Pfandbriefs, or pfandbriefes, as they are known in Germany, are known by various local European names as pantbrevs, cedulas, obligations foncieres, lettres de gage, mortgage bonds, covered bonds, asset covered bonds, asset covered securities, etc.

The genesis of the covered bonds is a specific legislation that grants a bankruptcy remoteness to the bond holders. The essential idea is not unique - in typical English law concept of secured lending, a secured lender has a bankruptcy-remote claim on the secured assets.

In case of covered bonds, a specific law regulates the entities that issue such bonds. Unlike in the case of securitisation, there is no off balance sheet treatment, as there is no true sale. The assets, for example, the pool of mortgages, remains with the mortgage issuer - but there is a bankruptcy-remote claim that the bondholders have against the pool of mortgages.

Covered bonds have existed for over 100 years in Germany; however, there have been strong recent moves to popularise this instrument. Obviously, the instrument is far less clumsy as compared to true-sale based securitisation, since it does not require sale of the assets and the consequential legal hassles. It does not inovlve off balance sheet treatment - therefore, accounting treatment is far less cumbersome than the IAS 39 compliances required in case of securitisation. It does not lead to proliferation of servicer role.

In future, covered bonds are expected to become more popular.

Covered bonds market in Europe:

According to data from the European Mortgage Federation (EMF), the representative body of the European mortgage industry that represents the vast majority of covered bond issuers, there was more than E1500bn outstanding at the end of 2003. This account for about 16.5% of EU GDP and represents 17% of Europe’s bond market.

Legal basis for mortgage bonds: a sneak preview of national laws:

The mother source of pfandbrief or covered bonds laws is Germany - therefore, let us take a quick look at th eGerman pfrandbrief legislation. In Germany, regulated mortgage banks are only allowed to issue pfrandbriefs, which are regulated under the Mortgage Banks Act 2002. While the mortgages backing up the bmortgage bonds stay with the mortgage bank, the bank creates security interest on the mortgages. The law lays down the extent of the mortgages cover and the assets that qualify for the cover, The law also lays down conditions of the mortgage loan, loan to value ratio, etc. Full text of the law is here.

In general, holders of mortgage bonds do have a preferential claim on the collateral and the proceeds arising from it. Loan-to-value (LTV) ratios, prudent property valuation rules (e.g. mortgage lending value) and trustees or cover asset monitors acting in the interest of the mortgage bondholders reinforce the safety of the mortgage bond in most countries. Finally, issuers of covered bonds are subject to strict supervision of their respective authorities, which also monitor the compliance of the banks’ management with the various
covered bond legislations.

Do write to me.

• Have you enrolled for the most popular feature on my website -  our mailing list?
• Any reactions, good or bad - please do post them on our guestbook
• Have any interesting materials or links to suggest - shall be obliged for your contribution - e  -mail me
  

Copyright ...Unless otherwise mentioned, all materials on this site are subject to the sole copyright of Vinod Kothari- their reproduction and use in any form is strictly prohibited. Downloading for personal use (and not circulation) is permitted, provided the credit of such materials to Vinod Kothari is preserved. No permission is required for linking to any of the materials on this site.