Alert April 29, 2008

FDIC Adopts Interim Final Policy Regarding the Treatment of Covered Bonds in a Conservatorship or Receivership

The FDIC published an interim policy statement (the “Interim Policy Statement”) to address uncertainties in the market for covered bonds.  Covered bonds are mortgage-backed bonds that an insured depository institution (“DI”) sells for purchase by investors or trusts.  Unlike other mortgage-backed securities, however, the mortgages underlying the covered bonds remain on the bank’s balance sheet.

Traditionally, parties in contract with a failed DI must wait up to 90 days before liquidating their collateral.  This Interim Policy Statement reduces the collateral liquidation waiting period for holders of qualifying covered bonds.  In order to qualify for expedited access to collateral, the covered bond must either be: (i) backed by pools of high-quality home mortgages underwritten at the fully indexed interest rate with full documentation of the borrowers’ income, or (ii) backed by AAA-rated mortgage-backed securities collateralized solely by mortgages that would independently qualify under part (i) above, provided that the securities do not constitute more than 10% of the collateral for any bond issuance or series.  Holders of qualifying covered bonds will be able to access bond collateral: (a) 10 days after a monetary default on an DI’s obligation to the covered bond obligee, or (b) 10 days after the effective date of a written repudiation by the conservator or receiver.  The Interim Policy Statement only applies to covered bonds issued with the consent of the DI’s primary federal regulator.  To prevent excessive change in the proportion of secured to unsecured liabilities on a DI’s balance sheet, expedited collateral access is limited to qualifying covered bonds that comprise no more than 4% of the DI’s total liabilities after issuance.  The Interim Policy Statement became effective on April 23, 2008, but will be open for public comment until June 23, 2008.