Mortgage bond and MBS market development in Germany.Funding mortgage loans through Pfandbriefe is constrained by a conservative loan-to-value limit of 60%. Therefore, there is an increasing need for MBS See Mb/sec. MBS - mobile broadband services , particularly synthetic transaction. However, MBS are still subject to 100% risk weighting. The international reforms, through the Basel Accord Basel Accord Agreement concluded among country representatives in 1988 in Switzerland to develop standardized risk-based capital requirements for banks across countries. among other things, will affect German banks more than in any other European country because they will force them to change their less-stringent capital reserve requirements Reserve Requirements Requirements regarding the amount of funds that banks must hold in reserve against deposits made by their customers. This money must be in the bank's vaults or at the closest Federal Reserve Bank. , which now give them a competitive advantage in pricing loans and holding them on their books. Furthermore, Landesbanks, the state-owned German banks required to lend on property law, enjoy "AAA AAA: see American Automobile Association. (Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied. " ratings because they are state supported. This gives them a funding advantage that has been recently challenged by the European Banking Federation The European Banking Federation (abbreviated EBF or FBE in French) is an organization of the European banking sector, representing interest of over 5000 European banks in 31 countries with combined assets of over 20,000 billion Euro and around 2.3 million employees. to the European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the European Community . I. RESIDENTIAL PROPERTY MARKET STRUCTURE The German property market has historically been stable and conservative: * A relatively stable interest rate environment has led to a large proportion of fixed-interest mortgages with long maturities. The interest is mainly fixed for between five and ten years. However, high penalties make an early conversion of the loans in time of falling interest rates economically unattractive. * Lenders are generally conservative in their lending policy. As a rule, borrowers are expected to have a minimum equity cushion of about 20% of the value of the property. Down payment is typically 35 to 40%. The main mortgage lenders are the savings banks savings bank, financial institution that, until recently, performed only the following functions: receiving savings deposits of individuals, investing them, and providing a modest return to its depositors in the form of interest. and private mortgage banks with a share of around 25% each. With a market share of about 15% cooperative banks Cooperative bank may refer to:
The mortgage banks are strongly specialized as a consequence of legal restrictions and mainly integrated within the scope of the major universal banks where they act as subsidiaries. These mortgage banks can only refinance Refinance 1. When a business or person revises their payment schedule for repaying debt. 2. Replacing an older loan with a new loan offering better terms. Notes: When a business refinances they typically extend the maturity date. a maximum of 60% of the mortgageable value through Pfandbriefe. The amount over and above this 60% cannot be included in the collateral for Pfandbriefe and must be refinanced elsewhere, creating an opportunity for MBS. Some characteristics of the German housing market can be highlighted. First, the level of home ownership has always been very low in Germany--40%, with 42% in Western Germany The geographic term Western Germany (German: Westdeutschland) is used to describe a region in the west of Germany. The exact area defined by the term is not constant, but it usually includes North Rhine-Westphalia and Hesse, the and 31% in Eastern Germany Eastern Germany refers to:
In the traditional model category, there is a mix of the depository The place where a deposit is placed and kept, e.g., a bank, savings and loan institution, credit union, or trust company. A place where something is deposited or stored as for safekeeping or convenience, e.g., a safety deposit box. system (savings banks, cooperative banks) and of the mortgage bank system (mortgage banks). In the modern model category, the direct sale system is predominant. II. SPECIALIZED FUNDING VEHICLES A. Mortgage Bonds--Pfandbriefe The German Pfandbrief market is the largest non-state segment in the European bond market with a volume outstanding of over EUR EUR In currencies, this is the abbreviation for the Euro. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. 1 tn at the end of 1999. Public Pfandbriefe account for around 80% of the volume outstanding, the rest being Mortgage Pfandbriefe. 