House and Senate conferees shaping the final regulatory reform bill tentatively accepted an amendment by Rep. Scott Garrett, R- N.J. that would create a new legal and regulatory framework for the development of a covered bond market in the United States. 

Bank issuance of covered bonds backed by residential and commercial mortgages is more common in Europe. Foreign banks service and keep the mortgages on their books in a manner unlike the mortgage-backed securities used more commonly in the U.S. where the underlying mortgages have traditionally been placed in separate, off-balance-sheet trusts.

"Covered bond legislation offers a way for the government to provide some certainty for private enterprises to find a way to generate liquidity through innovation of a new marketplace," Rep. Garrett said.

The New Jersey congressman also stressed that covered bonds would open the door for lenders to originate mortgages that are not guaranteed by the government.

Under the Garrett amendment, the Treasury Department would be the primary regulator of covered bonds, and set standards and reporting requirements for issuers. But for the market to move forward, the Federal Deposit Insurance Corp. must continue its policy of not seizing mortgages that are backing covered bonds when the sponsor bank fails.

House Financial Services Committee chairman Barney Frank, D-Mass., noted that Treasury and FDIC officials have raised some questions about the covered bond proposal.

Rep. Frank said the conferees would not formally approve the Garrett amendment until Thursday, giving regulators time to refine their concerns and "tell us what they are," Frank said.

Sen. Bob Corker, R-Tenn., was prepared to offer a similar covered bond amendment on the Senate side but House members offered their amendments to the regulatory reform bill first.

Tom Deutsch, executive director of the American Securitization Forum (ASF), issued a statement of support for House-drafted covered bond legislation currently being considered by the House-Senate conference committee on financial reform.

“We urge policymakers and Senate conferees to seriously consider and accept the House offer on covered bonds,” Deutsch said.

He added the proposal would facilitate a, "robust covered bond market as it includes important provisions for default and insolvency of covered bond issuers and subjects covered bonds to appropriate securities regulation by federal regulators.”

The American Securitization Forum is a broad-based professional forum through which participants in the U.S. securitization market advocate their common interests on legal, regulatory and market practice issues.

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