US to go European covered bonds for mortgages?

[c1ue]

The 2nd note put up by Minyan Peter...

With the rumors swirling on both Fannie (FNM) and Freddie (FRE), I would offer the following thoughts:

The US Government will not explicitly guarantee the [COLOR=blue! important][COLOR=blue! important]debt[/COLOR][/COLOR] of Fannie and Freddie, but rather will either inject capital (super senior preferred stock subordinated debt a la a Continental Illinois style bailout) or provide a “make-whole” guaranty on the assets of both companies (a la an FDIC/RTC style failing bank resolution). The choice of the former suggests a “going concern” for the GSEs, while the latter suggests an orderly wind-down.

In either case there's considerable historical precedence. And either choice implies that the common [COLOR=blue! important][COLOR=blue! important]stock[/COLOR][/COLOR] of both companies is worthless and the preferred stock value is at best uncertain.

If Freddie and Fannie are placed into conservatorship and are wound down (the second choice), I expect that the US mortgage market will move quickly to the covered bond format that is common to the Europe mortgage market.

[c1ue]

Re: US to go European covered bonds for mortgages?

Go Minyan Peter!

You saw it from him first...

http://biz.yahoo.com/rb/080728/usa_financial_bonds.html

The Treasury and the nation's four biggest banks on Monday said they were ready to kick-start a market for a new tool to support home financing in the latest effort to spur a moribund housing market.


The Treasury released a set of "best practices" for institutions that issue so-called covered bonds, and Bank of America (NYSE:BAC - News), Citigroup (NYSE:C - News), JPMorgan Chase (NYSE:JPM - News) and Wells Fargo (NYSE:WFC - News) said they planned to begin issuing them.
"We look forward to being leading issuers as the U.S. covered bond market develops," officials from the four banks said in a joint statement. Covered bonds, issued by banks and secured by pools of assets like home loans, are widely used in Europe but have only become attractive in the United States since the segment of the mortgage securitization market driven by investment banks dried up last year amid a wave of home foreclosures.