A Kinder Gentler Mortgage Backed Security

Covered bonds are a financing tool that has been utilized in Europe since the 18th century. Recently, bankers stateside have begun to use them as an alternate method of financing residential and commercial mortgages .

The instrument in question is not much more than an MBS with the allegedly game changing caveat of having the underlying assets (a.k.a. "cover pool") carried on the issuer's balance sheet.

The idea is that the added transparency will act as a preventative measure against underwriting of risky loans by issuers.

A novel idea to the optimist and another smoke screen to the cynic. Which one are you? For those interested in further explanation of covered bonds, I recommend the PIMCO breakdown for a nice introduction.

As you may suspect, this seems like another attempt to check the pulse of our on-life-support housing market. I am curious to see if anyone has the nerve to admit that it is time to invoke a DNR order ?

As much as I like the notion of greater bond holder protection with regards to mortgage backed securities, I fail to grasp how covered bonds will change the standard modus operandi of the mortgage industry/real estate market/fannie/freddie/fed octopus-hydra.

Here is the allegedly bulletproof logic of Anna T. Pinedo, partner at Morrison & Foerster and covered bond legal expert:

Because of the safety features, most covered bonds are rated triple-A. In the history of the European covered bond market, which began in 1769 when Prussia issued them to finance agricultural projects, there has not been a single default.

Really? Interesting. The next thing we'll be hearing is that we should invest in Egyptian real estate because the Great Pyramid of Giza is a guarantee of that nation's infrastructural integrity. What was AIG's rating pre-Credit Crunch,again?

A few paragraphs later the real truth of the matter is broached by another member of the law firm with perhaps the greatest website name for a law firm:

Banks need alternative methods for financing mortgages. The time is going to come when the housing market is going to recover, and now is the time to get new forms of financing in place.

Aha. So you want to re-inflate the bubble and need a new pump? Is that it?

What if the housing market doesn't recover? What if the price correction that our co-mingled conglomerate of government, banks, mortgage brokers, etc is refusing to allow has to happen in order for a recovery to begin?

Better said, what if reality does have to set in?

Keep your eyes open guys, over the past few weeks and months many more shady events have and will occur. Just remember, as long as the housing market's artificial resurrection is a part of the game plan...a real recovery...can...not...occur.