1. Types of mortgage bonds Traditional Pfandbriefe The bonds are usually with fixed interest rates and with maturities of 1 to 10 years (although the medium term maturities of 5 to 7 years predominate). On average the size of a classical Pfandbrief is some EUR 150 mn. Traditional Pfandbriefe are offered for sale in the open market in the form of tap issues. Within one issue, individual series are set up, the issuing price of which varies depending on the capital market rate applicable at the time of issue. This type of mortgage bond is flexible and can thus be tailored to investors' specific needs. Jumbo Pfandbriefe In order to be considered as a Jumbo, the issue volume has to be at least of EUR 500 mn. Other conditions need to be met: a) only fixed-interest, bullet instruments with annual interest payable in arrears Adv. 1. in arrears - in debt; "he fell behind with his mortgage payments"; "a month behind in the rent"; "a company that has been run behindhand for years"; "in arrears with their utility bills" behindhand, behind (so-called straight-bond format); b) at least three market makers, two rates with a spread of a maximum of 5 to 10 pfennigs; c) standardization (which makes for transparency) of the Pfandbrief global certificate, the Pfandbrief terms and conditions and other documentation. The jumbo Pfandbrief market currently consists of over 280 Pfandbriefe with a maturity of up to 14 years and a combined volume of over EUR 325 bn. Here the Public Pfandbrief, which is covered by state loans is dominant. Recently however, Jumbo Mortgage In the United States, a jumbo mortgage is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. This standard is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac. Pfandbriefe have increasingly been issued too. For example, in 1999 a Global Mortgage Pfandbriefe in the amount of EUR 2 bn was launched. The successful placing of new issues with international investors, the listing of jumbo Pfandbriefe in various international bond market indices Commonly used bond indices include: Global
 This article or section is in need of attention from an expert on the subject.Please help recruit one or [ improve this article] yourself. See the talk page for details. system EuroCreditMTS, which brings the jumbos involved closer to the liquid government bonds, reflects the success of this new instrument. Jumbo Pfandbriefe are placed through issuing syndicates consisting of national, and to an everincreasing extent, international banks. To guarantee the liquidity of Jumbo Pfandbriefe at all times, at least three syndicate banks Syndicate Bank, established in 1925 in Udupi (in Karnataka, India) by Upendra Ananth Pai, Vaman Kudva and Dr. T. M. A. Pai, is one of the oldest and major commercial banks of India. must act as market-makers for each issue. There is apparently a trend towards larger issue volumes (EUR 2 bn or more). As a result of the EMU emu or emeu (both: ē`my  ), common name for a large, flightless bird of Australia, related to the cassowary and the ostrich. convergence process, the remaining
yield difference between government bonds of the EMU countries have
settled on a low level and jumbo Pfandbriefe might benefit from an
increase in the demand for spread product. In this new environment, this
new security is becoming a European benchmark in view of its high
rating, liquidity, homogeneity HomogeneityThe degree to which items are similar. , and rising international investors' market acceptance. One can thus assess Jumbo Pfandbriefe as liquid and transparent, but not very flexible, instruments. Structured Pfandbriefe These bonds range from simple step-up bonds Step-up Bond A bond that pays an initial coupon rate for the first period, and then a higher coupon rate for the following periods. Notes: In other words, the coupon "steps up". or callable bonds Callable Bond A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a "redeemable bond". Notes: The main cause of a call is a decline in interest rates. to highly complex structures. They can be tailored to specific risk-yield profiles. Although these instruments are flexible, they are illiquid Illiquid An asset or security that cannot be converted into cash very quickly (or near prevailing market prices). Notes: A house is a good example of an illiquid asset. See also: Cash, Liquidity Illiquid In the context of finance. and are therefore of interest to buy-and-hold investors. International investors show great interest in such structured products. 2. Issuers 45 credit institutions are allowed to issue Pfandbriefe. 23 are private mortgage banks whose lending operations are limited essentially to mortgage loans and public-sector loans. In addition to these "pure" mortgage banks, there are also two "mixed" mortgage banks. The latter are also licensed to engage in universal banking operations. The remaining are 19 credit institutions from the public sector (among others, 12 Landesbanken) and two private ship mortgage banks. 33 amid the authorized institutions are present in the jumbo market. The five most active issuing banks Issuing bank Bank that issues a letter of credit. account for a combined market share of around 50%. Those are Depfa, AHB AHB Advanced High-performance Bus AHB Assault Helicopter Battalion AHB Air Historical Branch AHB Attack Helicopter Battalion AHB Automatic Half Barriers AHB Aussie Home Brewers AHB Active Hyper Bass , Hypo Essen, Dt. Hypo H/F and Rheinhyp. 