A series of summer initiatives designed to boost activity in the US covered bond market have already starting to make an impact.
In the absence of dedicated covered bond legislation such as that which exists in the UK and Europe, market makers across the Atlantic have welcomed the launch of a US Treasury ‘best practices guide’, which outlines ways to promote market simplicity and homogeneity in the industry.
Bank of America, JP Morgan, Wells Fargo, and Citigroup, the country’s four largest banks, are expected to launch covered bond programmes this quarter and other banks could follow suit.
“I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards, and strengthen US financial institutions by providing a new funding source that will diversify their overall portfolio,” Henry Paulson, Treasury secretary, said .
The Treasury initiative followed the launch by the Federal Deposit Insurance Corporation (FDIC) of a dedicated policy statement effectively securing investors access to collateral should the FDIC decline to continue the covered bonds in the event of a bank failure.
The programmes expected to be launched by the four US banking giants will likely to adhere to the provisions set out in the FDIC statement.
Sheila C. Bair, FDIC chairwoman, said covered bonds can serve as an additional source of financing for mortgage lending thereby offer potential benefits to banks and home buyers. “I believe that the underwriting standards set out in the policy statement will support strong, sustainable lending while at the same time give stability to the value of the covered bonds.”
Currently, only two banks have covered bond programmes in the US. Washington Mutual Bank was the market’s debutante in 2006 and Bank of America came to market last year.
Until now, 70 per cent of residential mortgages have been funded through the US government-sponsored enterprises, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and the Federal Housing Administration.
However in light of a sudden realignment of the $12,000bn (€8,500bn) US mortgage finance industry following its government’s dramatic decision to bail out both Fannie Mae and Freddie Mac, there is fresh focus on the covered bond market as an alternative funding conduit.
“In the US, covered bonds would offer financial institutions an alternative to financing mortgages through the issuance of agency securities (Fannie Mae and Freddie Mac),” Fitch Ratings said in a report.
Mr Paulson added that a US covered bond market also will present new opportunities for further international investment in the US.
The Securities Industry and Financial Markets Association (Sifma) announced in August the formation of a US Covered Bonds Traders Committee, which includes participants in the primary and secondary trading markets for covered bonds. It is hoped members of this committee will play an active role in supporting the growth and strength of the covered bond market in the US.
