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


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  • Jay Surti


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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/277.

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Length: 50
Date of creation: 01 Dec 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/277

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Postal: International Monetary Fund, Washington, DC USA
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Keywords: United States; bond; bonds; mortgage; bond holders; mortgage loans; mortgages; cash flows; mortgage bonds; residential mortgage; mortgage bond; financial institutions; foreclosure; cash flow; mortgage loan; bond holder; mortgage credit; deposit insurance; mortgage lending; housing finance; financial sector; moral hazard; mortgage default; hedge; interest rate risk; bond market; home equity; mortgage-backed securities; housing finance agency; hedging; mortgage rates; home ownership; mortgage lenders; financial services; mortgage insurance; cash flow risk; bond issuance; foreclosure process; bond payments; financial structure; mortgage bankers; present value; mortgage defaults; mortgage corporation; residential mortgages; mortgage originators; mortgage debt; financial system; bond investors; bond issuer; bond issues; bullet bond; bond return; mortgage pass-through securities; mortgage creditors; home loans; foreclosures; callable bonds; mortgage credits; bond business; mortgage pool; mortgage market; home equity loans; housing finance sector; mortgage finance; discount rate; housing loan; mortgage backed securities; government bonds; bond deal; hedging strategies; future cash flow; liquid asset; mortgage loan portfolios; bond maturity; mortgage portfolios; net present value; bond transactions; mortgage insurer; mortgage principal; credit derivatives; portfolio of mortgage; second mortgages; private mortgage insurer; mortgage bank; mortgage products; home equity loan; mortgage servicing; mortgage obligations; operating cash flows; family mortgage; private mortgage; hedges; first lien mortgage; adjustable rate mortgage; bond issuers; long-term mortgage; bond default; bond markets; commercial mortgages; bond systems; mortgage financing; financial contracts; callable bond; bond indenture; financial markets; financial stability; bonds issuers; credit bonds;

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