BNS SEC Filing Expires
On September 9, 2016, the SEC registration statement of Bank of Nova Scotia for its covered bonds expired without renewal.* This was followed by the pricing on September 13, 2016, of a $1.5 billion offering of five year covered bonds by BNS in a 144A private placement. Apparently BNS, like BMO, has abandoned the SEC registered format for its covered bonds.
On inquiry, BNS stated that ……. This action now leaves Royal Bank of Canada as the sole Canadian bank with an SEC registered covered bond program.*
The RBC program was inaugurated in September 2012 to much acclaim. While RBC has not publicly stated what action it will take regarding the loan-level disclosure requirements imposed under Regulation AB starting in November 2016, the response of BMO and BNS suggest that there may be no further issuances of SEC registered covered bonds after November. This will certainly be a disappointment to investors and will increase the funding costs of the banks.
Reg AB II — BMO Abandons SEC Filing
BMO Abandons SEC Filing
On December 16, 2015, Bank of Montreal quietly withdrew its SEC registration statement for covered bonds. The registration statement became effective on November 8, 2013. The registration statement was originally filed in July 2013. Prior to the filing, BMO had obtained a no-action letter from the SEC staff to permit the Guarantor to register its Guarantee on the same shelf registration statement as the bond to be issued by the bank.
On inquiry, BMO reports that there were a number of reasons for their withdrawal of the registrations statement. One of the reasons for the withdrawal was the prospect of needing to comply with the loan-level disclosure requirements of Regulation AB beginning in November 2016. That compliance requirement arose from the conditions imposed on BMO by the no-action letter. BMO cited the uncertainty of its ability under Canadian law to provide the information required and the significant cost of altering its systems nationwide to collect the information.
This is the first of the three Canadian banks with SEC registration statements to react publicly to the new loan-level disclosure requirements imposed by the SEC. (See Regulation AB II and Canadian Covered Bonds– the end of SEC registered covered bonds?). This action suggests that the other two banks, Bank of Nova Scotia and Royal bank of Canada, may cease issuing SEC registered covered bonds by the November 2016 date. Neither of the two banks, however, has publicly stated its intent in this regard.
EU Covered Bond Framework
EU Covered Bond Framework
U.S. Legislation in 2020
U.S. Legislation in 2020
Where are we with U.S. legislation for covered bonds starting 2020?
First, we are in a highly contentious and partisan presidential election year. A few days ago CNN reported that there was a tie for the most admired person in the United States: Donald Trump and Barak Obama. The division is deep and wide.
Second, the possibility for bi-partisan legislation is not high, but there has been some bi-partisan legislation, even during the impeachment hearings in the House. For example, the amended North America Free Trade Agreement was passed. So there is some possibility of passage of legislation, as there always is even in an election year.
Third, it is unlikely that covered bond legislation will be separated from GSE reform, because GSE reform will inevitably examine housing finance and the role of the government in housing finance. Until that is settled it probably makes little sense to initiate a new form of housing finance in the form of covered bonds.
It seems very unlikely that covered bonds would not be a viable form of housing finance in a post-GSE reform world, but why put the cart before the horse.
That leaves us with the question of the prospects for GSE reform in 2020. The GSEs have now been in conservatorship for more than 10 years. The current situation of the GSEs is obviously acceptable to many sectors. Nevertheless, there remains a desire to resolve the situation and clean up this unfinished business.
In June 2018, the President of the United States released a reform and reorganization plan entitled “Delivering Government Solutions in the 21st Century.” This plan includes a proposal to convert Fannie Mae and Freddie Mac into private sector entities, to provide an express government guarantee of mortgage loans to Fannie, Freddie and other qualifying entities, and to restructure financial support for low and moderate income family mortgage loans into the Department of Housing and Urban Development.
In March 2019, the President issued a Presidential Memorandum directing the Secretary of the Treasury to develop a plan to reform housing finance. In September 2019, the Department of the Treasury issued The Treasury Housing Reform Plan. While the Plan provides many specifics for the resolution of the conservatorship of Fannie Mae and Freddie Mac, much of the Plan is dependent on enabling legislation, the prospects for which appear rather bleak in this strained political environment. As part of the plan, the Federal Housing Finance Agency, as Conservator of Fannie and Freddie, exercised its administrative power in the fall of 2019 to permit the GSEs to retain their profits and begin rebuilding their capital as an initial step to resolving the conservatorships. This step increases the pressure on Democrats in Congress to agree to a resolution of Fannie and Freddie.
In 2020, we may see additional administrative action from FHFA that will increase pressure on the Democrats to come to the table on GSE reform. Democrats will be reluctant however to agree to any significantly undesirable changes to the GSEs while there exists a fair prospect for taking over the White House this year and taking more control of GSE reform. Accordingly, we are most likely waiting until 2021 to see any real movement in GSE reform.