3. Investors Credit institutions (banks) represent the largest investor (26% in 1998), followed by insurance companies (23%). Foreign investors represent about 20% of the market share. This large proportion is due to their primary interest in the Jumbo Pfandbriefe. In 1999, around 40% of newly issued Jumbos were placed abroad. 4. Market structure-liquidity and transparency There is a high level of liquidity due to large market volumes and high issue volumes, the market making, a relatively well developed secondary market and a broad investor base. Furthermore, additional liquidity is expected in the future due primarily to electronic trading (EuroCreditMTS). There is also a high level of transparency due to standardization procedures, introduction of Pfandbrief indices and introduction of the German mortgage bond in the cross-segment and cross-border bond indices of international investment banks The following is a list of investment banks Financial conglomerates Large financial-services conglomerates combine commercial banking and investment banking, and sometimes insurance. . One important addition has come in the shape of Medium Term Note (MTN MTN A short-form for Medium Term Note. MTN Medium term notes issued by corporations, much like shorter-term commercial paper. MTN See medium-term note (MTN). ) and Commercial Paper (CP) programs, which are being launched by a growing number of mortgage banks and under which Pfandbriefe can be issued with different maturities and in different currencies. Programs of this kind offer issuers a number of advantages; in particular: a high degree of flexibility in refinancing, an access to new circles of investors and a reduction in the workload and consequently in the costs. 5. German Pfandbrief--a European benchmark German Pfandbriefe together with the other newer European mortgage bonds are an essential component of the financial intermediation bringing together the demand for funds by households in order to finance real-estate property at an efficient cost of capital and the supply of funds by portfolio investors who wish to obtain an attractive return on safe and liquid fixed-income debt securities. The safety of the mortgage bond allows lenders to obtain funds in capital markets at a reduced borrowing cost. The possibility to issue mortgage bonds therefore encourages lenders to provide medium or long term finance for housing, non-residential property or urban development at the lowest and most stable rate of interest for the borrower. The German Pfandbrief is the only non-government bond in Europe that satisfies all the main criteria for a benchmark function, that is: * a first-class, internationally recognised credit standing * modern issuing and trading practices used internationally * sufficient liquidity in all important maturities * a wide range of derivatives The German Pfandbrief is included in the Tier 1 category with the ECB See electronic code book. . As such it automatically retains its eligibility for Lombard credit Lombard credit is the granting of credit by banks against pledged items, mostly in the form of securities or life insurance policies. The pledged items must be readily sellable. , repo Repo An agreement in which one party sells a security to another party and agrees to repurchase it on a specified date for a specified price. See: Repurchase agreement. repo See repurchase agreement (RP). and settlement transactions within EMU, can be used by commercial banks across borders and without restrictions for open-market transactions Open-Market Transaction An order placed by an insider, after all appropriate documentation has been filed, to buy or sell restricted securities openly on an exchange. Notes: with the ECB and the national central banks This is a list of central banks. Contents A B C D E F G H I J K L M N O P Q R S T U V W Y Z . This makes the Pfandbrief the only private sector debt instrument so far to be placed on a par with government bonds. The success story of the Pfandbrief on the international capital markets in recent years is reflected in the increasing interest shown by foreign investors in Pfandbrief market investments. Today, about a quarter of all Pfandbriefe are held in foreign portfolios. The growing international demand for Pfandbriefe is just one indication of the esteem in which the Pfandbrief is held beyond Germany's borders. Another indication are the numerous Pfandbrief-like systems that have emerged in other European countries of late and which are often very closely modeled on the strict regulations laid down in the German system. As far as the investors are concerned, the growing variety of Pfandbrief-style products makes a differentiated credit assessment of the individual products all the more important. Above all, the collective term "Pfandbrief" which is frequently used internationally for this paper must not be allowed to disguise the significant differences that exist in terms of credit quality and market liquidity. The German Pfandbrief must continue to be seen as the undisputed benchmark. B. Residential Mortgage-Backed Securities Residential mortgage-backed securities (RMBS) are a type of bond commonly issued in American security markets. They are a type of Mortgage-backed security which are backed by mortgages on residential rather than commercial real estate. 