The past couple of years have not garnered much public enthusiasm for financial mechanisms, and disagreement over the necessary or meddling behavior of the federal government is riding high. Within the more extreme political zeitgeist there is an opinion that Europe can provide no satisfactory solutions to US problems; however, a covered bonds market forged in a European mold could provide unique solutions to perpetually unanswered questions of CMBS, the GSEs and federal competition.

The question of a US covered-bonds market developed in the past cycle, as investors noticed issuers heading back to the well, offering securities on the same pool. The result, notes Paul Hinton, vice president, NERA Economic Consulting, was that credit spreads were being pushed up and tapping out issuers on particular exposures. There was an “untapped pool of investors in the European covered bonds market,” and the US essentially lost out, not having that capability. Covered bond markets in varying forms have been big for years in countries like Germany, Spain and Sweden with the European Union even establishing a standard set of regulations to 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 of competition in the air regarding other securitizations, and in commercial real estate, this means the commercial mortgage-backed securities market. But these are not direct rivals, vying for the same meat at the dinner table. “It’s less a matter of one being better than the other,” explains Hinton. “They just have different characteristics and so they tend to attract different investors.” He points out that even during boom times, the interest in covered bonds arose from funding diversification, not simply as a cost-saving measure.