US Congress Takes Another Run at Covered Bond Legislation

A bipartisan group of US Senators yesterday submitted legislation which is aimed at finally getting a U.S. Covered Bond market off the ground.

Senators Kay Hagan (D-N.C.), Bob Corker (R-Tenn.), Chuck Schumer (D-N.Y.) and Mike Crapo (R-Idaho) introduced the United States Covered Bond Act of 2011 which contains many of the same provisions included in a House bill which was sponsored by Representatives Scott Garrett (R-N.J.) and Carolyn Maloney (D-N.Y.).

While we have stressed in the past that the establishment of a clear framework for a U.S. Covered Bond market is important, it should not be viewed as a panacea.  Under the best of circumstances, we would view a vibrant Covered Bond market to be simply one complimentary component to a healthy structured finance marketplace.

Certainly, banks and other originators of mortgages and other related assets will appreciate the additional and potentially more efficient funding option that covered bonds could represent for their funding strategies.  However, the fact that these assets will remain on the balance sheet and therefore will need to remain “capitalized” on the balance sheet, most  likely makes the option signficantly less attractive than a pure securitization structure.

Nevertheless, we view this as another positive, if small, step in the right direction to resurrecting a structured finance market in the U.S.

Assuming that the Senate and the House come together to pass a bill, keep in mind that there will still be one very significant hurdle to be overcome.  The FDIC continues to drag its feet on clarifying their position related to investors rights under an issuer insolvency scenario.  So long as they refuse to make it crystal clear that they will not violate the “safe harbor” expectations of covered bond investors, this market will not gain much traction in the US, regardless of whether the proposed legislation is passed by Congress.

About markferraris
Managing Principal Orchard Street Partners LLC

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