Volatility in the capital markets has pushed industry participants towards safe-haven assets such as covered bonds.
And not only in Europe, where they have a long history, or the U.S., where they’re the bright new things. They’re making friends in emerging markets as well. Turkey completed its first covered bond transaction around two months ago, while Latin America is ripe with talk of this new instrument.
As usual, the region’s heavyweights Brazil and Mexico are capturing the most attention as the next potential platforms for covered bonds.
For this month’s cover story, Felipe Ossa reports that Brazil holds the most promise in terms of growth in this sector given that the country’s savings deposits cannot keep up as a source of mortgage financing.
Indeed, valid funding alternatives need to be found soon. However, as Felipe points out Brazilian authorities need to be won over before a market for these securities can be made.
Meanwhile, in the U.S., the markets are still being riled up by the recent S&P downgrade of U.S. sovereign debt. One asset class in particular — FFELP ABS — is feeling the brunt of it. Even though S&P on Aug. 30 affirmed the ratings of 239 classes from 178 FFELP-backed deals, it still said that, pending completion of its review, the firm expects to lower some of its 984'AAA' ratings on these securities. As John Hintze explains in his story, this means that institutional investors are still holding their breath while awaiting the fate of most of the
It's also been raining law suits on the ABS landscape. The Bank of America saga continues as objections keep mounting against the bank's proposed $8.5 billion settlement with 22 Countrywide MBS investors. Nora Colomer notes in her story that if the settlement doesn't get court approval and BofA goes back to the negotiating table, the bank's expenses will just pile higher and higher.
BofA's problems are just the tip of the iceberg for a nation caught in the midst of a massive housing crisis. In his column this month, Bill Berliner describes the nation's mortgage market as one that is "entangled in a seemingly intractable web of investigations, negotiations and unimplemented regulations." He blames this on what he calls "the counterproductive and destructive role" that the U.S. government has played in this crisis.
An important short-term goal, Berliner says, is to make headway against the huge backlog of nonperforming loans. He adds that a successful initiative to solve the housing crisis requires government officials to look closely at the operational and legal constraints of the different parties in the mortgage process, specifically servicers.
The securitization industry continues to look for solutions to these gargantuan problems.
Just last week, as part of the ASF’s ongoing efforts to better align the interests of RMBS participants and address the issue of risk retention, the trade group came out with some guidelines for RMBS repurchases. The trade group is recommending, according to a story by Poonkulali Thangavelu, that pooling and servicing agreements include a provision for an independent reviewer as an enforcement mechanism for the reps and warranties related to mortgage loans. ASF Executive Director Tom Deutsch hopes that through this mechanism “enforcement happens quicker, faster, stronger…and reduces litigation costs [on RMBS].”
Let's hope that the ASF solution works, as MBS-related cases have been keeping the courts far too busy lately.