Paulson's path could be a perilous one
Treasury secretary Henry Paulson’s plan to revive US mortgage financing depends on investors buying the same kind of bonds they’re shunning in Europe.
By Bloomberg |
LONDON: Treasury secretary Henry Paulson���s plan to revive US mortgage financing depends on investors buying the same kind of bonds they���re shunning in Europe. Paulson wants to create a version of Europe���s market for covered bonds in the US just as sales of the debt have fallen to a six-month low and prices have dropped 2.5% this year.
While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.
The extra yield on covered bonds sold in Europe by Seattle-based Washington Mutual, the biggest US savings and loan, has jumped 13-fold since the sale two years ago to 3.16 percentage points over government notes. The premium for debt of Bank of America, the largest home lender, has quadrupled since June 2007.
���This is absolutely not going to be an instant fix for the US mortgage market if you see how tough it is and how expensive covered-bond funding currently is for established markets in Europe,��� said Florian Hillenbrand, an analyst who follows the securities in Munich for UniCredit SpA, Italy���s largest bank.
Paulson says the $3.3 trillion covered-bond market, which dates back to 18th-century Prussia, is a remedy for the worst housing crash since the Great Depression.
It offers ���new sources of mortgage funding��� that will cut costs for homebuyers, he said at a forum in Washington on July 8. Developing a US market for the securities is the latest of Paulson���s initiatives to revive lending among banks crippled by $452 billion of credit losses and writedowns.
His plan for a ���SuperSIV��� to bail out the $400-billion market for structured investment vehicles failed last year after Wall Street firms rescued the credit funds independently.
While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.
The extra yield on covered bonds sold in Europe by Seattle-based Washington Mutual, the biggest US savings and loan, has jumped 13-fold since the sale two years ago to 3.16 percentage points over government notes. The premium for debt of Bank of America, the largest home lender, has quadrupled since June 2007.
���This is absolutely not going to be an instant fix for the US mortgage market if you see how tough it is and how expensive covered-bond funding currently is for established markets in Europe,��� said Florian Hillenbrand, an analyst who follows the securities in Munich for UniCredit SpA, Italy���s largest bank.
Paulson says the $3.3 trillion covered-bond market, which dates back to 18th-century Prussia, is a remedy for the worst housing crash since the Great Depression.
It offers ���new sources of mortgage funding��� that will cut costs for homebuyers, he said at a forum in Washington on July 8. Developing a US market for the securities is the latest of Paulson���s initiatives to revive lending among banks crippled by $452 billion of credit losses and writedowns.
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His plan for a ���SuperSIV��� to bail out the $400-billion market for structured investment vehicles failed last year after Wall Street firms rescued the credit funds independently.
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