US covered bond legislation included in a House GSE reform bill would limit the FDIC’s possible actions towards covered bonds in a credit positive manner, Moody’s said today (Monday), but a spokesperson for the Congressman pushing the bill told The CBR the regulator appears intent on spiking the proposal.

There is no covered bond legislation in the US, despite several attempts to create it. A renewed attempt was launched again a few weeks ago, with covered bond legislation, in the form of the US Covered Bond Act of 2013, included in a House Republican housing reform bill aimed at winding down Fannie Mae and Freddie Mac, the Protecting American Taxpayers & Homebuyers Act (PATH Act).

The hotly contested PATH Act was passed by the Republican-controlled House Financial Services Committee (HFSC) on Wednesday, without any Democrat support.

Yehudah Forster, vice president, senior credit officer at Moody’s, said that the proposed covered bond legislation “would address a major weakness in the current framework and help spur growth in the domestic covered bond market”, namely by prohibiting the Federal Deposit Insurance Corporation (FDIC) from repudiating covered bonds and paying damages to covered bondholders that would not fully compensate them.

These repudiation powers have been one of the factors that have contributed to stifling the growth of a domestic covered bond market, noted Forster, but the proposed framework would provide covered bond-friendly alternatives.

These involve the FDIC being given a one year option following a bank failure to transfer a covered bond programme to a solvent bank, during which time the FDIC would be required to make all timely payments on the bonds and satisfy the programme’s other requirements, such as maintaining the required minimum overcollateralisation. If the FDIC chose not to exercise this option, the cover pool assets would form a segregated legal estate apart from the bank’s other assets. An administrator would pay covered bond investors to maturity using the cash generated by the legal estate.

The FDIC’s opposition to a loss of repudiation rights with respect to covered bonds has been a major stumbling block for previous attempts to introduce covered bond legislation in the US.

Asked whether the 2013 Covered Bond Act made any concessions to FDIC concerns about covered bonds, a spokesperson for Representative Scott Garrett (R-N.J.), the main sponsor of this and previous covered bond bills, told The Covered Bond Report that many concessions have been made to the FDIC, but that none “pacify them”.

“Rather than negotiate, the FDIC seems to be determined to kill the proposal,” she said.

Moody’s Forster said that an amendment seeking to restore the FDIC’s repudiation powers was put forward, and rejected, in the markup session that preceded the vote on the PATH Act last week.

He downplayed the chances of the latest covered bond legislative proposal being enacted as long as it is tied to an initiative to reform the government-sponsored enterprises (GSEs), as this is something that Moody’s does not expect in the next few years, especially as the GSEs have returned to profitability.

“[T]he covered bond proposal would likely need a different vehicle to be enacted,” he said.