1. MBS market development So far in Germany, there have only been isolated examples of Residential Mortgage Backed Securities (RMBS RMBS Residential Mortgage-Backed Securities RMBS Rambus, Inc. (NASDAQ stock symbol) RMBS Russian Mortgage-Backed Securities ). Nonetheless, at around EUR 900 bn, the German residential property market is by fare the largest in Europe. However, at the moment, German RMBS still only play a secondary role in the European capital The term European capital may refer to:
Due to the low liquidity level, MBS in Germany are often "buy-and-hold" investments. 2. MBS relative attractiveness For issuers, RMBS offer much greater flexibility than Pfandbriefe for the purpose of securitising mortgage loans. For universal banks especially, which are not allowed by law to issue Pfandbriefe, RMBS are an attractive opportunity for refinancing their loan books and to improve their balance sheet equity. Mortgage banks can securitise subordinated loans In the field of finance, a subordinated loan is a type of loan which ranks after other debts should a company fall into receivership or be closed. It is also known as subordinated debt, or as junior debt. and the residual loan amount exceeding the 60% LTV LTV See: Loan-to-value ratio ratio. From the investor's point of view, RMBS offer a much broader spectrum of risk/return combinations and they therefore lend themselves to diversification along the credit curve. For this reason, however, RMBS require a more detailed risk analysis than the largely standardized Pfandbriefe. 3. True sale vs. synthetic MBS transactions "Pfandbriefe technology" allows for the large volume issuance of a mix of commercial and residential properties, whereas RMBS can only be issued backed by residential properties loans. Synthetic unfunded structures have been the most common, allowing issuers to transfer risk without transferring the assets. A major new development is the use of residential mortgages for credit default swaps Credit Default Swap A swap designed to transfer the credit exposure of fixed income products between parties. Notes: The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. , which entitle banks that use them to receive regulatory and monetary relief: These structures combine funding and capital relief objectives. Numerous problems of true sale transaction structures in Germany: restrictions imposed by bank supervisory authorities as for example the transfer of personal or corporate loans is often subject to special sales clauses. The sale of loans out of the bank's balance sheet to a SPV SPV sheeppox virus. can be rendered more difficult as a result. However it should be noted that these clauses have been amended in more recent contracts. Another problem facing banks when they come to sell loan assets is that of complying with bank secrecy Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. regulations. Apart from these problems set by the true sale, cost considerations and the time needed to bring a transaction to market have been the main factors explaining the growing importance of synthetic transactions. Few German RMBS transactions to date are structured as traditional true sale transactions. Indeed, most German RMBS transactions have been structured in a synthetic form. And particularly, a certain number of unfunded structures have been executed. CLN CLN Clean CLN Community Learning Network CLN Colon CLN Celsion Corporation CLN Class Library for Numbers CLN Credit Linked Note CLN Comitato di Liberazione Nazionale (Committee of National Liberation) CLN Corn Lethal Necrosis are going to play an important role alongside the refinancing methods just mentioned. 4. Rating A central problem in the valuation of RMBS in Germany is the limited availability When customers of the PSTN make telephone calls, they commonly make use of a telecommunications network called a switched-circuit network. In a switched-circuit network, devices known as switches are used to connect the caller to the callee. of data. The rating agencies are therefore dependent on assumption and on statistics that are hardly representative for the whole market. In their attempt to limit the resulting risk, those agencies make very conservative assumptions. III. TAX TREATMENT Mortgage interest does not qualify as an item deductible from the taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. base. The tenant-friendly legislation and tax incentives for investment properties lead to relatively low rent levels