Covered Bonds: A New Source of U.S. Mortgage Loan Funding?

Abstract

One of the largest sectors of the European fixed-income market consists of covered bonds, a financing mechanism for bank originators of residential mortgages and other assets. The term “covered bonds” comes from the “cover pool” used as collateral. The loans remain on the bank’s balance sheet. In this article, the authors define covered bonds and briefly describe their markets in Europe and the United States. They go on to explain the significance of the July 2008 actions to jump-start the covered bond market in the United States by the FDIC, Treasury, and U.S. Rep. Scott Garrett (R-NJ). While it is unlikely that covered bonds will be a major source of funding for U.S. residential mortgages, they will undoubtedly find some place among alternative funding sources.