Covered Bonds Bill
Covered Bonds Update – July, 2011
On June 22, 2011 the House of Representatives Financial Services Committee approved the Covered Bonds bill. The legislation intends to establish a regulatory framework for covered bonds, which are securities issued by banks and backed by pools of loans. Several economists now believe that covered bonds in the United States have the potential to supplement securitization and to form part of a well-diversified liquidity management program for financial institutions and other issuers. Covered bonds allow banks to raise funds by selling bonds to investors. The bond is backed by the collateral of the asset and the banks contract to repay. Investors like covered bonds because the investor has recourse against both the financial institution who issued the bond and the assets that back the bond. Therefore, banks who issue bonds have a stake in assuring the long-term viability of the mortgages underlying the bond.
IREM Members took this issue to the Capitol Hill Visit Day on April 13, 2011, emphasizing the importance of a covered bond market in the United States. The bill passed out of committee with a bipartisan vote of 44-7.
Three amendments to the bill were passed. Please see below for a synopsis of the amendments and how they impact real estate practitioners.
Maloney Amendment (Passed by voice vote)
Extends the time period the FDIC has to sell off a covered bond program after a bank fails, from 180 days to 1 year. NAR and IREM supported this amendment.
Campbell Amendment (Passed by voice vote)
Establishes a cap on the number of covered bonds a single institution can issue, based on the percentage of an issuer’s total assets, to be determined by the relevant regulator. NAR and IREM did not favor this amendment because the caps could decrease the amount of capital available.