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Covered Bonds in the United States – Latest News

Updated: 01/20/2017

See the infographic on U.S.$ covered bond statistics for the period 2010 through 2016.

Commentary

1/20/2017

New Administration – what does it mean? Still too early to tell. Treasury Secretary-designate Mnuchin indicated in his confirmation hearing testimony that the administration intended to move to address Fannie Mae and Freddie Mac. There has also been some quiet indications that covered bonds are again on the agenda. However, it is still early days, too early to know if covered bonds will play a role in a new housing finance system.

Nov 2016- Trump won?! What!? Really?! Whoa! Now what? And what does it mean for covered bonds? What does it mean for the GSEs? Good questions! But not questions we have answers to right now. It’s too soon.

It would not be a surprise to see the Republicans in Congress tackle GSE reform. But the nature of the reform is not clear. It is likely that some reduction in the role of the Government in housing finance would be part of the reform, but this will be a contentious issue with the Democrats and one they might filibuster in the Senate, so it will take some support from Democrats to reach a 60-vote majority needed to defeat a filibuster. That means compromise somewhere to bring in the necessary Democrats.

The covered bond picture is more nuanced. First, the role of the GSEs in housing finance has to be reduced before the banks will look to other means of finance for mortgage loans. Second, the champion of covered bonds over the last six years has been Representative Scott Garrett (R-NJ), who was defeated in the election and will not be returning to the House next year. There is no apparent successor to pick up the baton. With an expected heavy focus on reducing banking regulation, covered bond legislation may never see the light of day. So keep your fingers crossed for someone to perceive the benefit of covered bonds in a changed housing finance framework.

July 2016- 2016 is of course a Presidential election year in the United States. It seems pretty unlikely, therefore, that we will see any progress in 2016 on covered bond legislation, in part also because it is unlikely we will see any movement on GSE reform. Particularly GSE reform turns on the outcome of the election and covered bond legislation seems closely tied to GSE reform. See Why is CB legislation tied to GSE reform? Unfortunately, it looks like a long wait until 2017 for covered bond legislation in the United States, notwithstanding the positive comment from Rep. Scott Garrett (see below).

Nov 2015- Rep. Scott Garrett reportedly told the audience at a mortgage industry conference in New York on November 12 that with the lifting of the federal debt ceiling it might be possible now to pass a covered bond bill in the Senate. The conference was the 2nd Annual Private Label RMBS Reform Symposium, sponsored by the Structured Finance Industry Group and IMN.

Why do investors like covered bonds? – What is it about covered bonds?

Why not covered bonds? – What’s to lose?

Jan 2015- Congress schedules covered bond review. With the beginning of the new Congressional term, the House Financial Services Committee released its Oversight Plan, which includes a statement that the “Committee will examine the potential for covered bonds to increase mortgage and broader asset class financing, improve underwriting standards, and strengthen U.S. financial institutions.” See the related article posted on January 23 in The Covered Bond Report.

Canada Housing Overvalued – The Bank of Canada reports that Canadian housing is up to 30% overvalued. However, the Bank says that household imbalances remain the most important risk to stability.

Use CBs to Restore PLS – Can covered bonds assist the recovery of the PLS market by allowing the GSEs to shrink faster?

GSE Reform – A disquieting process

Mortgage Rates – Are they uncompetitive?

US Legislation – Why is legislation taking so long? Does the U.S. not see the benefit of covered bonds?

Pass-Through CBs – Given the long RMBS history in the U.S. would pass-through covered bonds work here?

Housing Bubble? Is there a housing bubble in Canada?

Non-Canada US$ Issuers

KHFC and Kookmin return to the U.S. dollar market, each for $500 million, on Nov 12 and Jan 22

Westpac – Back in the dollar market with a $1 billion 2.250% offering due 2020 on Nov 2

KHFC – In its initial legislative offering, Korea Housing Finance priced a 5 year $500M 2.500% on Nov 12

Kookmin Bank – In the first ever Korean legislative covered bond, Kookmin priced a5 year $500M 2.125% on Oct 14

DBS Bank – in its inaugural covered bond offering, DBS priced a $1.000B 1.625% three year in a 144A offering on Jul 29

Westpac and CBA – Australians are half of the July supply: Westpac with an $800 M 3yr on Jul 7 and CBA with a $1,000 M 5yr on Jul 9

Hot Topics

CBs as HQLA – should covered bonds qualify in U.S. as high quality liquid assets for LCR purposes?

Encumbrance – why such a hot topic?

Anemic RMBS – CMBS and CLOs are booming, but not RMBS. What does that tell us?

Canadian Issuers

Dec 2016- 2016 has been a good year for Canadian issuance of covered bonds. Canadian banks came to the market with 34 offerings of covered bonds in $, €, £, C$ and A$ currencies. &nbspFive of those offerings were reopenings of existing series of covered bonds by CIBC, RBC and TD. &nbspThe distribution of offerings across currencies was as follows:

Currency	# Offerings	Amount
€	14	12,861
$	6	9,250
C$	3	4,500
£	10	2,625
A$	1	400

See Canadian Issuance.

Feb 2016- Change Canada’s 4% Limit? OSFI is apparently considering raising the 4% of total assets limit on the issuance of covered bonds. See OSFI to Reconsider 4% Limit?

Jan 2016- 2016 began with a flurry of Canadian offerings. Seventeen offerings in all in the first two weeks; six covered bonds: TD Bank CBL10 (€1.000B), RBC CB28 (€0.100B), CIBC Tap CBL8 (€0.100B), BNS CBL11 (£0.400B), BMO CBL7 (€1.500B), BNS CBL12 (€1.500B); and eleven senior notes: BNS $1.000B, $0.500B, €0.050B, £0.300B and €1.500B; BMO £0.217; TD Bank $0.750B and $0.500B; and RBC $1.250B, €500 and £200. See CDN Issue Details and MTNs. A pretty remarkable showing in a volatile market for the start of 2016. Perhaps the best commentary on the overall market conditions one day last week came from Citibank MD Laura Drumm: “Well, that was ugly …”.

Regulatory Developments

BCBS – Basle has announced increased capital requirements for securitization exposures. See the full report.

Final Risk Retention – The SEC has finalized its risk retention rule for securitizations. See the full text of the final rule.

Reg AB II and Covered Bonds – Generally Reg AB II is not going to apply to covered bonds. Canadians?

Final Reg AB II – SEC finalizes the amendments to Regulation AB

U.S. Treasury – United States Department of the Treasury has requested comments on the private sector development of a well-functioning private label securities (PLS) market for residential mortgage loans. See the original request.

LCR in Canada Covered bonds qualify for LCR Level 2A.

Volcker Rule – only foreign bank covered bonds are carved out of the prohibitions in the rule?

Technical Notes