when compared with the cost of owner-occupied housing. Therefore, most individuals buying property for their own use do so more as a result of personal preferences rather than pure economic considerations. IV. LEGAL FRAMEWORK A. Mortgage Bonds German Pfandbriefe follow the characteristics prescribed under Article 22(4) of the UCITS Undertakings for the Collective Investment of Transferable Securities - UCITS A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union. Directive. Mortgage banks are the major issuer group and are subject to the Mortgage Bank Act, which has the following major implications: * Specialist bank principle * Risk offset in separate collateral pools * Pfandbrief creditors' preferential claim in case of insolvency * Independent trustee * Volume of Pfandbriefe outstanding limited by own capital * Limited activities abroad * Risk management Some special safety features for the mortgage Pfandbriefe include the following: * Prudential calculation of the mortgage lending value * A 60% LTV shields against price fluctuations * Financing only for multi-function properties * Tight rein on development finance * The Pfandbrief enjoys a privileged position The German legal framework is completed by the Act on mortgage bonds and related bonds from public credit institutions and by the new insolvency law (January 1, 1999). One of the new features of this law is the possibility of a private bankruptcy. B. Mortgage-Backed Securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. In Germany, unlike in Spain or in France, for example, there is no specific legal framework for the issue of MBS. However, since 1997 the supervisory authority of the German banking sector (BaKred) has circulated answers to a number of key questions relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc supervisory rules in connection with MBS. MBS are thus issued in Germany since 1997 after appropriate clarification from BaKred. The issuers are mortgage banks and all-purpose banks with large mortgage credit portfolios. V. RISK ASSESSMENT A. Credit Risk 1. Mortgage bonds In the case of mortgage bonds, the credit risk depends on the quality of the originator and of the collateral. Germany has set up a strong legal framework and effective supervision in order to ensure the quality of the mortgage bonds. Elements determining the quality of the originator The largest group of originators is composed by mortgage banks. Therefore, we will assess the quality of mortgage banks as originators of mortgage bonds. First, mortgage banks follow a specialist principle in the sense that their activities are legally constrained, mainly to public sector, residential and commercial mortgage lending in Germany. The restrictions on the lending operations of mortgage banks are aimed at obtaining the highest possible quality of covering assets. However, the Mortgage Bank Act, the Public Pfandbrief Act and the Shipping Bank Act are about to be amended. The amendment will expand the scope of activities of the mortgage banks: apart from covering transactions, mortgage credit will be possible in the US, Canada and Japan. Second, mortgage banks are under special supervision, namely a regulatory body and an independent trustee. Third, in terms of credit quality of the assets being securitised, mortgage banks must adhere to adhere to verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful 2. cautious mortgageable values as laid down by law and only first ranked mortgage loans may be used as cover. The Mortgage Banking Act stipulates that the mortgageable value may not exceed the carefully calculated sale value. In addition, the basis for the calculation of the value must be documented and authorized. From the above paragraph, it is clear that the quality of mortgage bonds will be strongly determined by the quality requirements of the underlying collateral. Elements determining the quality of the collateral Given that mortgage bonds are collateral-secured instruments, the credit risk is strongly determined by the quality of the collateral, which is influence by the followings: First, not only is a prudential calculation of the mortgage lending value required, but maximum Loan-To-Value thresholds are also set. The maximum is generally 60%, but it can increase up to 80%. In the case of social housing loans, it can even go up to 93%. Second, only public-sector loans and first-ranked mortgages loans are eligible collateral assets given the high safety embedded Inserted into. See embedded system. (government guarantee or underlying property). Third, mandatory overcollateralization has been set up. Indeed, the law requires the amount of assets to be at all times higher than the nominal value Nominal Value The stated value of an issued security that remains fixed, as opposed to its market value, which fluctuates. Notes: When referring to fixed-income securities, the nominal value is also the face value. of total liabilities. This feature is lost in case of bankruptcy. Fourth, since the third law