The House Capital Markets and GSE subcommittee late Tuesday advanced a bill to create a U.S. covered bond market but major issues need to be worked out first before the measure is ready for a full committee markup.

The bill (H.R. 940) sponsored by subcommittee chairman Scott Garrett, R-N.J., would establish the regulatory framework for Federal Deposit Insurance Corp. (FDIC)-insured banks to issue covered bonds that are collateralized by mortgages and other assets.

The mortgages would remain on the bank's balance sheet with investors taking on the interest rate risk. However, covered bonds are over-collateralized, which has raised concerns at the FDIC.

At Tuesday's markup, Rep. Maxine Waters, D-Calif., said she is prepared to offer five amendments that address FDIC's concerns, including one that would limit over-collateralization.

Another amendment would cap the amount of covered bonds one bank can issue.
Waters agreed to withdraw the amendments after Garrett pledged to work with the congresswoman on addressing FDIC's concerns prior to any full committee markup.

The subcommittee approved the covered bond bill by a voice vote. "I'm pleased to see the covered bonds bill received such wide bipartisan support," Garrett said.

Banking consultant Bert Ely said told National Mortgage News that, “There are still a lot of unresolved issues" that could delay further legislative action.

A proponent of covered bonds, Ely contends FDIC's concerns about this alterative to issuing MBS are "misplaced and reflect a fundamental misunderstanding of covered bonds.”

He notes that FDIC will be adequately compensated for the risk because the regulator currently levies assessments on secured borrowings such as covered bonds and Federal Home Loan Bank advances.

In other words, banks would "pay deposit insurance premiums on covered bonds they issue even though the bonds are not FDIC insured," Ely said in editorial published by the American Banker.

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