The Securities Industry and Financial Markets Association’s (SIFMA) U.S. Covered Bond Council criticized the Federal Deposit Insurance Corp.'s (FDIC) stance on covered bonds.

At the Mortgages and the Future of Housing Finance Symposium, the FDIC said that with the proposed covered-bond legislation, investors would have “a super-priority in receivership” and their claims would essentially be back-stopped by the FDIC.

These comments. SIFMA said, "reflect a misunderstanding of proposed legislation and existing law."

According to SIFMA, the proposed legislative framework for covered bonds provides that both before and after insolvency, investors would benefit from a first-priority lien on the issuer’s cover pool to secure their claims under the covered bonds.

This is like any other secured creditor and at no time would they be entitled to a lien —superpriority or otherwise — on any of the issuer’s other assets, SIFMA said. 

If the cover pool is insufficient to satisfy their claims in full, investors would fall in line with all of the issuer’s other general unsecured creditors.

Although the proposed legislation would preclude the FDIC from accelerating the covered bonds and reclaiming assets in the cover pool prematurely, these provisions give investors far more modest rights compared with those enjoyed by other classes of creditors, including counterparties to qualified financial contracts and the Federal Home Loan Banks.

SIFMA thinks that covered bonds can offer long-term and cost-effective funding from the private-sector capital markets. This, SIFMA said, can in turn be translated into meaningful credit for households, small businesses, and the public sector.

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