The development of a covered bond market in the United States may be a step closer to fruition as part of the long-awaited reform of Fannie Mae and Freddie Mac. To date, only two US lenders have offered covered bonds, securities that are issued by banks and usually backed by mortgage or public-sector loans.
Washington Mutual made its debut in 2006, and Bank of America followed shortly after in 2007. But the asset class failed to gain traction, partly because of the escalating global financial crisis, but also because relatively cheap alternative funding sources were already available to originators through the government-sponsored enterprises.
Since the last covered bond was issued by Bank of America, the securitization market has remained in a virtual state of paralysis and the ongoing bailout of Fannie Mae and Freddie Mac has left the US taxpayer with a $150 billion bill. In its long awaited proposal released on Friday, the Treasury announced that the mortgage giants - known as government-sponsored enterprises, or GSEs - would be gradually wound down and replaced by private capital under three possible scenarios.
One of these proposals includes privatising the housing finance system and limiting government-guaranteed mortgages to the Federal Housing Administration and the other housing programs targeted to credit-worthy low- to moderate-income borrowers.
"We will also work with Congress to consider additional means of advance funding for mortgage credit, including potentially the development of a covered bond market," said the proposal.
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