I think Paulson believes that CBs will absorb some of the loans away from F&F. It will encourage banks to finance the loans themselves instead of continuing to sell to F&F. It could also fund loans that F&F won’t take if standards continue to tighten.

Covered bonds work differently then MBS. They have structural features that makes the default of interest and principal remote even if the bank goes bankrupt. I’ve commented about this before on another post, but let me know if you want more details.

The all-in cost for CB’s will need to fall somewhere between F&F and FHLB for banks to make it work. It will effectively replace MBS, but with tighter standards, more collateral restrictions and better default protections.

“why would consumers want to get these middle-tier loans”

Why did consumers fall for the subprime and Alt A loans? Arguably, those interest rates were higher than conforming, yet I know…still low by historical standards.

Perhaps Paulson will tell us that the free market will drive prices (rates?) down with competition in the “covered bond” market.

What would this middle tier be? It would be loans to people with poorer credit and financial situations than the plain-vanilla GSE variety? If this is the case, I just can’t see why any investor would want to put their money in them unless they were being compensated with a significantly higher interest rate than GSE loans.

And why would consumers want to get these middle-tier loans if they had such high interest rates?

Here’s our future: Subprime quality deals will be directed towards the FHA insurance program.

The GSE’s (Fannie and Freddie) will accept only the cream puff conforming loans. Good credit, equity/downpayment.

Paulson’s looking for a place for all the middle tier loans.

Covered bonds means the banks will have to take some liability for the product originated at the retail level. What we can expect from this product line is much higher interest rates to better match the risk, and tight underwriting guidelines, since the banks are now extremely risk-averse, and will be for many, many years into the future.

Hard money is a growth area for buyers and refinancing homeowners who can’t fit into any of these three boxes.

We should expect the government to continue to try to mess with the free market by coming up with creative solutions like FHA Secure and HopeNow which will help some but not all. Some of these homeowners will lose their homes and re-enter the housing market as renters.

Let’s just hope the government doesn’t kill FHA by loading it with too many homeowners who will eventually re-default. The unintentional consequences of this are too great for me to handle. I’d rather stay in denial on this for just a few more hours before I lash out at the idiots trying to revive the downpayment assistance fraud.

“pls let sniglet know I have an answer re covered bonds but I’m teaching until 1 and will post a reply later”.

The more I ponder this, the more I wonder just what it is that today’s policy makers are really trying to accomplish by re-starting the private mortgage securities market? If we return to the “old” days, when nearly all loans were of a GSE conforming variety (as Jillayne illustrates), then how will that have helped re-inflate the real-estate market?

Is the real objective here to create investor demand for NON conforming loans? If so, I don’t see why this would necessarily be a good thing. The last thing we need is to encourage people with dodgy credit or inadequate financial resources to buy homes.

I just don’t understand what the goal is in Paulson’s efforts to get private mortgage financing going (e.g. covered bonds, etc). Why would any investor worth their salt would ever want to buy a private mortgage security that met the same criterion as the conforming GSE variety unless they were getting a higher interest rate (i.e. because there is no government guarantee)? What consumer would be willing to take such a private mortgage with higher than GSE rates if they still had to meet the exact same qualifications?

In other words, if the only mortgages made are going to meet GSE guidelines, then there is NO logical reason for private financing to exist.

I’ve been cleaning up my home office and just found a rate sheet from First Franklin dated October 2, 2006:

100% Financing (1 mortgage) 30 Yr Fxd (3 year prepay):

Full Doc
700 or better credit: 8.3%
620-629 credit: 9.3%
580-589: 10.95

Stated Income/No Income Ver.
700 or better: 8.9%
640: 9.55%
(640 is the lowest on this rate sheet for this product. With 10% down, a 600 credit score could state income w/a rate of 9.45%).

They used to charge money up front for B and C paper in case of default, so they had more of a cushion between high interest rates and up front costs..

Aren’t the rates on Sub-Prime much higher because there is “risk” involved? If no one defaulted, the high rates wouldn’t have been warranted. So why would the lenders be surprised that the high risk loans didn’t work out? Isn’t that what “high risk” means?