Ely: Covered Bonds a $21.5 Trillion Opportunity, But...

If covered bonds ever become a reality in the U.S., it would be a $21.5 trillion opportunity for financial institutions with about half of that tied to residential loans, according to analyst Bert Ely. In testimony before Congress, Mr. Ely cautioned that the $21.5 trillion figure is a number that represents the market's potential - not the reality. "While covered bonds will not come close to providing 100%" of the funding for all different asset types "even a 10% share would be enormous," he said. According to testimony before the House Financial Services Committee, the covered bond market has many hurdles to clear including the establishment of a regulator to oversee the business and how to treat a pool of covered assets should the issuer go out of business. A covered bond is bank issued debt that (unlike existing U.S. MBS) is not sold into a legal "trust." This allows investors to look to the issuing bank for repayment if something goes wrong with the credit quality of the underlying loans. The Obama Administration is expected to review the use of covered bonds in crafting its plans to revamp Fannie Mae and Freddie Mac.