A US covered bond bill passed by the House Financial Services Committee in June could move to the House floor in the very near future, Chris Russell, senior policy advisor to Congressman Scott Garrett, told delegates at ASF 2012 yesterday (Monday).

He said that “jurisdictional issues” have kept the US Covered Bonds Act of 2011, which is sponsored by Republican Congressman Garrett and Democrat Carolyn Maloney, from moving onto the floor of the House of Representatives. The bill (HR 940) is with the Ways & Means Committee, which has jurisdiction over tax matters, and Russell said that proponents of the legislation are waiting for the committee to alter the text of the bill in relation to some tax issues.

Russell said that the bill will “hopefully” move to the floor of the House of Representatives in the very near future.

“The goal is to do it in quarter one of this year,” he said.

House Of Representatives

He referred to the introduction of covered bond legislation by a bipartisan group of Senators in November as a “very big step forward” and said that the similarities between the Senate and the House bill represented a good starting point for taking the legislative project further, contrasting the bipartisan support for covered bond legislation with what he described as a very politicised process of reforming housing government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and the US secondary mortgage market.

Russell said that he hoped that progress will be made in the Senate and House over the next couple of quarters and that covered bond legislation could be passed to the President’s Office before the end of the year.

He made his comments on a covered bond panel at the American Securitization Forum’s event and the panellists discussed the role of legislation in allowing a domestic covered bond market to develop.

Rui Pereira, managing director, head of US RMBS, Fitch, identified legitimate GSE reform and covered bond legislation as the two main conditions needed for a US covered bond market to develop, noting that more than 90% of housing finance is provided by the GSEs. When there is some legitimate reform of the GSE system there will be a need for private capital, such as in the form of covered bonds, to step in, he said.

Aaron Klein, deputy assistant secretary for economic policy, US Treasury, said that Federal Home Loan Banks (FHLB) are also relevant to discussions about the prospects of and need for covered bonds in the US. They are “also part of the GSE equation”, he said, and one of the reasons why covered bonds have not developed in the US.

“The rest of the world has covered bonds, the US has Federal Home Loan Banks, and the two haven’t met,” he said.

Klein stressed the need to think carefully and holistically when considering moving toward opening mortgage financing to more private capital, and said that “we are working very carefully to construct a solution to work through this”

He said that covered bond legislation can clear up uncertainty, but added that he was “very intrigued” by market participants’ comments about the need for greater certainty, asking whether it is a lack of uncertainty in general that is a concern or a specific type of uncertainty.

Taking up that question, Jerry Marlatt, senior of counsel, Morrison & Foerster, said that uncertainty under the existing covered bond framework in the US has meant that issuers have had to build expensive structures, and that progress will not really have been made if the Federal Deposit Insurance Corporation (FDIC) retains the flexibility it has with respect to the treatment of covered bonds in an insolvency.

Russell referred to the FDIC taking a “myopic view” of its role of protecting the Deposit Insurance Fund (DIF) and that the FDIC’s concerns are “a bit overstated but we’re working on that”. He later said that the originate-to-hold model of covered bonds can help improve underwriting, and that fewer banks failing means that there is less of an adverse impact on the DIF.

“The FDIC doesn’t factor all that in its calculations,” he said.

He added that one of the major outcomes of the Dodd-Frank Act is a change in the way the DIF is funded and how the FDIC determines charges for insured depository institutions.

Marlatt said that this is a very good point and that DIF funds are not a taxpayer resource, with the banking system instead at risk and that this “gets misconstrued a bit”.