Richard Zahm: Covered Bonds to be "a Key Component of RMBS 2.0"

Second Angel Bancorp (SAB) is a California-based private mortgage bank and direct lender that arranges and makes loans on commercial, industrial and residential real property.  Richard Zahm, a founder and principal, is also a portfolio manager for SAB's Second Angel Fund I, LLC — a $300 million closed-end mortgage fund. 

Richard ZahmIn an interview by Phil Hall for Mortgage Orb (Oct. 20), Zahm discusses his views on the return of the private-label securitization market for mortgage funding.  Contrary to some, Zahm does not see private RMBS as threatened with extinction.  But he does believe that the emerging new version — "RMBS 2.O" — will be slower-paced, with higher capital requirements and transparency, and a lower level of fees.  And he predicts that covered bonds will play an important role.

Mortgage Orb quotes Zahm as calling covered bonds "a nearly perfect solution to our situation" and "a key component of RMBS 2.0" because they "contain a key element securitization lacks: a double layer of protection for investors, with the asset being backstopped by the issuer."

Zahm identifies two major obstacles to covered bonds in the U.S.: (1) they are not yet well understood here, and (2) certain legal issues need to be resolved through legislation.  But he believes those impediments could disappear within a short time frame.

Besides covered bonds, the Mortgage Orb interview also includes Zahm's views on a number of other points related to the future of the private-label market, including the role of the GSEs (e.g., Fannie Mae & Freddie Mac) and the impact of deleveraging.