Background slide

Housing finance faces a structural problem: mortgages repay over decades, but lenders need capital immediately to continue lending. Two dominant models exist. In the covered bond model, the bank keeps the mortgages on its balance sheet and issues bonds backed by a dedicated pool of its highest-quality loans, called the cover pool. Bondholders have a dual claim: they are paid by the bank directly, and if the bank fails, they can claim the cover pool. The bank retains the credit risk of every loan it originates. In the MBS model, the bank originates mortgages, then sells them to a special purpose vehicle, a separate entity created to hold them. That entity bundles the loans and sells claims to outside investors. The credit risk transfers entirely off the bank's balance sheet to those investors.