The past couple of years have not garnered much publicenthusiasm for financial mechanisms, and disagreement over thenecessary or meddling behavior of the federal government is ridinghigh. Within the more extreme political zeitgeist there is anopinion that Europe can provide no satisfactory solutions to USproblems; however, a covered bonds market forged in a European moldcould provide unique solutions to perpetually unanswered questionsof CMBS, the GSEs and federal competition.

The question of a US covered-bonds market developed in the pastcycle, as investors noticed issuers heading back to the well,offering securities on the same pool. The result, notes PaulHinton, vice president, NERA Economic Consulting, was that creditspreads were being pushed up and tapping out issuers on particularexposures. There was an “untapped pool of investors in the Europeancovered bonds market,” and the US essentially lost out, nothaving that capability. Covered bond markets in varying forms havebeen big for years in countries like Germany, Spain and Sweden withthe European Union even establishing a standard set of regulationsto which covered bond pools had to adhere.

With the advent of Rep. Scott Garrett’s proposed legislation,this market could become a reality in the US. There is a hint ofcompetition in the air regarding other securitizations, and incommercial real estate, this means the commercial mortgage-backedsecurities market. But these are not direct rivals, vying for thesame meat at the dinner table. “It’s less a matter of one beingbetter than the other,” explains Hinton. “They just havedifferent characteristics and so they tend to attract differentinvestors.” He points out that even during boom times,the interest in covered bonds arose from funding diversification,not simply as a cost-saving measure.