Wednesday, November 21, 2007

Europe Suspends Mortgage Bond Trading Between Banks

WOW! Desperation ? If you don´t like the quotes just shut down the market until things get better...? Credit Crunch at its best.... Mish has more on this topic

But when even the German Pfandbrief market is affected you know that something very serious and maybe irrational is happening. The German Pfandbrief is probably one of the safest bonds out there.

Verband Deutscher Pfandbriefbanken

To guarantee the high standard of safety of Mortgage Pfandbriefe at all times, besides the prudent determination of the mortgage lending value only parts of a loan up to 60% of the mortgage lending value are included in cover. Pfandbrief banks can also provide finance above the 60 % lending limit. However, these parts of the loan must not be funded through Mortgage Pfandbriefe.
And remember we are talking about German real estate that is flat for almost a 10 to 15 years and didn´t have any excess in lending practices etc....... The other states that are issuing covered bonds have a less ( often significantly) "tight" restriction and of course way often very inflated collateral........

Wenn das nicht nach einem leichten Anflug von Verzweiflung klingt Denke die Bezeichnung "Credit Crunch" ist hier keineswegs untertrieben..... Zeitenwende hat mehr zu diesem Thema.

Wenn aber selbst der Deutsche Pfandbriefmarkt betroffen ist dann ist wirklich was teilweise irrationales am laufen. Immerhin handelt es sich bei den Pfandbriefen um die wohl sichersten Papiere die zu bekommen sind. Zudem sind die zugrundeliegenden Sicherheiten im Gegensatz zu anderen Anlageklassen die letzten 10-15 Jahre nicht vom Fleck gekommen. In anderen Ländern sind die Sicherheiten der Covered Bonds nicht so weitreichend wie bei den Pfandbriefen. Zudem müssen diese sich dazu noch mit dem Problemen herumschlagen das die zugrundeliegenden Sicherheiten doch erheblich "infaltioniert" sind....

Verband Deutscher Pfandbriefbanken

Um die hohe Sicherheit der Hypotheken-Pfandbriefe jederzeit zu garantieren, werden zusätzlich zu der vorsichtigen Ermittlung des Beleihungswertes nur Darlehensteile bis zu 60% des Beleihungswertes in Deckung genommen
Europe Suspends Mortgage Bond Trading Between Banks
European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.

The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.


Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded banks pay the highest interest premiums on covered bonds in five years.

``We are in a deteriorating situation,'' Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview.

``A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.''

Sales Pulled
Covered bonds are securities backed by mortgages or loans to public sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings.

``There's a crisis of confidence for everything but AAA government bonds,'' Arnd Stricker, a management board member at Corealcredit AG, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt. ``Covered bonds are being thrown in the same basket'' as mortgage securities, even though they are safer, he said.

> No wonder spreads for financials are at historic levels and libor is rocketing.......

> Kein Wunder das die Risikoaufschläge auf historischen Ständen sind und Libor ein extremes Maß an Skepsis signalisiert....

Abbey National in London said today it postponed its sale of covered bonds because of ``poor'' demand. AIB Mortgage Bank, a unit of Dublin-based Allied Irish Banks Plc, pulled a covered bond sale in euros yesterday and Ahorro y Titulizacion, an investment unit controlled by Spanish savings banks, decided against issuing the debt on Nov. 16.

Spreads Widen
``In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads,'' the committee of banks and borrowers ``recommends that inter-bank market making be suspended,'' the council said in an e-mailed press statement.

The extra yield, or spread, that investors demand to hold covered bonds sold by German banks instead of government debt has climbed to 38 basis points from 23 basis points six weeks ago, according to Merrill Lynch & Co. indexes. The premium is the widest in more than five years.

Some banks agreed to stop providing prices on covered bonds for half a day on Aug. 16 to stem losses from widening spreads, according to Johannes Rudolph, a covered bond analyst at HSBC in Dusseldorf. Today's suspension is the first from the industry association, ECBC's Amat said.

``Conditions have really weakened over recent days,'' said Andreas Denger, a covered bond analyst at Calyon SA in London. ``Most investors are not willing to invest in the current volatile market.''

Pfandbrief `Solidarity'
Trading in Germany's pfandbrief market was also suspended in a sign of ``solidarity,'' said Helga Bender, a spokeswoman for the German Pfandbrief Association VDP's German Market Maker and Issuer Committee. Pfandbrief bonds are a subset of covered bonds with stricter regulations.

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19 Comments:

Blogger jmf said...


Derivatives Grow at Fastest Pace in Nine Years to $516 Trillion

12:52 AM  
Anonymous Worried said...

Trying to understand what is being said here

1. "European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders."

So home lenders. A really big deal.

$2.8 Trillion?? Is that for the whole mortgage market or just covered bonds??


And then

2. "Covered bonds are securities backed by mortgages or loans to public sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings."



So these bonds are only loans made to public sector institutions? like a hospital say?

They are not home loans?

Meanwhile the euro goes stronger. Seems its nothing to be too bothered about??

Or??

1:16 AM  
Anonymous Anonymous said...

Trying to understand what is being said here

1. "European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders."

So home lenders. A really big deal.

$2.8 Trillion?? Is that for the whole mortgage market or just covered bonds??


And then

2. "Covered bonds are securities backed by mortgages or loans to public sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings."



So these bonds are only loans made to public sector institutions? like a hospital say?

They are not home loans?

Meanwhile the euro goes stronger. Seems its nothing to be too bothered about??

