House Republicans yesterday (Thursday) announced a bill that includes the creation of a legislative framework for covered bonds in the US as part of wider legislation aimed at phasing out Fannie Mae and Freddie Mac, with a hearing scheduled for next week.

Rep Jeb Hensarling

Announcing the Protecting American Taxpayers & Homeowners (PATH) Act, Jeb Hensarling, chairman of the House Financial Services Committee, said that the committee will hold a hearing on it next Thursday (18 July).

Among the Republican Congressmen behind PATH is Representative Scott Garrett, who since 2008 has led the push for covered bond legislation, having introduced various bills. Most recently, in June 2011 the United Sates Covered Bond Act of 2011 was passed by the House Financial Services Committee, although no clear progress on it has been made since then.

“Approximately five years ago our nation was hit with an unprecedented financial crisis,” said Garrett yesterday. “I am pleased that we are continuing the process of addressing the core cause of it — the government’s misguided efforts at allocating mortgage credit through Fannie Mae and Freddie Mac.”

Although the latest initiative will tie covered bonds to a bill that will be a focus of attention, proponents of covered bonds in the US have previously cautioned that, with reform of government sponsored enterprises (GSEs) such a politically charged topic in the US, there is a danger that it will take years to be achieved.

The new bill is also a Republican initiative, whereas the covered bond bill that was passed by the House Financial Services Committee in 2011 enjoyed bipartisan support and was co-sponsored by Democrat Carolyn Maloney.

A bipartisan group of Senators on 25 June introduced parallel legislation aimed at replacing the GSEs with a private housing finance system. The group of members of the Senate Banking Committee included Democrat Kay Hagan and Republican Bob Corker, who in November 2011 introduced a covered bond bill.

However, the only mention of covered bonds in the new GSE reform legislation (the Housing Finance Reform & Taxpayer Protection Act) introduced in the Senate is a requirement that a new Federal Mortgage Insurance Corporation include an analysis of “the state of the global covered bond market” in a wider annual report it would prepare for the Senate Banking Committee and House Financial Services Committee.