Realtors® Recommend Covered Bonds for Revamped GSEs

The National Association of Realtors® (NAR) — a powerful voice in the U.S. housing arena — recommends moving toward a future where covered bonds could play a significant role in U.S. real estate financing.

This recommendation comes as part of a new NAR document on how best to restructure Fannie Mae and Freddie Mac, the giant "Government-Sponsored Enterprises" (GSEs) that continue to play a massive role in providing funding for home mortgages even while suffering huge losses.

Vince Malta, 2010 NAR Vice President, is set to testify at a House Financial Services Committee hearing on the "Future of Housing Finance"Until now, Fannie and Freddie have operated as publicly traded corporations operating under special federal charters.  They were highly profitable until the housing crisis forced the federal government to intervene in September 2008, injecting billions of dollars in return for a majority stake.

The main thrust of NAR's proposal is that Fannie and Freddie should be converted into not-for-profit institutions with an explicit federal guarantee — but "self funded" and "with no ongoing appropriations" from the government.

Among various specific recommendations, such as ensuring political independence, the NAR document states:

"In order to increase the use of covered bonds, particularly in the commercial real estate arena, the organizations should pilot their use in multifamily housing lending and explore their use as an additional way to provide more mortgage capital for residential housing.  Also, an FDIC guarantee should be considered to enhance the covered bond option to entice private market participation."

NAR plans to release its recommendations officially when its current Vice President and Liaison to Government Affairs, Vince Malta, testifies before the U.S. House Financial Services Committee at an upcoming hearing on the "Future of Housing Finance."  But meanwhile, NAR has "begun to share them more openly," according to Senior Policy Representative Anthony Hutchinson.

The current draft of NAR's recommendations regarding the GSEs is "a work in progress," Hutchinson stressed.  As NAR receives feedback from members of Congress and the financial industry, "we continue to tweak the document in order to better communicate the underlying message that we'd like to see the enterprises 'restructured in a manner that ensures the continual flow of capital into the housing and mortgage markets in all economic conditions, and removes the private profit and public loss structure.'"

NAR's support for covered bonds is "one of [the] key elements" among the document's business recommendations, in Hutchinson's view.

The National Association of Realtors® is a trade association with more than a million members who are actively involved with real estate sales throughout the U.S.

Covered bonds are debt obligations that have recourse to a pool of assets — the cover pool — that secures or "covers" the bond if the issuer becomes insolvent.  Little known in the U.S., they are widely used in Europe for real estate and public sector financing.

Disclosure: Covered Bond Investor™ cofounders Mercy Jiménez and Spencer Punnett performed a consulting project for NAR's Presidential Advisory Group in 2009 on the topic of covered bonds and the future of U.S. home financing.