Sustainable Mortgage-backed Securities (SMBS) are a good idea at the right time-- that's why I have been working with MTS to get support for this path-breaking concept. Let me explain why-- in plain English.
- What are Sustainable Mortgage-backed Securities?
- Why does the market need them now?
- Giving "credit" where credit is due.
What are Sustainable Mortgage-backed Securities?
Simply put, mortgage-backed securities and the other complex financial instruments that have been flooding the news, cut up and redistribute a pool of financial payments to better meet the preferences of investors. Think of a mortgage-backed security as a bolt of cloth-- the cloth is cut up and made into different garments (trousers, suits, skirts), and the clothing is then sold to consumers with specialized preferences. The mortgage-backed security achieves something similar by cutting up and redistributing payments from a pool of mortgage loans to investors with different investment needs. Payments of mortgage interest (which are received first) are fastest and least risky, so investors who want fairly safe investments select these. The last principal payments on a mortgage loan are the most risky (because they are furthest in the future), so specialized investors with higher risk tolerances buy these. Other payments, which combine mortgage interest and principal, are sold to investors who want medium risk.
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Why does the market need them now?
So why have subprime mortgage-backed securities been tanking, and why are sustainable mortgage-backed securities a good idea? The answer is simple. Subprime mortgage-backed securities were backed by poor quality loans, while sustainable mortgage-backed securities would be backed by loans with strong credit quality. In the subprime market, homebuyers with limited means were given variable rate loans, loans that they could not repay when loan interest rates increased. The problem was compounded by failing to check the credit profiles of many borrowers. So many subprime loans had poor credit quality, the loans defaulted, and the owners of the mortgage-backed securities suffered losses.
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Sustainable real estate is very different. Sustainable real estate is a relatively strong investment opportunity. Sustainable buildings not only reduce the emissions that produce climate change, they are healthier and more comfortable for the occupants. As a result, sustainable buildings have won strong market acceptance. Case studies and new market information from the leading commercial real estate database show that green buildings often lease and sell faster than conventional buildings and achieve top tier rents and sale prices. As well, the energy-saving features of sustainable buildings mean lower fuel costs. Strong rents and sale prices and lower fuel costs mean that green real estate, on average, produces higher cash flows than similar conventional buildings. As a result, we can expect that mortgages on a pool of sustainable buildings are likely be repaid more readily and represent good investment risks. In sum, SMBS would be based on good quality collateral, while many subprime loans were not.
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Giving credit where credit is due.
Why launch SMBS now? The credit markets are in gridlock and stimulus is urgently needed to restart the economy. It makes sense to relaunch the mortgage-backed securities market with good quality credits like SMBS that can have a positive effect on our environmental challenges. As well, SMBS-- by offering permanent real estate mortgages-- help to spur job creation in the real estate segment-- including jobs in construction, real estate leasing and sales, and property management. These are jobs that stay with the real estate and cannot be exported-- and good quality, new jobs are needed urgently.
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We welcome your comments
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CONTACT: Leanne.Tobias@malachitellc.com
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