The mortgage-finance alternative to securitization, covered bonds, came one step closer to larger acceptance in the US secondary markets with the introduction of the highly-anticipated United States Covered Bond Act by Rep. Scott Garrett (R-N.J.). In the February issue of HousingWire magazine, Garrett is featured in a lengthy Q&A on his push to get legislative and regulatory recognition for covered bonds, products that are collateralized typically by prime mortgages. Covered bonds are so named for the dual recourse provided, where the issuer is on the hook to pay out regardless of whether or not the collateral performs as expected. Usually, covered bonds hedge this risk by using over-collateralization as credit enhancement. This allows for non-performing mortgages to be pulled from bonded pools and replaced with performing mortgages. The platform is Europe’s oldest form of structured finance and has yet to see triple-A defaults. So in that sense, covered bonds remain to be vigorously tested. However in an e-mail to reporters, Garrett, along with support from co-sponsors Rep. Paul Kanjorski (D-Pa.) and Financial Services Committee Ranking Member Spencer Bachus (R-Ala.), says the bill will establish regulatory oversight of covered bond programs, includes provisions for default and insolvency of covered bond issuers and subjects covered bonds to appropriate securities regulations by federal regulators. Alberto Basu, the head of the US (dollar-denominated) covered bond trading at JP Morgan (JPM) remarked that such legislation is necessary to show support for the product in the market place. And the Securities Industry and Financial Markets Association (SIFMA), a secondary market trade group, agrees. “SIFMA’s US Covered Bond Council is pleased to see the increased momentum for a dedicated legislative framework for covered bonds that is fundamental to building a vibrant US covered bonds market,” said Sean Davy, managing director at SIFMA, in a statement. “We thank Congressman Garrett for his leadership on this issue and are pleased to see Reps. Kanjorski and Bachus join him in this effort.” The United States Covered Bond Act is the legislative follow-up to Garrett’s original legislation, The Equal Treatment for Covered Bonds Act, first introduced in 2008. The US Treasury also lists the options on Federal Deposit Insurance Corp. (FDIC) policy concerning what investors can expect if the bank that ‘covers’ the bonds itself goes out of business. Garrett’s Act list eligible assets for covered bonds as residential property, home equity assets, as well as auto, commercial and student loans. Credit cards, public sector assets and small business assets are also eligible. The established regulator, if passed, will be required to approve all covered bond platforms, and list on a single website, and establish over-collateralization minimums. As Garrett discussed in his Q&A, obstacles to introducing the legislation included not only getting co-sponsors, but also satisfying some concerns of the FDIC. One solution seems to be that, in the case of bank failure, the FDIC will have 15 days to shift the platform to another issuer. Thereby disallowing investors from seeking recourse from the FDIC. Write to Jacob Gaffney. The author holds no relevant investments.