Covered bonds provide an opportunity for fundamental changes in the US housing finance system, said Morrison Foerster in a response to a US Treasury consultation on reviving securitisation, with the American Bankers Association also mentioning the asset class.

The request for comment (RFC) was announced on 26 June by US Treasury Secretary Jacob “Jack” Lew (pictured) alongside initiatives to support access to rental housing and to help homeowners avoid foreclosure.

Stressing the need for more private financing of mortgage lending in addition to government-supported options, Lew said “that is why I have directed my team to bring investors and securitizers together in the months ahead so we can uncover new paths to increase private investment”.

“As part of this effort,” he added, “we are posting questions on our website today intended to help us better understand what we can do to encourage a well-functioning private securitization market.”

Comments – “On the development of a responsible private label securities (PLS) market” – were due by Friday, although some appear to have been filed after this date. At the time of writing, 27 responses had been submitted, of which two, from Morrison Foerster lawyers and the American Bankers Association (ABA), addressed covered bonds.

The Morrison Foerster submission did so in detail, while the ABA’s comment was brief, but clear.

“[R]ather than developing a single ‘silver bullet’ solution to housing finance, it may be desirable to develop a multiplicity of sources which aid in the reestablishment of a private market,” said the association. “Thus, in addition to the creation of a successor entity or entities to the GSEs, policymakers may want to consider the creation of a well regulated covered bond market, as well as enhancements to the Federal Home Loan Banks which better help them meet their mission of providing advances to private market portfolio lenders.

“Multiple sources of liquidity for private market lenders (and especially portfolio lenders in the examples cited) will lead to a more diverse and ultimately safer housing financing system.”

The Morrison Foerster lawyers also said that restoring the private RMBS market is desirable, but that other sources of private housing finance should also be developed, with covered bonds providing the Treasury with “an opportunity” to do so.

Implementing a covered bond framework in the US could satisfy many of the attributes of “a safe and sustainable channel for private financing of residential mortgage loans”, they said.

The conditions for establishing such a framework are already advanced, according to the lawyers, who noted that covered bond legislation introduced by Congressman Scott Garrett in 2011 was approved with strong bi-partisan support in the House Financial Services Committee, that the domestic investor base has developed strongly on Yankee issuance, and that the Securities & Exchange Commission (SEC) has developed a disclosure framework for covered bonds and periodic reporting to investors.

“The advanced state of these conditions means that there is an opportunity to achieve some fundamental changes rather quickly without the need to wait for investors to regain confidence in a previously toxic sector of the market,” said the Morrison Foerster lawyers. “The active support of the Department of the Treasury for covered bond legislation would hasten the development of an important alternative channel for private funding of residential mortgage loans.”

They noted that concerns around asset encumbrance arising from covered bonds have been raised by the Federal Deposit Insurance Corporation (FDIC) and others.