Banks could turn to covered bonds as a possible solution to balance sheet woes, industry sources said.

In light of the changing regulatory environment, they said, more players are joining the covered bond camp, likely pushing regulators to implement a framework that would open up the market to U.S. players.

And regulators seem to be taking heed as covered bonds are set to get another round in Congress. Yesterday Rep. Scott Garrett (R-N.J.) and Rep. Carolyn Maloney (D-N.Y.) introduced bipartisan legislation called H.R. 940, The United States Covered Bond Act of 2011.  (Click this link for a copy of the bill.)

This legislation — the third time a bill like this has been introduced in Congress — will provide a legal framework for covered bonds in the U.S.

Indeed, finding a balance sheet to house long-term mortgage assets is a practical problem that banks must grapple with as the option of securitization becomes less appealing given the new regulatory challenges.

Additionally, with the changing role of the GSEs, banks must find a new place to place thirty-year mortgages and market sources said that this problem will likely hold up any real activity in the RMBS space.

"That the only deals to have been completed to date are from the mortgage REITs makes sense because they have the capacity to house these assets over the longer term," an industry source said. "It is likely that the pipeline going forward will be dominated by mortgage REITs buying mortgages and then securitizing them like the Redwood Trust RMBS deals."

In a press release, the CRE Finance Council (CREFC) said today that it applauded the new legislation.

"The creation of a U.S. covered bond market has long been supported by CREFC, and the association believes the bill’s introduction in the House is the first step toward promoting an additional source of liquidity that will support commercial real estate lending and investment." the release said.

The newly introduced bill will be the focus of a planned March 11 hearing in the House of Representatives. The meeting will feature a testimony from Natixis Managing Director Ralph Daloisio. who will be representing the American Securitization Forum

 

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