Financing Mortgages With Covered Bonds

From Business Week:

If covered bonds catch on, they will magnify the losses the Federal Deposit Insurance Corp. suffers in the case of bank failures, thus exposing taxpayers to the risk of more big bailouts.

To put it bluntly, covered bonds wouldn’t reduce risk as much as transfer it from bond buyers to the U.S. taxpayer. Paulson sees covered bonds as a new funding source for mortgages at a time when investors are backing away from the radioactive mortgage-backed securities market.

If some of the mortgages go bad, the bank must replace them with better ones.

A More Vulnerable FDIC?

FDIC Chairman Sheila C. Bair is aware of the threat of covered bonds to her insurance fund, so she has decided that the FDIC won’t allow covered bonds to exceed 4% of bank liabilities at first. Trouble is, that low ceiling prevents covered bonds from making a meaningful contribution to mortgage availability.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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