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Can Covered Bonds Resuscitate Residential Mortgage Finance in the United States?
Author:
Jay Surti null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2010: Issue 277
Language:
English
Publication Date:
01 Dec 2010
DOI:
https://doi.org/10.5089/9781455210848.001
ISBN:
9781455210848
ISSN:
1018-5941
Pages:
50
Keywords:
WP; cover pool; covered bond program; bond holder; financial institution; issuer insolvency
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund