(Adds Garrett quote)
By Corbett B. Daly
WASHINGTON May 3 A bill to create a new market
for financing mortgages that would help wean the $10.6 trillion
U.S. mortgage market off government support advanced in the
House of Representatives on Tuesday.
The House Financial Services Subcommittee on Capital
Markets and Government Sponsored Enterprises approved the
legislation on a voice vote.
The bill, which the White House supports, would have to be
approved by the full committee, the full House and the Senate
before being sent to President Barack Obama for his signature
The bill aims to establish a market for covered bonds,
which are securities issued by banks and backed by pools of
The loans underlying the covered bonds would remain on the
issuer's balance sheet. That is different from the current U.S.
mortgage system, in which lenders sell many of the loans they
make to government-sponsored Fannie Mae FNMA.OB and Freddie
Mac FMCC.OB, which then repackage them as securities for
The panel's chairman, New Jersey Republican Representative
Scott Garrett, hopes to reduce the role of Fannie Mae and
Freddie Mac with a covered bond market.
"Covered bonds will serve not as a replacement" to existing
credit markets but should function as "an additional arrow in
the quiver" for funding home mortgages, Garrett said ahead of
the vote on his legislation.
Senator Charles Schumer, a New York Democrat, said in March
he was considering introducing a version of Garrett's bill in
Representative Carolyn Maloney, a New York Democrat, backed
Garrett's bill as one way to help the U.S. mortgage market on
the margins, though she cautioned that it is not a panacea.
"Why not give it a chance?" Maloney said, adding that she
considers covered bonds "a strong tool we could use to help ...
our housing market rebound."
The government seized Fannie Mae and Freddie Mac in 2008 as
losses on the loans they held spiraled.
The government, through Fannie Mae, Freddie Mac and the
Federal Housing Administration, now backs almost nine in 10 new
In Europe, covered bonds have long been in use. But they
have failed to catch on in the United States.
In a covered bond system, banks can borrow against the
value of the underlying mortgages to obtain fresh capital to
extend further loans. The bond investors have the right to
those underlying assets in the case of a bank default.
The Federal Deposit Insurance Corporation has warned that a
covered bond system could put its bank deposit insurance fund
at increased risk for losses because the investors would have
seniority over the agency in the event of default.
Treasury Secretary Timothy Geithner has said the FDIC's
concerns are legitimate and would have to be worked out.
"For this to work, you would be putting the taxpayer in
some sense behind private investors, and that has its own
consequences, but that is something we can work through and I
think it can play a greater role in our system," Geithner said
The White House and Congress are in the midst of a major
policy debate on how to overhaul the finance system for buying
U.S. homes, which collapsed in 2008.
The Obama administration in February announced several
steps to make government-backed mortgages more expensive in a
bid to lure private capital back to the mortgage market.
It also announced plans to phase-out Fannie Mae and Freddie
Mac over time and presented Congress with three options for
replacing them long-term.
(Reporting by Corbett B. Daly, Editing by Dan Grebler)