Thursday, 25 June 2015

DBS selling its first covered bonds! Reminds me of subprime crisis of 2008!

Dear Friends,

Recently, DBS has begun to sell a type of financial instrument called "Covered Bonds".

Check out Moody's website:
https://www.moodys.com/research/Moodys-DBS-first-covered-bond-program-opens-up-low-cost--PR_328724?WT.mc_id=AMRG93X0pvbmVzX05ld3NSb29tX1NCX1JhdGluZyBOZXdzX0FsbF9Fbmc%3d20150624_PR_328724

In the article, it was reported:

"Similar to other countries where covered bonds have been issued, DBS' program establishes a special purpose vehicle to hold the cover pool assets -- mortgage loans originated by DBS that are secured by private residential properties in Singapore -- and to guarantee the covered bonds."

DBS is using the mortgage payment of Singaporeans to guarantee the bonds?!


If you happen to search Wikipedia, this is exactly what bring down US in 2008!

Mortgaged backed securities!

Wikipedia definition of MBS:

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage, or more commonly a collection ("pool") of sometimes hundreds of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that "securitizes", or packages, the loans together into a security that can be sold to investors. The mortgages of an MBS may be residentialor commercial. Other types of MBS include collateralized mortgage obligations (CMOs, often structured as real estate mortgage investment conduits) and collateralized debt obligations(CDOs)


My concern:
As our housing prices get higher and higher, I am betting that a bubble in Singapore is brewing in the next 10 years. Although this may be the first for DBS to issue its first mortgage backed security, I don't think it will be the last. 

If this instrument gets more and more lucrative, I am sure DBS will issue more complicated MBS and take higher risk. OCBC and UOB will also follow! Greed will soon creep in just like what happened in US before the subprime crisis. In future, they may be selling something that not the common folks or even the other financial houses can understand. 

And ratings agencies may just give a AAA rating because of the good "stable" housing prices, ignoring the risk of a housing collapse.

Of course let us just hope all ends well. However that is also what the US financial banks and institutions thought in 2007!


Rgds
Daniel


The theory of How Financial system created AAA rated assets out of subprime mortgages:
IMF Diagram of CDO and RMBS


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