Bank of Portugal wants banks to securitize their real estate loans

Bloomberg reports that the Bank of Portugal wants to increase the availability of credit by having the country's banks securitize their troubled real estate loans.

While I understand why the Bank of Portugal wants to increase the availability of credit, this is going to be extraordinarily hard to achieve if the banks try to sell 'sub-prime' mortgage-backed securities without observable event based reporting.

Who would buy a portfolio of distressed real estate loans if they did not have current information on how the loans were performing?

However, with observable event based reporting, where all activities like a payment or default involving the underlying loans are reported before the beginning of the next business day, investors would have the current information they need to know what they own.

With the ability to know what they currently own comes the ability to assess the underlying loans and value the security.

The Bank of Portugal wants the country's banks to set up a fund where their shaky real estate loans would be securitised and sold in order to provide more financing to the recession-hit economy, the financial authority said on Tuesday. 

It said it had met representatives of the Portuguese Banking Association to present its initiative which had already been coordinated with the country's European and IMF lenders. 

Such a fund would increase the banking sector's "capacity to finance the economy, boost the prospects of longer-term profitability in the sector and reduce the levels of borrowing by the banking sector with the European Central Bank".

Your humble blogger has frequently made the point that restarting the securitization market would reduce the need for accessing a central bank for funds.

In fact, the ECB is desperate to restart the structured finance market.

Portuguese banks have long been frozen out of the interbank funding market due to the country's debt crisis and relied heavily on ECB liquidity....

The reason the banks are frozen out of the interbank funding market has to do with the lack of transparency.  Their disclosures leave them resembling 'black boxes'.

When banks with money to lend cannot assess the risk of banks looking to borrow, the banks with money to lend don't lend.  This is what is happening to the Portuguese banks.

Fixing this problem is simple.  The banks should provide ultra transparency and report on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  With this information, banks with money to lend could assess the Portuguese banks and the interbank lending market would reopen.

The property market in Portugal has not been as hard-hit by the crisis as in Spain or Ireland, but the volume of overdue loans held by Portuguese firms has been rising, hitting record highs in June, as credit conditions tightened. 

Bank of Portugal data show construction and real estate companies accounting for nearly 17 percent of all non-performing loans to businesses in the first half of the year. The share of bad loans to businesses in general increased to 8.8 percent of all loans in June from 5.6 percent a year ago. 

Housing loans to private individuals still have a fairly modest 2.2 percent share of overdue loans. 

Trends like these make it even more important that banks provide ultra transparency and structured finance securities provide observable event based reporting.