for the promotion of the financial market came into force, the collateral pools for Pfandbriefe have taken on the status of special assets (bankruptcy remoteness). Therefore, in case of bankruptcy, cover assets may not count as part of the insolvency funds and the Pfandbriefe may not be called in. As a result, the issuer's ability to meet its financial commitments is now only a marginal factor in mortgage bonds' credit rating, which now hinges mainly on the quality of the loan portfolio. Furthermore, in case of bankruptcy, mortgage bonds holders have priority claim over the collateral assets, i.e. all mortgages in the asset pool. Indeed, Pfandbriefe are fully covered by all the mortgage loans included in the issuer's cover pools. This loans portfolio is characterized by constant inflows and outflows during the period of the issue and theoretically therefore, the portfolio has a perpetual maturity. This remark is valid for all mortgage bonds, not only for those issued in Germany. Fifth, some interest and maturity matching required under the mortgage Banking Act. But this applies only to the Pfandbriefe and their respective asset pools. Mortgage banks are not restricted in terms of overall mismatching. Sixth, external support mechanisms have been organized. For instance, in the event of insufficient proceeds from the pool assets to cover their claim, Pfandbriefe investors rank pari passu [Latin, By an equal progress; equably; ratably; without preference.] Used especially to describe creditors who, in marshalling assets, are entitled to receive out of the same fund without any precedence over each other. PARI PASSU. By the same gradation. with senior debt holders. In addition, the parent bank may extend some other form of support. Finally, since clear "rules of the game" are in place in Germany, i.e. parties to the relationship between a mortgagor mortgagor n. the person who has borrowed money and pledged his/her real property as security for the (mortgagee). (See: mortgage, mortgagee) MORTGAGOR, estate's, contracts. He who makes a mortgage. 2. , a mortgage bank and holders of mortgage bonds are familiarized fa·mil·iar·ize tr.v. fa·mil·iar·ized, fa·mil·iar·iz·ing, fa·mil·iar·iz·es 1. To make known, recognized, or familiar. 2. To make acquainted with. with their statutory and contractual rights A contractual right is a claim, on other persons, that is acknowledged and perhaps reciprocated among the principals associated with that claim. Specialized contractual rights exist as part of a "contract" or agreement between persons to whom these rights belong. and obligations, exercising a mortgage (reimbursement of old mortgage and replacement by new loan) does not pose any insurmountable problem. The violation of obligations arising from mortgage transactions may rather be seen as something exceptional, which is for instance reflected in the low proportion of amounts enforced via auctions to the mortgage loan portfolio--approximately 1%. Therefore, it is no surprise that today, virtually all issuers of(Jumbo) Pfandbriefe carry a seal of quality from at least one of the three large rating agencies. Every Public Pfandbrief rated thus far has received at least one Triple-A by one rating agency. Mortgage Pfandbriefe has also been awarded the highest possible rating in the majority of cases. 2. Mortgage-Backed Securities In the case of MBS, the credit risk depends on the collateral and on the transaction structure. It is thus possible to separate the rating of the issue from the originator's financial strength. There are no restrictions in terms of the quality of assets and no limit on the maximum possible lending level on a property. This offers more flexible opportunities for an investor in terms of risk/return profiles. The loan pool to be securitised is usually determined at the beginning of the maturity based on set eligibility criteria. If; during the term of the MBS, there are any defaults or prepayments in the loans portfolio, then they will be passed on to the investor in the MBS. The loan are not replaced. As a consequence, the cash flows generated by an MBS transaction are not truly known at the date of issuance. This remark is valid for all MBS, not only for the ones issued in Germany. B. Prepayment Risk Prepayment Risk The uncertainty related to unscheduled prepayment in excess of scheduled principal repayment. Notes: This risk is generally associated with mortgage securities. The Pfandbrief investor bears virtually no prepayment risk since early repayment is precluded in the first 10 years by contract. Furthermore, German banks often prohibit renegotiation of the terms of a mortgage in the early years of the loan, but since German interest rates have been consistently low, few consumers have complained. In case the bank agrees to a prepayment, it will do so only against reimbursement of the economic loss sustained as a result (early prepayment penalty Prepayment penalty A fee a borrower pays a lender when the borrower repays a loan before its scheduled