Sen. Chris Dodd (R-Conn.) chaired a covered bond panel of the Banking, Housing & Urban Affairs Committee today and said he took comfort knowing all the participants having a history of talking to each another about the subject. A binding regulatory framework for the secondary mortgage product has long eluded legislative establishment in the U.S. After a few initial failures, covered bond legislation made it on the docket in July. Reps. Paul Kanjorski (D-Pa.) and Scott Garrett (R-N.J.) sponsored H.R. 5823, and the latter sits on the committee. One of the major differences between the covered bond legislation in the U.S. and Europe, is the expansion of asset classes. Under Garrett’s proposal, commercial real estate – as well as student loans, auto loans, etc – can be considered for covered bonds. This is an important point because two-thirds of Americans will be renters in the future, according to Ric Campo, the chief executive of Camden Property Trust, speaking to the committee on behalf of the National Multi-Housing Council. “The multifamily model is already doing very well with the current model,” Campo said, and Dodd agreed. However, Scott Stengel, a partner in the Washington office of Orrick, Herrington & Sutcliffe said the new framework needs to be carefully crafted. “We don’t want all quality loans going into covered pools and bad loans being left behind,” he said to the committee. “Investors will not dedicate funds to this market unless the legal regime is unequivocal and the risks can be identified and underwritten,” he said. Stengel is also a member of the steering committee for the Securities Industry and Financial Markets Association U.S. Covered Bond Council. The ratings of covered bonds are linked to the issue. The bond payments are covered in the sense that the issuing financial institution is on the hook for losses. However, should the bank go out of business, there are questions on how liquidation may be handled. During the hearing, Michael Krimminger, deputy to the chairman of the Federal Deposit Insurance Corporation said his agency’s role in the covered bond framework needs further clarification. “H.R. 5823 would muddy the relationship between investors and regulators, transfer some of the investment risks to the public sector and the DIF, and provide covered bond investors with rights that no other creditors have in a bank receivership,” Krimminger said. “As a result, this legislation could lead to increased losses in failed banks that have issued covered bonds.” Write to Jacob Gaffney.
Financial reform wrapped, Dodd turns to covered bonds
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