Geithner backs Congress eyeing of covered bonds

Reuters News
Posted: Mar 21, 2011 3:35 PM
Geithner backs Congress eyeing of covered bonds

WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner on Tuesday backed efforts from lawmakers on Capitol Hill to look into ways to expand the way homes are financed, including the creation of a covered bond market.

Representative Scott Garrett, Republican from New Jersey, is a strong proponent of the creation of a covered bond market to diminish the role of Fannie Mae and Freddie Mac in the housing finance system. Last week, he called covered bond advocates to a House panel he heads to push the idea.

"We also believe it is appropriate to consider additional means of advance funding for mortgage credit as part of the broader reform process, including potentially developing a legislative framework for a covered bond market," Geithner said in prepared testimony to the Senate Banking Committee.

"We will work with Congress to explore opportunities in this area," Geithner said.

Covered bonds are securities issued by banks and backed by a dynamic pool of loans, such as residential or commercial mortgages, which remain on the issuer's balance sheet. Investors have a preferential claim on the cover pool in the event of default.

In Europe, covered bonds have long been in use. But they have failed to catch on in the United States, where the housing market has generally been financed with mortgage-backed securities (MBS).

(Reporting by Corbett B. Daly; Editing by Jan Paschal)