FDIC Might Set a Policy View on New Mortgage Funding

Wall Street Journal (03/07/08) P. A12; Ip, Greg
By April, Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair expects to issue a proposed policy statement that would make it easier for banks to take advantage of covered bonds to fund new mortgages now that the securitization market has all but disappeared. U.S. banks have not had a major presence in the covered bond market because the obligations are backed by mortgages on the bank's balance sheet, and until recently, banks securitized mortgages to remove them from their balance sheets. The policy statement would indicate the FDIC's willingness to pay off the bonds if banks fail, which Bair says is less expensive than allowing collateral to be seized by bondholders. Given that banks are likely to use more caution in underwriting mortgages kept on their balance sheets, Bair believes the policy statement will minimize risks.