Mortgage-backed bonds

Corporate and Financial Public Relations: 1500 words


1. Explain what is meant by mortgage-backed bonds or securities ( see Article 3 ) How they are used to raise financess for mortgage loaning?

The classical definition of mortgage-backed bonds or securities is basically in two

parts, and represents either the re-selling of debt or the redistribution of it, depending

on which portion of the dealing you are involved in. The first portion of this occurs when

a corporation or authorities agrees to ‘buy’ mortgages from a primary loaner, so

‘commoditises’ the corporate debt as a ‘new’ merchandise. The gross watercourse from the

original mortgage holders – presuming they continue to pay – is what gives the bonds their

supposed ‘value’ . Having bought an involvement in the mortgage backed bond, the

investors gain an income from it: furthermore, they can make so with the reassurance that

such investing doesn’t remainder on the creditworthiness of any peculiar borrower or

borrowers, but on whole categories of debitors, amongst whom it is assumed that the hazard

of default is proportionally dispersed. The two rule hazards associated with this

type of investing are both linked to the vagaries of the lodging market. If involvement

rates are high, the value of fixed involvement payments to investors evidently diminutions in

existent footings. They besides suffer this destiny if, for any ground, the original mortgage holders halt

refunding their loans in important Numberss. The wagess are normally commensurate

with the hazard, since investors may acquire a higher rate of involvement if they put their money

into ‘riskier’ merchandises, such as sub-prime mortgages.

Apart from the investors in the bonds themselves, the net donees are the sellers

of the bonds, and this is where the 2nd portion of the dealing takes topographic point. Having

sold on their mortgage loans to be used as a bond or security, the original loaners –

Bankss or edifice societies for illustration – have new financess to impart to a new raft of

borrowers. As Jill Treanor’s article explains, even before the current fiscal

meltdown, UK mortgage loaners were minded to impart more than they really

earned through their ain concern: ‘In 2000, they borrowed ?13bn from the sweeping markets and by 2007 this had risen to ?257bn – about ?201bn of this came through mortgage-backed securities.’ ( Treanor 2008 ) .

Government intercession in the mortgage backed bonds market is virtually the last hope for a system which has been easy destabilised over the last two old ages. As long ago as 2006, Davies in theFinancial Timesreported that the UK, which dominates the European market for residential mortgage backed securities, was ‘…already beginning to see jobs among securitisations from non-prime loaners, or those who grant mortgages for buy-to-let or to people who can non borrow at high-street banks.’ ( Davies 2006 ) . HBOS entirely sold ?500 million of mortgage backed bonds in 2008. ( Davies and Croft 2008 ) . Finally, it was the hedge and trading of mortgage securities by establishments such as Bear Stearns in the US, which made them the accelerator for the domino-like prostration of assurance in banking and finance as a whole.

2. Sketch the assorted suggestions put frontward in the articles to assist increase imparting to little houses and families, and measure their likely effectivity in countering the recognition crunch.

There are basically two places in the duologue: the political one embodied in the authorities place, and the commercial one implicit in the banks’ response. The political place is of class non occupied entirely by the authorities, since it besides incorporates the voices of the resistance, other political parties, and independent analytical positions. Beyond this making nevertheless, disparity between the political and economic places ballads in their different intent and mark audiences. The authorities is at strivings to exert stewardship of the economic system and fiscal crisis, whilst other politicians must situate options which at the same time offer a review of authorities policy. The Bankss meanwhile – despite recent recapitalisation by the authorities – remain independent commercial concerns: the extent of their respect to political force per unit area is moderated by their duties to the conventional corporate stakeholders.

