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GSE reform filed, covered bond legislation next

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The office of Rep. Scott Garrett (R-N.J.) told HousingWire Wednesday that the latest draft of legislation providing a regulatory framework for covered bonds in the U.S. will be dropped "in the not too distant future." Proponents for serious covered bond issuance in the U.S. say now that reform of government-sponsored enterprises is under way, the alternatively structured product stands a better chance than ever for finally gaining a foothold. Opponents, on the other hand, see a limited market for covered bonds, as they'd be unable to compete with established European platforms, and they are uneconomical compared to Federal Home Loan Bank financing. "If Fannie and Freddie are going to shrink, it will open the market opportunities for covered bonds," said one source. Indeed, the sponsors of last year's failed bill are now in positions of greater influence following the Republicans return to power in the House. Garrett is now chairman of the subcommittee on Capital Markets and Government-Sponsored Enterprises and co-sponsor Spencer Bachus (R-Ala.) now chairs the Financial Services Committee. "The GSE reform option leaves room for covered bonds in mortgage financing, yet the starting point still remains in passing a regulatory structure in a covered bond act," said Jerry Marlatt, senior counsel at Morrison Foerster, a law firm supporting an established covered bond regulatory framework in the U.S. "As Fannie and Freddie shrink away from the total market dominance of today, it will open the market for private financing facilities," Marlatt said. "Covered bond legislation passed the House Financial Services Committee last year. So this time around, the education process regarding covered bonds needs to be taken into account." Marlett also said the onerous covenants of FHLB issuances will make covered bonds more attractive. Besides, he adds, an over dependence on any one product is not favorable to an active secondary markets. Furthermore, if the legislation looks anything like last year's, Garrett will expand covered bond assets from the traditional real estate and municipal debt. The representative's bill offered up student loans, auto loans and credit card receivables as eligible covered bond collateral. Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.

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