Covered bonds were included in the agenda of the House Financial Services Committee when its latest oversight plan was passed on Wednesday, but a market participant warned that in spite of some favourable conditions, their fate is still subject to the vagaries of US politics.

Covered bonds were included in a section on capital markets in the House Committee on Financial Services’ oversight plan for the 114th Congress.

“The Committee will examine the potential for covered bonds to increase mortgage and broader asset class financing, improve underwriting standards, and strengthen US financial institutions,” reads the document.

In July 2013 the committee passed a GSE reform bill (the PATH Act, HR 2767) that included covered bond legislation, but was not put to the full House of Representatives and progressed no further. The full committee had previously, in June 2011, passed the United States Covered Bond Act of 2011 (HR 940), but that suffered a similar fate, even though that November a similar bill was introduced in the Senate.

Although that and other US initiatives have at times enjoyed bi-partisan support, efforts have been Republican-led, primarily by Congressman Scott Garrett. Since his push for legislation began, control of the HFSC has passed from the Democrats to the Republicans – with Republican Congressman Jeb Hensarling now committee chairman – and following elections in the US in November both houses of Congress are now Republican-controlled.

Jerry Marlatt, senior of counsel at Morrison & Foerster, said that this augurs well for progress in covered bond legislation, although he cautioned against getting too carried away.

“The Republicans now control the schedule for legislation in both Houses of Congress and therefore it is more likely that if a covered bond bill passes one house of Congress, it will be taken up fairly promptly by the other house,” he said. “But in 2011, the bill that passed the House Financial Services Committee on a 44-7 vote languished in the Ways & Means committee and was never taken up by the whole House of Representatives, although the Republicans controlled the house.

“So the prospects are a little better, but a covered bond bill is still subject to the vagaries of politics. After all, there is not a lot of cachet in going back to your home district and telling your constituents that you passed a covered bond bill.”

Also on the HFSC agenda and much more politically charged is the issue of GSE reform.

“The Committee will examine proposals to modify or terminate Fannie Mae’s and Freddie Mac’s statutory charters, harmonise their business operations, and wind down any legacy business commitments,” reads the plan. “The Committee will also examine the overall size of the GSEs’ footprint in various aspects of the housing finance system and ways to reduce or constrain their large market share and develop a vibrant, innovative and competitive private mortgage market.”

Attaching a covered bond bill to GSE reform legislation, as in 2013, has often been cited as a way of helping pass legislation by proponents of the instrument.

Previous efforts to pass covered bond legislation have meanwhile been stymied by the US election cycle and the resultant time pressures on the Congressional agenda. However, 2015 is clear of elections, ahead of a presidential election in November 2016.

A potential next step for covered bonds in the House of Representatives would be for the HFSC to schedule a hearing on covered bonds, with the 2011 bill introduced as a focus for discussion, suggested Marlatt.

The Federal Deposit Insurance Corporation has been the leading opponent of covered bond legislation, arguing that subordination of the Deposit Insurance Fund resulting from covered bond issuance is harmful. It nevertheless in July 2008 published a Policy Statement that is the only form of covered bond framework yet in the US.

Covered bond legislation is considered a pre-requisite for the instrument to take off in the US, although in 2006 Washington Mutual launched a structured or contractual covered bond and was soon followed by Bank of America.