As is the case with a typical bond, a covered bond is a security made up of a group of loans such as home mortgages. But they differ in that when an investor buys the bond, he or she also has the assurance that the security is also backed by a separate pool of loans, lowering the risk of the overall security. As a result, a covered bond tends to attract a higher credit rating than a comparable regular bond, which in turn lowers borrowing costs for the issuer and, lawmakers hope, could make it more affordable to originate mortgages.
“With a legislative framework in place, U.S. financial institutions will have a powerful tool that can be used to fund loans to small businesses and households,” Hagan said. “This bill would level the playing field for U.S. financial institutions and help strengthen our U.S. economy.”
A comparable piece of legislation was offered in the House earlier this year, and approved by the House Financial Services Committee in June.