Last week, Rep. Scott Garrett, R-N.J., introduced the U.S. Covered Bond Act, with Rep. Paul E. Kanjorski, D-Pa., and Financial Services Committee Ranking Member Spencer Bachus, R-Ala., signing on as leading co-sponsors.
Covered bonds originated in the European bond market and are debt securities backed by cashflows from mortgage and public-sector loans. Assets from covered bonds, which normally carry a two- to 10-year maturity rate and include high credit ratings, are kept on the issuer's balance sheet.
The Garrett-Kanjorski-Bachus legislation establishes regulatory oversight of covered-bond programs, includes provisions for default and insolvency of covered-bond issuers and subjects covered bonds to appropriate securities regulations by federal regulators.
"As the U.S. continues to recover from the financial crisis, it is essential that Congress examine new and innovative ways to unthaw our locked credit markets and encourage private capital to confidently re-engage by turning cash now on the sidelines into active investments in our country's future," says Garrett, Ranking Member of the House Financial Services Subcommittee on Capital Markets.
The U.S. Covered Bond Act is the legislative follow-up to Garrett's original legislation, The Equal Treatment for Covered Bonds Act, which was first introduced in 2008. During that same year, the Treasury Department issued a list of best practices that described the most prudent ways for interested issuers to offer covered bonds, and the Federal Deposit Insurance Corp. (FDIC) published a final policy statement that provided guidance to investors as to what access the FDIC would offer to the collateral in case of a bank failure.
"I am optimistic that there is a good chance for bipartisan agreement on this issue," adds Bachus. "Once members understand how a covered bonds marketplace works and the benefits that it can offer homeowners, I believe Republicans and Democrats can come together and provide the legislative framework necessary to create a robust covered-bonds marketplace here in the U.S."
Garrett's bill has also garnered support from Commercial Mortgage Securities Association (CMSA), which lauded the legislation for including commercial mortgages and commercial mortgage-backed securities as eligible collateral.
"Today, commercial debt is permitted in covered-bond pools in most European jurisdictions, and CMSA believes any U.S. covered-bond framework should ensure that U.S. financial institutions, consumers and borrowers have a level playing field and equal credit opportunities," the CMSA said in a statement.