Or??

Worried

1:16 AM  
Blogger jmf said...

Moin Anon,

i have updated the post.

The $ 2.8 trillion is only covered bonds.

Usually covered bonds are backed by mortgages (50 percent)and public finance (50 pecent).

Recently there are efforts to introduce covered bonds for ships

It´s the European kind of securitisation.

The German started the thing with the Pfandbrief. Other states adopted the concept.

The rules are not as tight as from the Pfandbrief.

1:34 AM  
Anonymous traderboy said...

in fairness, the market-making in covered bonds always seemed crazy to me, forcing market-makers to provide for, say, 8 hours a day a firm market in a certain size with a ertain bid/offer. it could never last, and this situation was why Citi was able to execute its "Dr Evil" trade a few years back (which I personally thought was a great trade...)

so it sounds to me like the market will still be trading, it's just that the stupid rules around forced market-making will now be dropped.


as a slight aside, its kind of amazing how badly the European banking sector in general is getting hit given that their housing markets haven't even started going down yet...can't even imagine what it'll be like a couple of years from now after all the housing markets have crashed...

1:43 AM  
Blogger jmf said...

Moin Worried,

here another stat...

The European Mortgage Federation (EMF) statistics show that around 17% of the total volume of
residential mortgage loans outstanding in the EU is funded through the issuance of Covered Bonds.

1:51 AM  
Blogger jmf said...

Moin Traderboy,

" its kind of amazing how badly the European banking sector in general is getting hit given that their housing markets haven't even started going down yet"

This is especially true when you look at the German
Commerzbank
with almost no exposure to bubble countries

But overall they have the 10th largest credit book in Europe....

The "disruptions" should be really bad news for British, Spanish and Irish banks.....

2:22 AM  
Blogger jmf said...


Securitisation headaches for UK mortgage lenders


current spread levels make securitsing mortgages an economically painful exercise. Spreads on triple-A prime UK residential mortgage-backed securities have roughly quintupled since June. “We wouldn’t be prepared to pay the prices,” said Ian Stewart, HBOS’s head of securitisation and balance sheet management.....

The point of all this being, that if UK mortgage lenders are saying that they can’t securitise and can’t issue covered bonds, there’s a big problem

2:49 AM  
Anonymous traderboy said...

yet you can still get a 95% LTV mortgage and about libor flat or even libor minus.....i just don't get how that banks/building societies can do that.....

8:34 AM  
Blogger jmf said...

Moin,

probably why deep inside they know they will get a baliout....

10:47 PM  
Anonymous Anonymous said...

So what is actually happening here in Europe at the moment?

There seems no evidence so far of mortgages being turned down and rates going so much higher yet?

These developements seem enormously serious and yet again we had a one cent jump in the euro over night

Worried

11:37 PM  
Blogger jmf said...

Moin Worried,

i agree 100 percent.

I think the € is way overvalued. I´m considering a short position against the NOK

The € is already hurting the economy and profits.

I have listened to several conference calls showing slides over slides how expensive the hedging has become etc.

The next bigger story in the world markets will be the weakening of Europe.

11:48 PM  
Anonymous Anonymous said...

Seems like the slow down has already arrived!

Eur/Nok

did you see those townships up north holding *billions* of USD of stuff i think citibank sold them? And if there is a world wide recession the price of oil will of course fall. And then there is the super pension fund. What have they got in that??

Worried

2:06 AM  
Blogger jmf said...

Moin,

i saw the story. It looks like Citigroup can leave the country.... :-)

The SVF is diversified.

The oil factor was also the first thought myself. I was surprised to see that so far the NOK didn´t trade in symphaty with oil.


EUR/NOK Chart


Maybe its because the oil surplusses are leaving the NOK via the pension fund

Here is an
earlier post
on the fund.

2:22 AM  
Anonymous Anonymous said...

my curiosity got the better of me

what does "moin" mean?

Thanks

Worried

8:25 AM  
Blogger jmf said...

Moin Worried,

it´s just the local term for hello, good morning etc.

No hidden message :-)

9:18 AM  
Anonymous Anonymous said...

Thanks!

I am in Finland at the moment. There seems no local awareness of any kind of banking difficulty here in the countryside. The only thing i have heard is that a bank will not bridge a house purchase before the other is sold. So simultaneous transfers needed or sell first. Rates are 2% higher than last year. Prices flattening. Standard lending appears max ltv 80% with employment. Borrowing is 'easy'.

I have been to a few banks and agents now, people have zero awareness of anything unusual.

There was a terrible banking crisis here in the 1990's when russia defaulted and stopped the 'east trade' so these guys should be sensitive to problems but as i say nobody is aware of any problems so far.

Not sure if we are decoupled from reality or just decoupled:-)

11:08 PM  
Blogger jmf said...

Moin,

"Not sure if we are decoupled from reality or just decoupled:-)"

:-)!

I have visited a friend in Helsinki a few years ago.

As far as i can tell it was a very expansive but beautiful place.

I havn´t heard much about a bubble in Finland. The lending standards you describe sounding tight when you compare it to the rest of Europe. We in Germany have also very tight standards.

I assume the rest will follow us and not like most expected just a few month ago the other way around..... :-)

1:09 AM  
Anonymous Anonymous said...

I'm having difficulty understanding what an Mortgage Bond is. Initially I though it was aimed at the customer, and its purpose was to protect his or hers mortgage, but in your blog it states that its a deal between banks. I'm confused.

6:02 AM  

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