No Appetite for Securitization Leaves the US Covered

The recent conversations I’ve been having around the proposed covered bond act (read HousingWire magazine for the inside scoop) are pointing to two major concerns: the legal framework and the assets involved. The legislation, of course, is meant to clear some of the hurdles to the first concern. Yet, after reading the proposed bill, I was taken by the sheer asset variety available: student loans, credit cards, autos and more. First structured in Europe in the late 1700s, covered bonds are typically collateralized by mortgages or loans linked to municipals, as the strength of the issuer is considered stronger than in corporates. But with the new bill, the European method is taking on a decidedly American form, one that is filled with options. So here’s the conflict: is the offering of so many types of assets meant to provide an alternative to securitization, which in the past was used to finance the origination of loans in these areas? This makes some sense as securitization is no longer as cheap to structure and the assets cannot be moved readily off-balance sheet. Covered bonds, with its dual recourse and on-balance sheet structures, are also pricey to maintain. But traditionally, covered bonds spoke more to the sovereign wealth investor, not the private ABS investor, with ratings pegged to the issuer. But with the timing and market in consideration (after all, we are still waiting for the new private label RMBS), is the covered bond act telling us that mortgages are no longer the best-structured finance investment out there? The mere consideration of alternatives suggests this is true. But think about it. With Americans walking away (or thinking about it) from their mortgages and showing a preference to paying their auto notes and credit cards, is the oldest structured finance vehicle in Europe, looking for launch in America, providing us the ultimate sign of the times? According to a report from lawfirm Patton Boggs, investors are looking for some sort of incentive, and could use some convincing. “Investors provide the capital that make securitization markets work yet the lessons learned over the last three years demand greater transparency and empowerment of investors for them to be comfortable buying mortgage products in the future,” said Micah Green, a partner at the lawfirm. So if it’s a question of investor confidence, we need to ask if investors will no longer accept investing in mortgages, if the issuer itself doesn’t backstop the losses. Because, they may not, if given the option not to.