Democrat Senator Charles Schumer yesterday (Tuesday) said that he is considering introducing a covered bond bill in the Senate while questioning Treasury Secretary Timothy Geithner in a Senate Banking Committee hearing on housing finance.

Schumer co-sponsored with Republican Senator Bob Corker covered bond legislation introduced into the Senate in May 2010, and the two are seen as a likely pairing again to push for legislation in parallel with the initiative of Representatives Scott Garrett and Carolyn Maloney in the House of Representatives. The Maloney-Garrett US Covered Bond Act of 2011 was introduced last week.

Senator Schumer: no rocket scientist

Schumer raised the prospect of introducing legislation when questioning Geithner – and Shaun Donovan, secretary of the US Department of Housing & Urban Development – in a hearing following up on the Obama administration’s “Reforming America’s Housing Market” report to Congress.

“I want to ask you questions first about covered bonds, which is something I care about,” said Schumer. “Whatever we do with Fannie and Freddie, we’re going to need to get private capital back into housing finance sooner rather than later.

“Covered bonds work in Europe, haven’t caught on in the US because we don’t have a statutory framework that provides certainty regarding their treatment in the event of insolvency. There has been a bill introduced just recently in the House that I’m considering introducing in the Senate, by Representatives Garrett and Maloney on covered bonds.”

The senator noted that Geithner had indicated a willingness to work with Congress on exploring a legislative framework for covered bonds, and asked him what he thought of the legislation. He also sought Geithner’s view on the Federal Deposit Insurance Corporation’s concerns about covered bond issuance putting the Deposit Insurance Fund at risk, adding that he could not see how covered bonds were any different to other secured obligations in this respect. This is the exchange that followed:

Geithner: Yes we would support a legislation that would help create better conditions for a covered bond market. It’s important to recognise that we do have a covered bond market in the US today in the form of the Federal Home Loan Banks financing structure. It’s essentially the functional equivalent. The questions you raise about the FDIC are very legitimate concerns – we have to work through those. Again, for this to work, you’d be putting the taxpayer in some sense behind private investors and that has its own consequences. But that’s something that we can work through and I think it can play a better role, a greater role in our system.

Schumer: How are they different than any other secured obligations?

Geithner: It depends how the law defines it.

Schumer: [They] don’t’ have to be…

Geithner: I don’t think this is rocket science, Senator. I think it’s something we can work through

Schumer: That’s why I want to get involved: it’s not rocket science. I can probably deal with it…

Donlan: I would just add to Secretary Geithner’s point: it is important that we create the conditions for more innovation in the system. I do think though it’s important to point out as well – given that GSE obligations are the second largest securities market in the world – there really is no precedent for covered bonds operating in a market as broad and deep as the US market. And so I think it’s an important element, but I don’t think as some have suggested that it’s sort of a silver bullet if you will.

Schumer: Or a total replacement…

Donlan: Or a replacement for…

Schumer: I agree…

Donlan: For whatever system…

Schumer: And I see Secretary Geithner agreeing. But you, too, support the basic concept and think we ought to explore it?

Donlan: Absolutely.

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