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Covered Bonds Seen as Ripe For U.S. Role.
Byline: Paul Muolo
Washington-Hoping to revive the private label MBS market, the Treasury Department last week issued a best practices guide aimed at underwriters that are interested in issuing "covered bonds" backed by nonconforming loans.
"The private label market is severely constrained," said Treasury secretary Henry Paulson at a press conference. "Fannie Mae and Freddie Mac are funding more than 70% of all mortgages today," he said.
A covered bond is a debt instrument backed by a specific pool of mortgages. The underlying collateral is held on the balance sheet of the institution issuing the security.
At the Treasury Department press conference last week, four major banking companies - Bank of America, Citigroup, JPMorgan Chase and Wells Fargo - expressed interest in issuing covered bonds in the next few months.
These four hope to issue the bonds directly through their banks without having to go through the expense of forming a special purpose vehicle or registering them with the Securities and Exchange Committee.
Mr. Paulson called covered bonds a "new funding source" for non-agency loans. Initially, the effort likely will entail jumbo mortgages and not necessarily subprime loans.
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Source: HighBeam Research, Covered Bonds Seen as Ripe For U.S. Role.