Only a fool would still hold out hope of proper standardisation in the reporting of European covered bond collateral. The International Capital Market Association's Covered Bond Investor Council has certainly thrown in the towel: it recently settled for national definitions.
A single template — but one that accommodates jurisdictional differences — will be used to regularly update investors with overcollateralisation (OC) levels, loan to value (LTV) ratios, non-performing loan (NPL) figures and the like.
But information is not knowledge, as Albert Einstein observed. And when the information is wrong, it's not even information.
Moody’s is still following up on a series of discrepancies in 2011 between the figures it received from Spanish issuers and the figures Spanish issuers published in their annual reports. Overcollateralisation differed by as much as 50%, cover pools were overvalued by up to €15bn and outstanding volumes underestimated by as much as €10bn.
Spanish issuers also use un-indexed LTVs, with no recalibration to take into account plunging house prices. That makes it pretty tough to carry out any meaningful assessment of the quality of a cover pool.
As Spanish cover pools comprise a bank’s entire mortgage book, the proportion and volume of bad loans is highly pertinent. But there are widespread concerns that non-performing loans are badly underestimated. Banks like CAM that were taken over by the government posted sudden jumps in the proportion of non-performing loans on their balance sheets.
In addition, issuers have restructured loans to avoid them becoming non-performing. Bankia renegotiated almost €10bn in assets in 2011. Some restructured loans are listed as sub-standard loans. Others are not. Investors and analysts have little idea what proportion of loans Spanish banks have restructured.
An outlook marred by rising unemployment and the potential for colossal mortgage losses has amplified these concerns. As jobless figures rise, so will mortgage defaults, which will put more downward pressure on house prices.
But unrepresentative residential LTVs are actually the least of investors’ worries. Issuers are exposed to real estate development projects that could be largely worthless, and commercial real estate assets outside of urban centres also need to be written down.
Residential mortgages still provide the best collateral Spanish banks have to offer. But however regularly issuers provide cover pool data, it if remains fundamentally unsound then investors are well justified in staying clear.