Nearly seven years ago, financial institutions, specificallyWashington Mutual and Bank of America (BAC), issued the first U.S. covered bonds.
Despite the success with covered bonds, it became clear that the existing structure for issuing U.S. covered bonds was too expensive to replicate and too complicated for investors — investors disfavored the unusual securitization-type structure.
To try and break the structure of the covered bond market, proposed legislation was introduced in the Senate and assigned to the Committee on Housing, Banking and Urban Affairs, but no hearings were held on the bill and, consequently, no further action was taken.
With the start of 2013, a new Congress began and any bills unfinished by the old Congress must be reintroduced into the new council. However, the legislative agenda is crowded this year with spending limitations and bills out there designed to wind down Fannie Mae and Freddie Mac.
Perhaps, it’s time to try an alternative to try and restart covered bond issuance by banks in the absence of a statute, suggested Anna Pinedo and Jerry Marlatt of Morrison & Foerester.
"The housing market is clearly recovering strongly and the need for private sector funding of residential mortgages is growing," both attorneys explained.
They added, "Covered bonds provide a more policy-friendly means of residential mortgage finance. Because mortgages remain on the bank’s books, the bank’s interests are better aligned with those of investors."
From an investor perspective, covered bonds create additional confidence because they are dual recourse instruments, providing recourse both to the issuing bank and to a pool of collateral in the event of a bank failure or default.
It may seem worth attempting to obtain approval for issuing covered bonds under the structure used by Canadian and English banks prior to the passage of statutes in those countries and still used today.