A functioning covered bond market in America may give lenders additional sources of funding to make more loans, but it may also hurt Federal Home Loan Banks, according to Moody's Investors Service (MCO). Analysts at the rating agency said legislation introduced by Rep. Scott Garrett (R-N.J.) and Rep. Carolyn Maloney (D-N.Y.) earlier in March would be credit positive for domestic banks and credit negative for the dozen FHLBanks across the country. "The U.S. housing finance market may not function as well during periods of stress if greater reliance is placed on the covered-bond market versus the FHLBanks," Moody's said. Chris Whalen at Institutional Risk Analyst calls the Garrett-Maloney bill "a wolf in sheep's clothing" because it appears based on European models, but is actually "the same old subprime model that caused the crisis of 2007 all over again." Whalen said the bill, as written, helps the largest mortgage servicer banks the most. "Think of the Garret-Maloney legislation as reinforcing the large bank monopoly on mortgage finance in the U.S., this while enabling new regulatory arbitrage in terms of asset quality, collateral and regulation," he said. All U.S. banks finance part of their mortgage portfolio with FHLBank funding. If covered bonds become another funding source for banks, FHLB institutions could see reductions in their overall footprint and profitability, according to Moody's. Whalen also believes the current covered bond proposals are anti-competitive. "During the recent economic credit crisis, spreads on both FHLBank debt as well as covered bond debt widened significantly," analysts said. "However, FHLBank advances were a very reliable source of additional funding for U.S. banks." The advances rose by about $400 billion through the crisis while European covered bond issuance fell without support of the European Central Bank. "The increase in funding by the FHLBanks was precisely at the same time during which the capital markets were withdrawing funding for banks owing to asset quality concerns and reinforced the FHLBanks' critical role as liquidity providers to U.S. banks," Moody's said. Covered bond proponents told Garrett and a House subcommittee Friday the structured finance product is "an untapped but proven resource" that could help sate investor appetite for highly rated, secure bonds and give lenders cost-effective funding. Whalen thinks establishing a covered bond market stateside under the direction of Rep. Garrett "simply moves the large bank game in mortgage servicing and securtization to a new table and leaves the rest of the banking industry and consumers behind." "For students of American history, there is no surprise that the latest gift for the big banks comes from two politicians from New York and New Jersey," Whalen said. Write to Jason Philyaw.