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Author/Editor:
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Surti, Jay
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Publication Date:
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December 01, 2010
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Electronic Access:
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Free Full text
(PDF file size is 1,367KB).
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
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Summary:
This paper considers the case for mortgage covered bonds as an alternative to the originate-to-distribute mortgage funding model. It argues that the economic incentives provided to market participants under the covered bonds model are less susceptible to moral hazard even while retaining the key benefits of securitization such as capital market funding and flexibility in risk allocation. Notwithstanding these advantages, however, limited market size and the greater pro-cyclicality of mortgage loan quality in the United States - potentially reflecting borrower incentives under the personal bankruptcy framework - impose limits on the benefits ensuing from this model. The analysis underscores the need for a comprehensive legal-regulatory framework to underpin market development and discusses a number of ways in which the current draft legislation may be further strengthened. A potential strategy to hasten market development within the current institutional framework is identified.
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Order a print copy
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Series:
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Working Paper No. 10/277
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Subject(s):
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Bankruptcy | Bonds | Capital | Capital markets | Credit risk | Economic models | Financial institutions | Housing | Loans | Risk management | United States
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Author's Keyword(s):
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Covered bonds | mortgage-backed securities | personal bankruptcy | United States. |
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