beginning of 2011 mortgage-backed bonds (covered bonds) are issued by $ 5.5 billion (representing more than a quarter of total output in 2010). The Treasury of Australia in December 2010 announced the upcoming changes in the law to create an active market of covered bonds, and the Reserve Bank of New Zealand even limited edition of covered bonds to 10% balance of banks to ensure controlled growth and to avoid crowding out other long-term funding with this tool. And, of course, the issue of covered bonds became more active in many countries in Europe and Asia.
Because of the different traditions in approaches to financing, we can expect preservation and co-existence of these alternatives at financial markets for further.
According to Amerisave mortgages review, the main difference of traditional "American" securitization MBS and covered bonds is in three aspects:
1) for a typical transaction MBS pool of loans is sold (in financial reporting in accordance with US GAAP uses the term “true sale”). When issuing covered bonds, the pool of assets remains on the balance of the sponsor;
2) the structure of the covered pool for covered bonds is dynamic, that is, the "bad" loans and loans with early repayment are replaced by new loans or other permitted types of assets. Securitization through MBS pool of assets is static and can not be changed until maturity;
3) covered bonds give investors the right of recourse to the balance sheet of the issuer if the market value of the collateral is insufficient to pay investors the principal and interest payments. Investors in MBS, as a rule, have no such right.
In connection with the foregoing, it is clear that the credit quality and credit ratings of MBS and covered bonds have significant differences.
Under the conditions of market stress, covered bonds have higher liquidity, as the securitization is less transparent and more speculative instrument, limiting investor demand in adverse conditions, in terms of increased credit spreads.
Given the advantages of covered bonds and relatively restrained today appetite to risk, why are financial products of standard pass-through mechanism continue to occupy a significant place among the instruments of long-term funding?
Securitization and mortgage bonds correspond to different investment objectives and appetite for risk, and thus, both models have a right to exist.