The Legislative Framework for U.S. Covered
Bonds: Facts and Myths

Abstract

The clamor for covered bonds has remained steady since Representative Scott Garrett introduced his initial proposal for a legislative framework nearly three years ago. Covered bonds occupy a middle ground between the government-sponsored enterprise (GSE) and securitization markets. Although the balance sheets of financial institutions cannot replace the multi-trillion dollar securitization market, covered bonds can bridge funding gaps in the short term and can supply a much needed source of complementary liquidity in the long term. Similarly, while covered bonds are not a comprehensive solution for the difficult policy issues implicated by GSE reform, a robust covered-bond market would immediately attract private capital without need of a federal subsidy and would ultimately contribute to a more stable system of mortgage finance. This article highlights some essential facts and dispels lingering myths about the covered bond market and the proposed U.S. legislative framework.

TOPICS: Legal and regulatory issues for structured finance, information providers/credit ratings