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Covered bond legislation takes first step in House

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A House of Representatives subcommittee approved legislation Tuesday that would establish framework needed for a larger covered bond market in the U.S. Rep. Scott Garrett (R-N.J.) and Rep. Carolyn Maloney (D-N.Y.) introduced the United States Covered Bond Act of 2011, H.R. 940, in March. It is the third time in as many years Garrett is attempting to pass the legislation. Covered bonds are similar to asset-backed securities by providing liquidity to markets, funding loans such as mortgages. But unlike traditional ABS, issuers remain on the hook to compensate investors on any potential losses. In a rare moment of bipartisanship, Garrett's bill passed the capital markets subcommittee by a voice vote. It will be considered by larger the House Financial Services Committee. The bill sets up what Garrett called "legal certainty" for covered bond programs and regulatory supervision. "I’m pleased to see the covered bonds bill receive such wide bipartisan support in the subcommittee," Garrett said. "With our economy still recovering from the financial crisis and the need to unlock credit at an all time high, facilitating the development of a covered bond market in the U.S. makes perfect sense." Covered bonds are much more common in Europe. However, there typically only municipal, corporate or high-quality real estate debt is bonded. The American version would likely allow for a much larger swath of collateral (student loans, auto loans, etc.) that some say are too risky. However, covered bonds are not without detractors. Analysts at Moody's Investors Service said recently that a U.S. housing finance market may not function as well during periods of stress if more reliance is placed on a covered bond market instead of the Federal Home Loan Banks. Chris Whalen at Institutional Risk Analysts previously said the bill was a "wolf in sheep's clothing," claiming it is essentially the same subprime model that caused the crisis. Still, Garrett defended the legislation Tuesday, saying it would not only restore credit to the market but will give U.S. firms a competitive leg-up. "This legislation will not only generate increased liquidity but will also level the playing field so that U.S. financial institutions are no longer at competitive disadvantage to their foreign counterparts," Garrett said. Write to Jon Prior. Follow him on Twitter @JonAPrior.

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