Further Cover Assets as a Necessary Component of Pfandbrief Cover Pools

Sascha Kullig and Andreas Luckow, vdp

An investor who purchases a Mortgage Pfandbrief wants to be sure it is backed by property loans and real estate liens. Why should any other asset types be used as collateral? Would that not be a case of false labeling? Could it be that banks that issue Pfandbriefe want to take advantage of the highly favorable refinancing conditions the Pfandbrief offers and generate high profit margins by using substitute cover assets, now referred to as “further cover assets”?

Such questions have increasingly been asked of late since a number of investors and analysts began focusing their attention on the topic of further cover assets. Yet the eligibility and the use of further cover assets is actually older than the German Mortgage Bank Act (Hypothekenbankgesetz). This article provides an account of why further cover assets are anything but the devil’s work, and explains that they are in fact an important, appropriate and necessary component of Pfandbrief cover pools.