Can Covered Bonds Resuscitate Residential Mortgage Finance in the United States?

December 1, 2010

Preview Citation

Format: Chicago

Jay Surti. Can Covered Bonds Resuscitate Residential Mortgage Finance in the United States?, (USA: International Monetary Fund, 2010) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper considers the case for mortgage covered bonds as an alternative to the originate-to-distribute mortgage funding model. It argues that the economic incentives provided to market participants under the covered bonds model are less susceptible to moral hazard even while retaining the key benefits of securitization such as capital market funding and flexibility in risk allocation. Notwithstanding these advantages, however, limited market size and the greater pro-cyclicality of mortgage loan quality in the United States - potentially reflecting borrower incentives under the personal bankruptcy framework - impose limits on the benefits ensuing from this model. The analysis underscores the need for a comprehensive legal-regulatory framework to underpin market development and discusses a number of ways in which the current draft legislation may be further strengthened. A potential strategy to hasten market development within the current institutional framework is identified.

Subject: Bonds, Collateral, Covered bonds, Loans, Mortgages

Keywords: Bond holder, Cover pool, Covered bond program, Financial institution, Issuer insolvency, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/277
Stock No:

WPIEA2010277
ISBN:

9781455210848
ISSN:

1018-5941

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