This disparity of motivations and desired results becomes clearer when considered against some of specific issues discussed in the three articles: return, for illustration, the instance of recognition to little concerns. These represent a peculiar preoccupation in authorities circles because of their important – if hard to quantify – function in exciting the economic system as a whole. They are in consequence assumed to be an index of underlaying economic tendencies. As Deakins and Freel point out, with recognitions to Wennekers and Thurik, ‘Many economic experts and politicians now have anintuitionthat there is a positive impact of entrepreneurship on the growing of GDP and employment…unfortunately, this “intuition” has yet to be unambiguously supported by empirical evidence.’ ( Deakins and Freel 2006: p.34 ) . The point here is that waiting for absolute rationalist standards is a luxury which the authorities does non hold. The logic of its ain attack, and stakeholder sentiment, means it must move to reenforce the steps already in topographic point, such as Insurance from the Export Credits Guarantee Department and the Small Firms Loan Guarantee Scheme. As the Federation of Small Business’s caput of parliamentary personal businesss, Stephen Alambritis has commented that ‘…Something’s happened someplace [ in authorities ] that recognises that the existent economic system is little concerns, and if they don’t acquire the money and don’t get the recognition, so we’ll be in a recession.’ ( Eaglesham Oct 2008 ) . However, FSB entreaties for a catch-all ‘survival’ fund of ?1 billion appear calculated to convert its members that it is using due force per unit area to authorities, instead than offering existent hope of execution. By contrast, authorities steps to replace lost commercial insurance screen, therefore liberating off recognition along supply ironss and enabling houses to obtain goods and services, appear seasonably and focused. What the authoritiescan nonmake, of class, is assure that the firm’s ain clients are still able to afford their usual orders. Merely the Bankss have the capacity – where appropriate – to act upon the result of such a stand-off.

The proposals put frontward by the Opposition and Liberal Democrats are hard to estimate, merely because they contain so small item: the Tories’ ‘new establishments to establish lending’ , or the Lib Dem thought of direct authorities loans to concern, can non in themselves address the current jobs, since it is politically certain that they will non be implemented at present. Furthermore, they both appear predicated on a meteorologic origin and launch time-scale, an premise which implies about certain disagreements, doublings-up and short-circuits with taxpayers’ money. In decision so, a cardinal difference in attitudes hence still divides authorities and Bankss: basically, it is non the map, or the concern of the latter, to salvage little concerns, families, or any other portion of the economic system, apart from their ain borders. Not even the ‘nuclear option’ of nationalization precludes this: experience of earlier UK nationalizations indicates an symbolic, instead than a functional alteration, in which executive assignments and scheme tended to stop up in the custodies of those with relevant industry experience. In the instance of the Bankss, it is by no agencies clear exactly what seting bing banking executives in charge of a nationalised bank would accomplish.

3. Write a short note from the PR section of a major UK bank in answer to John McFall’s remarks.

To Mr. John McFall

Dear Sir,

I have pleasance in mentioning to your recent comments sing the desirableness, likeliness, and principle for a possible nationalisation of the UK banking sector. I am composing with respect to practicableness, desirableness, and justification of this thought.

As you will be cognizant, the bank has an on-going responsibility to its stockholders and investors, every bit good as bing and future clients, to retain stableness and guarantee the best possible footing for the concern. A prevalent subject in recent political and media commentary has been the concern that improbity and misreckoning on the portion of fiscal establishments has been a major contributory factor in wider commercial hurt. The alleged acquisition and encouragement of high hazard debt has been a important facet of such reviews.

It is for these grounds that the bank is presently concerned to guarantee that responsible loaning, based on sound and established banking rules, underpins present and future recognition minutess. Whilst we understand that appropriate adoption has an of import portion to play in both belongings and concern markets, it is in everyone’s best involvements that such capital is directed towards those histrions who represent the best agencies of return, and acceptable borders.

The nationalization steps to which you refer, we believe, would non basically change these demands, but simply a transportation of duty for them. There already exist sufficient steps for the proviso and overseeing of finance capital to concerns, including the proposed new Small Business Lending Forum. The latter would be best served by the efficient operation of this and other good established organic structures, a position besides held by independent perceivers. As the Director General of the British Chamber of Commerce, David Frost, has remarked, ‘…if the group ends up around a table speaking alternatively of demoing existent leading and taking action, so it will be meaningless. It ‘s the Government ‘s occupation to guarantee that this group has the dentition to truly do an impact.’ ( British Chamber of Commerce 2008 ) .

Consequently, whilst the Bankss are committed to cooperation with authorities in the present crises, we steadfastly believe that government’s function ballads in supplying the necessary warrants and regulative model, instead than presuming duty for primary commercial direction.


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Unattributed, ‘Small concern loaning forum must be able to keep Bankss to account’ , 23.10.08, British Chamber of Commerce Website, INTERNET, available at hypertext transfer protocol: // [ viewed 26.12.08 ]

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