Eurohypo: covered bonds may be solution to CMBS collapse

Covered Bonds may be the solution to the lack of available financing for real estate as a result of the collapse in demand for asset-backed securities and commercial mortgage-backed securities (CMBS) in particular, German lender Eurohypo has said.

In a new report, Eurohypo said that banks have been relying on the European Central Bank and Federal Reserve to secure short-term funding since September by offering asset-backed securities already originated and not refinanced as collateral. But this was only a temporary measure. A more permanent solution, Eurohypo researchers said, could be Covered Bonds, modelled along the lines of the German Pfandbrief.

Under the German model of the instrument, investors bring their cash to a reliable counterpart such as a bank. Loans made by the bank with those funds are covered by the assets and there is a maximum, conservative loan-to-value. The bank keeps the loans on its balance sheet. 'As a result, the risk is well identified and better controlled, so the spreads are able to remain low,' Eurohypo said.

The lender said it raised EUR 2.5bn in November 2007 and EUR 1bn in May 2008 from the Covered Bond market as a refinancing tool for property. Between August and December 2007, EUR 60bn of Covered Bonds were issued, bringing the year‘s total to date EUR 135 billion, Eurohypo said citing Financial News. Covered bonds are used in several European countries to a greater or lesser extent, including Germany, France, Spain, the UK and Ireland.