An Alternative to Securitization for Funding Mortgages

Covered Bonds: An Alternative to Securitization for Funding Mortgages

Covered bonds are a relatively common method of funding mortgages in Europe, but uncommon in the United States. A covered bond is a recourse debt obligation that is secured by a pool of assets, in this case mortgages. The holders of the bond are given additional protection in the event of the bankruptcy or insolvency of the issuing lender. They have some features, such as pooled mortgages, that resemble securitization, but the original lenders maintain a continuing interest in the performance of the loans. Because some believe that the subprime mortgage turmoil may have been influenced by poor incentives for lenders using the securitization process, some policymakers have recommended covered bonds as an alternative for U.S. mortgage markets......

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