time of maturity. ). Therefore, a borrower is permitted to prepay a loan subject to certain prepayment penalties for fixed-rate loans Fixed-rate loan A loan whose rate is fixed for the life of the loan. . There are generally no prepayment penalties for variable-rate loans Variable-rate loan Loan made at an interest rate that fluctuates depending on a base interest rate, such as the prime rate or LIBOR. or fixed-rate loans at their reset date. Prepayment penalties for fixed-rate loans before the reset date are calculated based on the interest rate differential to current interest rates until the reset date. VI. CONCLUDING REMARKS The high quality of the Pfandbriefe, both in terms of credit risk and prepayment risk, explains the development of the current market. However, other factors are also responsible for this growth. Hence, standardization and thus flexibility have been crucial to the development of the Pfandbrief market. Finally--and most importantly--the cost advantage of mortgage bonds relative to MBS (Basel Accord risk weighting) has given Pfandbriefe the opportunity to become a major fixed-income instrument. However, given the 60% LTV limit, mortgage banks will find it necessary in the future to fund their mortgages through off-balance securitisation instruments such as MBS. Therefore, the use of MBS will come into play primarily in lending beyond the cover limit. Cost and flexibility factors, as well as legal considerations (the lender's duty to inform the borrower when loans are transferred) provide clear indications that synthetic transactions will constitute the bulk of the MBS transactions done. MATHILDE FRANSCINI Graduated from HEC HEC Hautes Études Commerciales HEC Hautes Etudes Commerciales (French) HEC Higher Education Commission (Pakistan) HEC Hydrologic Engineering Center (Davis, CA) Lausanne, Switzerland in 2001. She is a titular tit·u·lar adj. 1. Relating to, having the nature of, or constituting a title. 2. a. Existing in name only; nominal: the titular head of the family. b. of a Licence en Sciences Economiques, a Master in Banking and Finance (MBF MBF Thousand Board Feet MBF My Best Friend MBF Microsoft Business Framework MBF Medical Benefits Fund MBF My Boyfriend MBF Man's Best Friend MBF Management By Fact MBF Master Business Function (J.d. ) and a Certificate FAME (Financial Asset Management and Engineering). She currently works at ABB n. 1. Among weavers, yarn for the warp. Hence, Noun 1. ABB - an urban hit squad and guerrilla group of the Communist Party in the Philippines; formed in the 1980s Financial Services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. . TAMARA SCHILLINGER obtained a Licence en Sciences Economiques from University of Lausanne The University of Lausanne (in French: Université de Lausanne) or UNIL in Lausanne, Switzerland was founded in 1537 as a school of theology, before being made a university in 1890. Today about 10,000 students and 2200 researchers study and work at the university. , Switzerland in 2000; a Master of Science in Banking and Finance from University of Lausanne, Switzerland in 2001-2002. Tamara is currently working for ABB Financial Services.
Exhibit 1. Basic Features of True Sale and Synthetic RMBS Vs
Pfandbriefe Transactions
RMBS
True Sale Synthetic
Assets Assets transfered to Defined pool of
an SPV reference assets and a
defined notion of losses
Nature of the Residential mortgage Residential mortgage
assets loans loans
Issuer SPV SPV or a sufficiently
rated bank or any bank
with certain collateral
arrangements
Funding Fully funded to match Unfunded, partially
the pool of assets funded, or fully funded
based on the obligation
of the rated bank or
collateral arrangements
BS treatment Generally designed for Generally designed for
off-BS treatment off-BS treatment
Principal and From the pool of From the issuing bank or
interest segregated assets the collateral securing
payments the funded elements
CF analysis Detailed CF analysis to Rated collateral usually
ensure the payments from tailored to provide CF
pool of assets are as required. Interest
sufficient to payments subparticipation might
of interest and principal require separate CF
on the rated debt in a modeling
recessionary environment
Maturity of the Dependent on the Potentially part of the
transaction maturity of the transaction definitions
underlying assets
Hypotheken Pfandbriefe
Assets Assets with a cover register
Nature of the Principally residential and
assets commercial mortgage loans
up to 60% lendable value as
defined by the Mortgage
Banking Act and associated
rulings
Issuer Mortgage bank or
Landesbank
Funding Fully funded and supported
by assets in the cover
register
BS treatment On-BS design
Principal and Assets of the cover register
interest
payments
CF analysis Detailed CF analysis
addressing the dynamic
nature of the asset pool
Maturity of the Usually shorter than the
transaction underlying assets, but still
dependent on the asset
characteristics
|
|
||||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion