Rising house will benefit holders of Germany covered bonds than covered bonds issued in other European countries, Moody’s Investors Service said today.

That’s because Germany’s Pfandbrief Act places conservative restrictions on mortgages that are eligible to back the covered bonds. “When house prices increase, the eligible amount of each cover pool asset remains generally constant,” Moody’s said. “A more valuable property backing the same loan amount provides a greater buffer against losses in the event of the borrower’s default.”

Under the act, covered bonds can only be issued up to the value of the total eligible assets in the cover pool. The level of eligible assets is capped at 60% of the value of a property. That compares with thresholds of 75%-80% in other European jurisdictions. By comparison, under many European covered bond laws the level of eligible assets is determined by the current property value, not the property values at the time of origination.

Also, the act does not allow for the upward indexation of the value of the collateral property and only allows updates of the valuation if significant improvements have been made to the property.

As a result of these two rules, house price increases do not inflate the amount of eligible assets, and the covered bonds benefit accordingly through the lower severity of losses, if the underlying borrowers default.

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