Sen. Schumer to introduce covered bond legislation

Sen. Charles Schumer (D-N.Y.) plans to introduce legislation in the Senate soon that would establish a regulatory framework for covered bonds. During a Senate Banking Committee hearing Tuesday, Schumer said he was monitoring a bill recently introduced in the House of Representatives by Rep. Scott Garrett (R-N.J.). Treasury Secretary Timothy Geithner and Department of Housing and Urban Development Secretary Shaun Donovan back the idea of a strong U.S. covered bond market. Ron D’Vari, CEO of NewOak Capital, an advisory, asset management and capital market firm, also supports a larger covered bond market in America, as well, because it can offer an investment alternative to government sponsored entity pools. “Since the sub-prime and subsequent global credit crises, the non-agency RMBS market has essentially become non-existent. Creation of a well developed and regulated covered bond market will be a good supplement to the GSE-guaranteed mortgages and fill a necessary private market void for the residential mortgages,” D’Vari said. Both Geithner and Donovan answered questions from the Senate regarding the white paper on the future of housing finance released in February. In it, the federal government recommended to Congress three different options that would replace Fannie Mae and Freddie Mac, which should be wound down. Neither Geithner or Donovan could be pinned down on which option they prefer though they both pledged to work with lawmakers. Geithner reiterated his earlier stance that lawmakers should pass legislation in the next two years. When Schumer brought up covered bonds, neither secretary hesitated in supporting the Senator’s exploration of the possibility. Covered bonds are similar to asset-backed securities in many ways, supporters assert, and the collateral remains on the issuer’s balance sheet. “It is important to create room for more innovation in the system,” Donovan said. However, Donovan pointed out that there remains a lot of uncertainty with how these products would behave in a market unfamiliar with them. Though covered bonds have long been popular in Europe, Donovan said there is no precedent for how they would perform in a market as deep and broad as the U.S. mortgage market. “We don’t know how it would work as a replacement for the GSEs,” Donovan said. Write to Jon Prior. Follow him on Twitter: @JonAPrior