Realtors, Professor Urge Congress in Favor of Covered Bonds
Treasury Secretary Geithner includes among "examples to consider"
03/24/2010
At a Congressional hearing (March 23), a professor of Real Estate Finance and the Vice President of the National Association of Realtors® (NAR) both testified in favor of covered bonds as a future funding tool in the U.S. Also, Treasury Secretary Timothy F. Geithner listed covered bonds among international practices that "can provide useful insights and examples to consider."
The topic of the hearing, held by the House Financial Services Committee, was "Housing Finance — What Should the New System Be Able to Do?" A central issue was the future role of two major Government-Sponsored Enterprises (GSEs): Fannie Mae and Freddie Mac.
Anthony SandersAmong members of an eight-person panel of witnesses was Anthony Sanders, Distinguished Professor of Real Estate Finance, School of Management, George Mason University. In a written statement, he testified:
"My fourth recommendation is to pass legislation governing a covered bond market (similar to the market that exists in Denmark) and begin with the jumbo mortgage market. Covered bonds potentially provide an excellent vehicle [to] fund the residential and commercial mortgage markets. Specifically, covered bonds solve some of the problems found in the securitization model, such as keeping loans with the lender so that they are easier to modify in case of further economic downturns. Covered bonds would allow financial institutions to get back in the lending game since new loans could be kept on balance sheet, but bonds issued against those assets. As long as the assets (loans) are high quality and have transparency, the covered bond market should provide a viable competitor to Fannie/Freddie. I would also recommend a covered bond model that includes less than prime loans with 20% down payment or more. Neither of these covered bond programs should carry a guarantee."
Vince Malta, NAR's Vice President and Liaison to Government Affairs, was another member of the panel. His written testimony stated:
"REALTORS believe that all options should be utilized to encourage liquidity in the housing market. One tool that has captured the attention of NAR's members is covered bonds. Though an underutilized tool in our current secondary mortgage market arsenal, covered bonds are a product that should be further explored because of the added security these financial vehicles offer to potential investors. REALTORS® do not believe that this tool can be dominant in our secondary market, but its use should be expanded.
Vince Malta"As the GSEs are restructured, NAR members feel that whatever model is selected should allow the organizations to pilot the use of covered bonds (e.g. to help improve liquidity for multifamily housing) in order to foster a better understanding of the tool, and then encourage its use in the nation's residential secondary mortgage market."
An appendix to Malta's testimony added:
"In order to increase the use of covered bonds, particularly in the commercial real estate arena, [Fannie Mae and Freddie Mac] 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, initially a government guarantee, such as by the FDIC, should be considered to enhance the covered bond option to entice private market participation."
Treasury Secretary Geithner did not go so far as to recommend use of covered bonds in a revamped U.S. housing finance system. But in response to a question from Rep. Scott Garrett (R-NJ) at the hearing, he stated that "looking at the covered bond model will be an important part of the agenda." His written testimony also included a reference to covered bonds (italics added):
"Many countries provide significant government support for housing finance, but they do so in a variety of ways. Several countries have GSE-like entities that guarantee and/or hold mortgages, but in no other country are they as large as they are in the United States. In a number of countries governments underwrite mortgage insurance. In some cases countries governments provide a regulatory framework and set standards that promote liquid mortgage markets. Securitization does not play a major role in housing finance in all other high-income countries, and where it does exist, it takes different forms. Many European countries use so-called covered bonds to channel credit to housing. This diversity of international practice in housing finance can provide useful insights and examples to consider."
Disclosure: The cofounders of Covered Bond Investor™ have served as consultants to NAR on the topic of covered bonds.
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