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Mortgage bonds

Mortgage bonds are strictly regulated transferable, registered securities and, pursuant to the Act XXX of 1997 on Mortgage Loan Companies and on Mortgage Bonds (Mortgage Act), can be issued only by mortgage banks.

Mortgage bonds (covered bond) are debt securities and are different from senior unsecured bonds. The special condition for its issuance, i.e the existence of the underlying coverage required by the Mortgage Act (Jht.) is certified by an independent Asset Controller approved by the MNB. Claims in the form of covered bonds never expire against the issuer.

Special status in case of liquidation and resolution

The obligations arising from the Mortgage Bonds are equal in rank to each other (pari passu) in the event of the liquidation or resolution of the Issuer. Unlike the Issuer's other unsecured, non-subordinated obligations, they enjoy a special status under the Section 20 Subsection (5) and Section 21 Subsection (2) of the Mortgage Act, given that these claims do not form part of the liquidation assets.

Security of Mortgage Bonds

According to the Section 14 Subsection (1) Mortgage Act Mortgage loan companies shall at all times have sufficient cover assets to ensure that all liabilities of the mortgage bonds are covered. The liabilities referred to in Subsection (1) shall include:

  • the obligations for the payment of the principal amount of outstanding mortgage bonds;
  • the obligations for the payment of any interest on outstanding mortgage bonds;
  • the obligations attached to derivative contracts held in accordance with the requirements set out in this Act; and
  • the expected costs related to maintenance and administration for the winding-down of the mortgage bond program.

According to the Section 14 Subsection (1b) Mortgage Act the following cover assets shall be considered to contribute to the coverage requirement:

  • ordinary assets; principal, interest, costs according to Section 14 subsection (3). The amount of ordinary collaterals must always reach 80% of outstanding mortgage bonds with a remaining maturity of longer than 180 days. In case of loans secured by a residential real estate the principal arising from a mortgage loan can be considered as ordinary collateral up to 70% of the mortgage lending value of the property. In case of loans secured by commercial real estate the limit is 60%
  • complementary assets serve to complement ordinary security and shall contain assets set out in Section 14 subsection (11)
  • liquid assets held in accordance with Section 14/B, other than those mentioned in Section 14. Subsection (1b )sub-subsection b) hereof; and
  • claims for payment attached to derivative contracts held in accordance with the requirements set out in the Mortgage Act (Section 14 subsection (6))

According to Section 14/B Subsections (1) and (2) in order to cover the net liquidity outflow, the mortgage bond program shall contain a cover pool liquidity buffer composed of liquid assets. The cover pool liquidity buffer shall cover the maximum cumulative net liquidity outflow over the next 180 days. The Subsection (3) regulates which types of segregated assets shall the cover pool liquidity consist.

According to Section 14 Subsection (4) collaterals of mortgage bonds has to be calculated and monitored both on nominal and based on present value calculation.

In accordance with Section 14 subsection (17) the overcollateralization of outstanding mortgage bonds has to be least 2 percent.

The independent property supervisor monitors and certifies the permanent availability of the collateral for the mortgage bonds, as well as the registration of the collateral providing the ordinary collateral of the mortgage bonds, of their real estate registration data and loan to value, as well as of the ordinary and additional collateral.

The strict regulations of the Jht. and other laws provide further protection for the investors:

  • Special MNB supervision: Pursuant to the Jht. rules, MNB is obliged to have an inspection at mortgage banks on annual basis.
  • Increased transparency: Mortgage banks are obliged to publish the value of outstanding mortgage bonds and the cover pool on quarterly basis. Moreover, MBH Mortgage Bank semi-annually publishes the quick reports on its previous half year performance, and also updates the Transparency Report on quarterly basis on its website, in line with the requirements of MNB and CRR 129.
  • Rating, (S&P) further information about the mortgage bonds issued

Why buy mortgage bonds?

Special security features and risk mitigation factors described above make it attractive to buy and hold mortgage bonds, but in addition to these, there are other characteristics that are worth considering for potential investors. The Covered Mortgage Bonds issued by the MBH Mortgage Bank

  • are publicly issued securities.
  • offer medium and long term investments, having 3-5-10-15 year tenor,
  • are listed on the stock exchange,
  • are less risky compared to other similar assets (senior unsecured bonds)
  • provide higher yields than government securities