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December 2008 | ifr special report | 15 PFANDBRIEFE ROUNDTABLE “

We are in the midst of a discussion as to whether we should take advantage of this legislative procedure to implement some more regulations for Pfandbriefe, to make the market even safer.

change or to amend the Pfandbrief law on the table, and the Parliamentary process, the legislative process, is just about to start. We expect that by January of next year the main negotiations in the financial committees of the German Parliament will have been completed. Then, hopefully, by March or April the law or the amendment will pass. Today the amendment has some changes regarding a new type of Pfandbriefe, the aircraft Pfandbrief. This sounds like a big change, but we do not expect a huge volume of aircraft Pfandbriefe. To date, the major changes have been more on the safety side. There is an explicit liquidity buffer which will be built in the cover pools. The cover pools have to be protected against any liquidity gaps for the next 90 days, and there is already discussion of this point.

On the other side we are trying to ensure that Pfandbriefe can be used, at least indirectly, by more banks. This concerns the so-called funding register, where there have been some legal questions. These questions have to be cleared up, and we hope that by doing this Pfandbriefe will become more attractive to new issuers, and to non Pfandbrief issuers who could make their assets available to Pfandbriefe issuers.

These are the major points, but things

have moved on considerably since we began discussing all these changes. Now we are in the midst of a discussion as to whether we should take advantage of this legislative procedure to implement some more regulations for Pfandbriefe, to make the market even safer. These changes will not, of course, have an immediate effect, but in the long run will hopefully have a

Steffen Dahmer, JP Morgan

positive impact in restoring investor confidence.

Restoring is, in fact, not the right word: it implies that there had been a loss of confidence. But of course the confidence has to stay with the Pfandbriefe and hopefully get stronger.

There are further issues that we might add to the amendment of the Pfandbriefe law.

IFR: Is there anything the Pfandbriefe law is missing or hasn't been addressed?

Engelhard : The introduction of an aircraft Pfandbrief regime in this stage of the credit cycle seems to be in some respects i- nappropriate, when you consider, for example, that banks are not allowed to raise LTV barrier for residential mortgages to 80%. The German mortgage market, par- ticularly the residential mortgage market, is quite stable. It gives the impression that the Pfandbrief product should be homogenous across all types of Pfandbriefe, which seems to me inappro- priate. But that's a minor thing – it isn’t going to be a major market anyway. Liquidity it the really hot debate. We appreciate, of course, that there will be some limitations enshrined in law on the one side, but on the other hand I think it may be an exaggeration, there is a risk we may regulate to strongly. Banks actively running liquidity risks do not tend to do it in this market, and if there are banks around who think they are going to need to use that feature, I think disclosure would be sufficient.

On the commercial mortgage side of things we face the risk of a lengthening of the duration of the mortgage assets – they need to be rolled because the respective borrowers are increasingly unable to refinance. This problem has increased dra- matically in the current environment, and this is putting the whole liquidity risk situation in a different perspective.

Volk : With respect to LTV ratios, the housing market problems are occurring in a number of countries, and although it is not evident in Germany so far, Germany is entering a recession. If you sell a house in a distressed environment you will benefit from having a higher cushion, so on that basis it is simply better to having a lower LTV of 60% compared to an 80% LTV. In my view this will help mitigate some investors' concerns and a 60% LTV in this market would send a very strong signal. And for liquidity, 180 days would be better.

Bertram : But don't forget that the 60% LTV is not the market value it is the mortgage lending value.

I am a bit more relaxed than Fritz on the

aircraft Pfandbriefe. I believe as we are not mixing these kinds of assets into the mortgage public sector side, if someone is doing it they will differentiate themselves. It’s a different asset class.

Engelhard : As a jumbo you mean?

Bertram : Yes in jumbo format. In terms of liquidity, I believe it is necessary. The investor wants these kinds of commitments, but a law is always stronger than a binding

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