Covered bonds may not be a lost cause in the U.S. after all.
These securities, which are backed by cash flows from mortgages on bank balance sheets, have long been touted as an alternative to mortgage securitization. They have been used in Europe for decades. But previous efforts to establish a U.S. legislative framework for covered bonds have stalled due to concerns raised by the Federal Deposit Insurance Corp. and the Treasury Department.
They still have at least one supporter on Capitol Hill, however: Rep. Scott Garrett, R-N.J.
Garrett told attendees at a mortgage industry conference in New York that there might be an opportunity to push covered bond legislation through now that the federal debt ceiling has been raised.
Garrett didn't raise the issue himself; he was responding to a question following his keynote speech at IMN's Private Label RMBS Reform Symposium Thursday.
He said that, for "political reasons" he included covered bond provisions in broader housing reform legislation that he co-sponsored in 2013. He thought it would make the Protecting American Taxpayers and Homeowners (PATH) Act an easier sale. But this legislation, which also calls for winding down Fannie Mae and Freddie Mac, has also stalled.
Until recently, the congressman said, it would have been difficult to get a single-issue bill like establishing a covered bond framework through the Senate, where the Republican majority falls short of the 60 votes needed to pass legislation. That's because Democrats were unwilling to cross party lines unless the debt ceiling was raised.
The debt cap has now been lifted, which Garrett said "may open the floodgates" for a covered bond bill in the Senate.