Rep. Scott Garrett (R-N.J.) introduced the U.S. Covered Bond Act today, with support from Rep. Paul Kanjorski (D-Pa.) and Financial Services Committee Ranking Member Spencer Bachus (R-Ala.) as leading co-sponsors. This legislation, according to a press release from Garrett's office, aims to help facilitate a robust covered bond market in the U.S. to add liquidity and certainty to our nation's capital markets.

“As the U.S. continues to recover from the financial crisis, it is essential that Congress examines new and innovative ways to unthaw our locked credit markets and encourage private capital to confidently re-engage by turning cash now on the sidelines into active investments in our country’s future,” said Garrett, who is a ranking member of the House Financial Services Subcommittee on Capital Markets. “I believe that a robust U.S. covered bond market would offer numerous benefits to investors, consumers, and the broader financial sector, ensuring longer-term liquidity that is more stable for U.S. credit markets.”

Covered bonds have been used in Europe to help provide additional funding options for the issuing institutions and are a major source of liquidity for many European nations’ mortgage markets. The Garrett-Kanjorski-Bachus legislation is a thorough framework that seeks to provide the same benefits to the U.S. market. The bill establishes regulatory oversight of covered bond programs, includes provisions for default and insolvency of covered bond issuers, and subjects covered bonds to appropriate securities regulations by federal regulators.

“The collapse of Fannie and Freddie and the taxpayer bailout that followed underscores the critical need to promote mortgage financing alternatives that are supported by the private market,” said Bachus. “Rep. Garrett’s bill will help establish an innovative and responsible source of financing that can reduce the cost of credit for families, small businesses, and the public sector.”

The U.S. Covered Bond Act is the legislative follow-up to Garrett’s original legislation, the Equal Treatment for Covered Bonds Act, first introduced in 2008. During that same year, the Treasury Department issued a list of best practices which described the most prudent ways for interested issuers to offer covered bonds and the FDIC published a final policy statement that provided guidance to investors as to what access the FDIC would offer to the collateral in case of a bank failure.

“I am optimistic that there is a good chance for bipartisan agreement on this issue. Once members understand how a covered bonds marketplace works and the benefits that it can offer homeowners, I believe Republicans and Democrats can come together and provide the legislative framework necessary to create a robust covered bonds marketplace here in the U.S. I want to thank Chairman Kanjorski and Ranking Member Bachus for working with me closely on this important legislation,” Garrett said.

Meanwhile, in a related development, the Commercial Mortgage Securities Association (CMSA) released a statement applauding today’s introduction of covered bond legislation.

The CMSA said that the facilitation of a U.S. covered bond market is an important item in CMSA’s efforts to provide liquidity and new sources of capital for commercial real estate that will help support a recovery in this sector today and a more robust sector in the future.

Indeed, as part of its support, in December CMSA was invited as a select witness to provide testimony before the House Financial Services Committee on this issue.  During this hearing, the association outlined how covered bonds could serve as an additive financing tool for the market that would help raise much needed capital to fund commercial real estate loans and, in turn, ease the current the downturn, which persists in certain forms.

Covered bonds originated in the European bond market and are debt securities backed by cash flows from mortgage and public sector loans. Assets from covered bonds, which normally carry a two- to 10-year maturity rate and include high credit ratings, are kept on the issuer’s balance sheet.

Notably, according to the CMSA. the newly introduced legislation has commercial mortgages and CMBS as eligible collateral, as CMSA has promoted. Currently, the CMSA release said, commercial debt is permitted in covered bond pools in most European jurisdictions, and CMSA believes any U.S. covered bond framework should ensure that U.S. financial institutions, consumers and borrowers have a level playing field and equal credit opportunities.

Earlier this month CMSA issued a paper called "A Framework for a Sustainable Commercial Real Estate Recovery," where, among other things, the association discussed the economic possibilities that exist with covered bonds.

In the paper, the CMSA said policymakers should create a regulatory environment that includes covered bonds using commercial mortgages and CMBS as eligible collateral.

The CMSA said this market has found great success in Europe and, over time, could generate new capital through the sale of covered bonds secured by high-quality commercial mortgage loans and CMBS.

The Securities Industry and Financial Markets Association’s (SIFMA) U.S. Covered Bonds Council (USCBC) today also released the following statement on the  bill's introduction. The statement is from Sean Davy, managing director at SIFMA:

“SIFMA's U.S. Covered Bond Council is pleased to see the increased momentum for a dedicated legislative framework for covered bonds that is fundamental to building a vibrant U.S. covered bonds market," Davy said. "We thank Congressman Garrett for his leadership on this issue and are pleased to see Reps. Kanjorski and Bachus join him in this effort.”

The USCBC is a forum sponsored by SIFMA through which a diversity of market participants desire to promote a U.S. covered bond market as a complementary and additional funding source for financial assets.

Fundamental to the USCBC’s mission is the development of market policies and practices that uphold public confidence in U.S. covered bond to the benefit of issuers, investors and ultimately consumers and the public. The USCBC will further represent the industry's interests through constructive dialogue with legislative, regulatory and other policymaking bodies, according to a release from the SIFMA.