It’s back. Again. Efforts to set forth legislation to establish regulatory oversight for covered bonds is being marked up in the House Financial Services Committee today. Covered bonds are so-called because the issuer remains on the hook for any investor losses. In short, the banks have buyers ‘covered,’ therefore, credit ratings are tied to the strength of the issue. If the bank itself defaults, the assets revert to the bondholders, not insurers such as the Federal Deposit Insurance Corp. (FDIC). The products popularly supply funding for mortgage originations (residential moreso than commercial) in Europe, with some countries offering platforms, and the products have yet to see defaults. Despite this, the structured finance vehicle has yet to gain tremendous support in the US, recently being booted from financial reform. The event represents another miss in what is now a handful of opportunities to get legislation on covered bonds passed. Traders argue that passing such legislation into law will be key to acquiring investor support, especially abroad. Critics say the dual recourse is too pricey and the typical bullet repay structure is unattractive to American bond investors. However, the new legislation, if it’s similar to previous drafts will include a much wider asset base, notably commercial real estate, credit cards, student loans, etc. The trade group, the CRE Finance Council is in total support of the new bill, called H.R. 5823, United States Covered Bond Act of 2010. The bill is being introduced by House Financial Services Capital Markets subcommittee ranking member Scott Garrett (R-NJ), subcommittee chairman Paul Kanjorski (D-PA) and Spencer Bachus (R-AL). According to the CRE Finance Council, as introduced, H.R. 5823 would enable insured depository institutions (IDIs) and holding companies to access an additional source of liquidity through a covered bond market at this critical time. Such an alternative helps IDI’s raise much needed capital to fund commercial real estate loans (CRE loans), and in turn, support a recovery in the CRE market. In a letter of support to Chair of the committee Barney Frank (D-MA) and Bachus “more than $1trn in commercial mortgage loan maturities come due in the next several years (most of which face an ‘equity gap’ between property value and loan amount),” the letter states, “while at the same time, the CMBS market – which accounted for nearly 50% of all CRE lending in 2007 – is still largely dormant.” The letter, signed by CEO Dottie Cunningham and the SVP of government relations Brendan Reilly, also argues that “in order to be globally competitive, any US covered bond regime should include commercial mortgages and CMBS; thus giving American consumers and businesses access to the same sources of credit available to foreign counterparts.” Write to Jacob Gaffney. The author holds no relevant investments.

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