The latest legislation looking to establish a regulatory framework for a U.S. covered bond system to finance mortgages is being bogged down due to conflicts in the tax code.

The House Finance Services Committee passed a bill from Reps. Scott Garrett, R-N.J., and Carolyn Maloney, D-N.Y., in June. But it hasn’t moved to the floor yet. Because of a tax provision in the bill on how firms would account for a covered bond, the bill must pass through the House Committee on Means & Ways, according to congressional aides.

According to the bill, the acquisition of a covered bond will be treated as an investment and not an interest in the loan. Both are treated differently under Internal Revenue Service.

But the Means & Ways committee is waiting on extra work to be done on the bill. The Congressional Budget Office and the Joint Committee on Taxation are both due to release analysis on the stipulation.

“I feel confident that the bill will be voted on in the House this year,” said a spokesman for Rep. Garrett.

Sens. Kay Hagan (D-N.C.), Bob Corker (R-Tenn.), Chuck Schumer (D-N.Y.) and Mike Crapo (R-Idaho) introduced a sister bill in November. But it too waits behind a long list bills held up in a gridlocked Congress.

Sponsors of both versions boast bipartisan and industry support, moreso than previous delayed efforts to reform the mortgage finance system post-crisis.


“The covered bond issue has come up in discussions about housing finance reform and it is an issue that Chairman Johnson will continue to look into,” according to a Senate Banking Committee aide.

But regulators, particularly the Federal Deposit Insurance Corp., are uneasy with the idea of covered bonds.

In previous testimony before Congress, representatives from the FDIC said the bill fails to maintain the balance between investors’ demands and government exposure, “providing investors with lopsided benefits at the direct expenses of the Deposit Insurance Fund.”

“Covered bonds, much more accepted in Europe, is a good way to deal with getting mortgage securitization in the U.S. restarted,” said Ron D’Vari, CEO of NewOak Capital Advisors. “The liabilities and assets are both kept on the banks book and they are on the hook for ultimate losses. There is typically less transparency and hence concerns by bank regulators.”

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