Legislative Proposals to Create a Covered Bond Market in the United States

Congresswoman Maxine Waters (D-Calif.), the ranking member of the Subcommittee, issued the following opening statement:

Thank you, Mr. Chairman, for convening this hearing today to examine the potential for creating a covered bond market in the United States.

Today we convene to discuss covered bonds, and Representative Garret's covered bond bill, H.R. 940.

Covered bonds offer a way for financial institutions to raise funds by selling a bond that is backed by the institutions' assets, which are pledged as collateral.  The assets in the "cover" pool remain on the balance sheet of the issuer, and the covered bonds provide dual recourse to both the cover pool, and to the issuer. 

Covered bonds represent a potentially promising alternative to securitization.  We know that securitization failed us in many ways leading up to the 2008 financial crisis – particularly as originators used securitization as a means to originate bad loans, and then quickly transfer them off their books.  This lack of "skin-in-the-game" was a cause of the financial crisis, and was something we addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

We are also seeing "chain of title" problems in foreclosures, stemming from banks not following proper legal protocols when structuring securitization deals.  These problems are creating significant legal reverberations, as banks' ability to foreclose on borrowers is questioned.

For these reasons, I am interested in exploring covered bonds more fully.  I am also interested in learning more about the potential limits of covered bonds, including whether issuers would be able to accomplish the same volume of lending with this more capital-intensive system.  From what I have learned so far, I do not believe that covered bonds could constitute a full replacement for the Government Sponsored Enterprises (GSE). For example, Fitch Ratings notes in a recent report that bank capacity for covered bonds amounts to about 11 percent of the mortgage securitizations outstanding by Fannie Mae and Freddie Mac.

 I am also interested in learning more about the concerns of regulators, particularly whether covered bonds present risks to the FDIC when they try to resolve failed institutions.  Given the new resolution responsibilities provided to the FDIC under the Dodd-Frank Act, we must ensure that their ability to protect the Deposit Insurance Fund is protected.

Again, thank you Mr. Chairman for convening this hearing, and I look forward to exploring covered bonds, and your bill, more fully.