When it comes to covered bonds – especially their application in the mortgage market – Rep. Scott Garrett of New Jersey just won't give up.
The New Jersey Republican, a fierce critic of Fannie Mae and Freddie Mac, has been pushing legislation to create a covered bond market for several years without success. But now that he chairs the House Financial Services subcommittee on capital markets he may have a real chance at success.
Earlier this week he reintroduced a bill to create a regulatory framework for federally insured banks to issue covered bonds. Rep. Carolyn Maloney, D-N.Y., is a co-sponsor of the measure, H.R. 940.
Covered bonds would provide a "purely private means of finance without government guarantees or subsidies," chairman Garrett said at subcommittee hearing Friday.
Covered bonds are well established in Europe and Canada. The product enables banks to tap low-cost, long-term financing for their mortgage portfolios. The covered bond issuer retains the mortgages on their balance sheet and investors have recourse to the bank as well as the assets.
In the U.S., it is expected large banks will use covered bonds as an alternative to securitization but not a substitute because of capital constraints.
H.R. 940 details the "exact process" for dealing with the failure of a covered bond issuer. But Friday's hearing revealed that the Federal Deposit Insurance Corp. remains concerned that covered bond investors would have superior rights to other secured creditors. The FDIC has suggested changes to the bill – but covered bond supporters testified that such changes would kill any chance of establishing a market in the U.S.
Meanwhile, in 2010 foreign banks issued $30 billion of covered bonds dominated in U.S. dollars. Roughly, $15 billion of these dollar-denominated bonds were sold by Canadian banks, according to Ralph Daloisio, managing director of Natixis, who represented the American Securitization Forum at the hearing.
"In short, our investors have been investing noticeably in U.S dollar covered bonds for over a year now, but they have been buying from non-U.S. issuers," Daloisio testified.
