Garrett, Kanjorski Introduce Equal Treatment for Covered Bonds Act

The following is a statement received from the office of Rep. Scott Garrett shortly after 1:00 PM today.

(Washington, DC)—Rep. Scott Garrett (R-NJ-5) and Rep. Paul E. Kanjorski (D-PA-11) introduced the Equal Treatment for Covered Bonds Act today. This legislation aims to help facilitate a robust covered bonds market in the US to add liquidity and certainty to our nation's housing market.

 "Covered bonds have the potential to aid in returning liquidity to the mortgage market and reduce borrowing costs for homeowners by providing an alternative to securitization," said Garrett, Ranking Member of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.  "If we want to truly level the playing field and foster the growth of covered bonds in the U.S., we need to develop a legislative structure for covered bonds."

"As a result of the financial crisis, the private securitization markets have dried up, and we must explore new ways to oil the gears and get consumer credit flowing again," said Rep. Kanjorski, Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises.  "I am therefore pleased to join with Rep. Garrett to advance this sensible legislation.  Because covered bonds have worked well in Europe, and because they will keep skin-in-the-game for securities, we should now work to write it into U.S. law."

The Garrett-Kanjorski legislation, which is also cosponsored by Financial Services Ranking Member Spencer Bachus (R-AL-6), does the following:

• Amends the Federal Deposit Insurance Act to provide the same treatment for covered bonds as for other qualified financial contracts.

• Defines a covered bond as a non-deposit recourse debt obligation of an insured depository institution.

• Allows for the minimum term of maturity for a covered bond of at least 1 year and does not set a maximum term of maturity for a covered bond.

• Allows for a wide variety of asset classes to be eligible as collateral in the cover pool.

• Adds a clause ensuring that a bank failure will not impair the value of the covered bonds.

• Provides for joint rulemaking authority to the Secretary of the Treasury, the Federal Reserve, Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS) and Federal Deposit Insurance Corporation (FDIC) for any new regulations affecting covered bonds.

Need for a Covered Bonds Statute

Covered bonds as debt instruments are broad enough in scope and magnitude to warrant being authorized and codified in federal statute. The codification of this investment tool will provide greater stability and permanency for covered bonds, in addition to encouraging the use of covered bonds as an alternative to mortgage securitization.  Establishing a statute will also provide for the benefit of legislative review, rather than the possibility of changing covered bond policy through a simple motion of the FDIC Board of Governors. Statutory language provides more certainty than a regulatory change, and this certainty can lower transaction costs because investors and issuers will not be pricing for uncertainty.
 
In addition, spreads will be narrower which will encourage more institutions to enter a covered bonds marketplace. It is the goal to provide for an environment in which the marketplace with flourish and produce increased liquidity. Legislated covered bonds provide for the greatest level of legal certainty. Investors are most comfortable with legislated covered bond programs because they understand their rights under the law.  Investors are less familiar with the regulatory process and thus are less willing to invest in programs that are based on regulatory structures. Narrow legislative text will provide the certainty needed to increase investor confidence, leaving the details to regulation.

Editor's note: Three documents were attached to the the public statement:

(1) A fact sheet on covered bonds prepared by Congressman Garrett's office;

(2) a 2008 report from the Congressional Research Service (CRS) titled "Covered Bonds: An Alternative to Securitization for Funding Mortgages," by Edward V. Murphy; and

(3) A 2008 fact sheet from the U.S. Treasury Department released in conjunction with its covered bonds "Best Practices" document. 

PDFs of these items may be downloaded by clicking under "Attachments" below.]