Frankly, I’m tired of covering the credit crisis in the mortgage market. It was supposed to be over by now, and I wish it was. Personally, I’m ready for stability in home prices and a return to a normal market. (Yes, that’s true, even though the crisis does provide a lot to write about.) But, unfortunately, the poor underwriting standards that got us into this mess still have some time to play out. Analysts say the “peak” month for subprime loan resets isn’t until October. And it’s not just subprime loans that are troubled. Higher quality 100% LTV loans and interest-only loans are also going bad. And that doesn’t even count the “normal” increase in defaults and foreclosures that occur when the economy turns down.
Covered bonds are the U.S. Treasury’s latest proposal to help out the market. The bonds are supposed to be a “best of both worlds” type of approach. Banks can sell them to move the interest rate and prepayment risk off their books, but keep the credit risk. Since they have that risk, they should make sure they underwrite only loans that have a good chance of being repaid, unlike when they securitize them and dump the risk on the investor.
But investors seem to have little appetite for any type of mortgage loan now, and covered bonds are unlikely to help the current situation. As Treasury Secretary Henry Paulson says, “there is no silver bullet” that will get us out of this mess. I wish there were.
Comments
Henry Paulson says, “there is no silver bullet” that will get us out of this mess; that may or may not be true. With the new 'bail-out bill' however, it seems that the government will be firing blanks, with a blindfold on, at a moving target. Actually, those blanks are the tax dollars of hard working Americans that will be ineffectually sent off in the direction of the bureaucrats and bankers. The chance of actually doing much long term good with this scheme doesn't seem great to me; but then, perhaps this band-aid approach is all we're ever going to get as long as Americans continue to believe that the cure will be worse than just treating the symptoms.