This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

A Mortgage Fix That Won't Come Soon

NEW YORK (TheStreet) -- Covered bonds have been heralded, time and again, as a cure for what ails the U.S. mortgage system, but a few things are standing in the way: Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and Sheila Bair.

In a different environment, covered bonds could be a viable alternative to mortgage securitization - whose flaws have been made even more evident of late. But cheap funding alternatives and regulatory pushback have relegated them to the sideline, once again. >>>Earlier Coverage: Once Favored Housing Fix Put on Back Burner

The Treasury Department first began hyping covered bonds in the summer of 2008, just before Fannie and Freddie were taken over. Despite its best attempts to "kickstart" the market, Congress' effort to pass covered-bond legislation, strong investor appetite, cooperation from the financial industry, and a joint pledge from the country's four largest lenders - Bank of America, Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (C) - to become "leading issuers as the U.S. covered bond market develops," there have only been two issues from U.S. banks to-date. They occurred in 2006 and 2007 and one of the issuers no longer exists.

"People thought, 'Gee, this is the start of a new market' and then it never went anywhere," says Sean Davy, who specializes in covered bonds at the Securities Industry and Financial Markets Association (SIFMA).

The reason covered bonds have appeal - particularly now - is that they're quite different from the "originate to sell" model U.S. banks have embraced via mortgage securitization.

Covered-bond investors lend them money at a specified rate, with the assurance that a pool of top-quality mortgages have been "ring fenced" for them in case of insolvency. But the loans haven't been packaged, sold, chopped up and sold; they're kept on the bank's balance sheet. To maintain credit quality, lenders are usually able to swap out loans or change mortgage terms.

Total issuance in the covered bond market for 2010 is $338.5 billion, according to Dealogic.

It's a situation - unusual in this day and age - where mortgages represent piece of mind.

"It would lead to a sounder, safer housing finance system," says longtime banking consultant Bert Ely. "What we're seeing how seriously flawed the securitization process is."

Ely was alluding to the backlash plaguing major mortgage servicers today. Investors are demanding they buyback billions of dollars' worth of souring loans that were originated improperly. There's also the threat of litigation over sloppy foreclosure processes, which has led to confusion over who owns defaulted loans or the underlying property. As central clearinghouses of mortgage debt - originators, wholesale purchasers, sellers, packagers and servicers - big banks are feeling the heat.

1 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,880.36 -31.75 -0.19%
S&P 500 1,970.07 +0.12 0.01%
NASDAQ 4,462.9020 +20.2040 0.45%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs