House panel to vote on covered bond bill

Reuters News
Posted: Jun 22, 2011 1:39 PM
House panel to vote on covered bond bill

WASHINGTON (Reuters) - A House of Representatives committee on Wednesday plans to vote on a bill aimed at creating a market for covered bonds, an alternative to the mortgage securities at the center of the housing crisis.

Covered bonds, which are seen as more conducive to financial stability because they force the issuer to hold some of the risk, are widely used in Europe but have never gained a foothold in the United States.

The House Financial Services Committee will meet at 10 a.m. EST on Wednesday to debate legislation to "establish a framework that allows U.S. financial institutions to issue covered bonds," the panel said in a statement on Tuesday.

Analysts say covered bonds would help mitigate some of the financial risks from securitization.

In the current U.S. mortgage system, lenders sell many of the loans they make to Fannie Mae and Freddie Mac, the government-controlled entities that are the two biggest U.S. providers of home financing, which then repackage them as securities for investors.

The sale of loans allows lenders to raise more capital, but it also relieves them of any risk in the loans that they originally made.

In covered bonds, the loans underlying the bonds would remain on the bond issuer's balance sheet.

But few believe use of covered bonds would grow quickly enough to become a substantial source of funding for the multi-trillion-dollar U.S. housing market.

There are also a number of unresolved issues surrounding the new type of bond. The Federal Deposit Insurance Corporation has warned that a covered bond system could put its bank deposit insurance fund at increased risk for losses, because investors would have seniority over the agency in the event of default.

Despite such hurdles, it is widely acknowledged that the U.S. system of funding mortgages requires an overhaul, even if there is very little agreement on how to do it.

Two years into a recovery from the deepest recession in generations, the housing market remains mired in a rut, with some analysts arguing the sector has already slipped into a renewed period of contraction.

Sales of existing homes fell 3.8 percent in May to a six-month low, a trade group reported on Tuesday. It was the second straight month of declines.

(Reporting by Pedro Nicolaci da Costa; Editing by Leslie Adler)