Congress made one more step toward making the Covered Bond Act a reality. On Oct. 1, the Congressional Budget Office released a report estimating the cost of creating a legislative framework for the world’s oldest structured finance product. The House Committee on Financial Services asked for a cost estimation on July 28, after marking up H.R. 5823, which would establish a framework for regulating covered bonds. The CBO estimates that, over the 2011-2020 period, enacting H.R. 5823 would increase net direct spending by $50 million and net revenues by $18 million, thereby increasing deficits by $32 million over that period. In addition, CBO estimates implementing the bill would increase discretionary spending at the Securities and Exchange Commission by $9 million from 2011-2015. However, some are doubting the CBO’s findings. “To say covered bonds result in lower taxable income is not exactly accurate,” said Jerry Marlatt of law firm Morrison & Foerster. “The issuing banks may increase their taxable income through the increased efficiency of funding through covered bonds.” The law firm is an active supporter of creating a covered bond framework. Morrison & Foerster attorney Anna Pinedo recently published the Covered Bond Handbook, a comprehensive guide for dealing in the structured finance product. Covered bond traders at investment banks say that without a legislative framework their supervisors don’t fully support the investments. The popular option for funding is through the Federal Home Loan Banks advances but that debt is seen as comparatively onerous as it is callable and the bank puts a super-lien on the assets. The House bill is sponsored by representatives Reps. Scott Garrett (R-N.J.), Paul Kanjorski (D-Pa.) and Spencer Bachus (R-Ala.). Garrett told HousingWire that he does not see covered bonds replacing securitization but rather as a funding alternative. The assets in covered bonds are linked to the issuer, which is ultimately on the hook for any losses. Under H.R. 5823 financial institutions will need to pay additional fees or deposit insurance premiums to offset the costs to the Federal Deposit Insurance Corporation associated with the covered bond program under the bill. Based on the expected use of covered bonds under the bill, CBO estimates the cost of the mandate will fall well below the annual threshold for private-sector mandates of $141 million in 2010, adjusted annually for inflation. H.R. 5823 would expand investor protections and asset classes for certain covered bonds. The new program would apply to bonds issued to finance residential and commercial mortgages, public-sector assets, small business loans, and other asset classes authorized by regulators. Write to Jacob Gaffney. The author holds no relevant investments.