A Republican Congressman from New Jersey is working on legislation to facilitate the issuance of covered bonds in this country and create a market for these bonds that are collateralized by mortgages which remain in the issuing bank's portfolio.

"This type of securitization is widely used in Europe to provide liquidity to their mortgage markets and I believe they could be very effective in increasing mortgage funding in the U.S.," Rep. Scott Garrett said at a House Financial Services Committee hearing.

He noted that committee chairman Barney Frank, D-Mass., is planning to hold a hearing on covered bonds. The hearing has not been scheduled yet. The Treasury Department has issued guidance on covered bonds and the Federal Deposit Insurance Corp. (FDIC) issued a policy statement on covered bonds in August 2008. But Garrett contends that investors need more assurance that FDIC will not repudiate a covered bond if an issuing bank fails.

A spokeswoman for Garrett noted that a covered bonds statute would provide more certainty than any regulatory change. "And the certainty could lower transaction costs because the investors and issuers aren't going to be pricing for the uncertainty," spokeswoman Erica Elliott said.

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