US Congress ponders bill to establish government-regulated covered bonds

The US has taken an important step towards setting up a system of government-regulated covered bonds similar to those that exist in the UK, Germany and other European countries. Republican Scott Garrett has put the US Covered Bonds Act 2010 before Congress.

Crucially, the legislation would allow commercial mortgages and CMBS to be used as collateral in the pools backing the bonds. Residential property, home equity assets, and other types of assets such as credit card and car loans are also included.

The Act provides for a regulatory authority to approve bond programmes of eligible issuers and maintain a public list of the issues. The covered bonds regulator would also specify eligibility criteria for cover pools and set minimum over-collateralisation requirements for bonds backed by different asset classes.

The CRE Finance Council (formerly the Commercial Mortgage Securities Association) has welcomed the move. It believes covered bonds will be a new source of debt finance for commercial and residential real estate, adding much-needed liquidity to the capital markets.

Covered bonds already exist in the US, but supporters of the bill argue that without a statutory framework, the market will not develop. European covered bonds such as Germany’s pfandbriefs are a big source of mortgage finance.

The legislation also includes provisions in case of default and insolvency of covered bonds, and for them to be governed by the appropriate securities regulations.

The move to introduce regulated covered bonds to the US began two years ago, when former Secretary of the Treasury Hank Paulson suggested they might be used to help the US housing market regain liquidity.