As the fog surrounding the floundering U.S. financial sector begins to clear, one possibility for righting the finance of both housing and commercial real estate is the covered bond. Until recently, the prospect of translating this common European mortgage instrument into terms cogent to the U.S. was obscured by technical, regulatory, and economic barriers. But in this article, the authors make the case that the congressional stage is set in 2011 to finally advance covered bonds as an integral part of the U.S. property finance system.

Anyone who has been in the commercial real estate business for more than two decades recalls that securitization became important as a result of a reluctance to rely solely on bank and insurance company financing. The circumstances are different now, but the basic theme remains the same. There can never be too many sources of funding. And that is why covered bonds are receiving a great deal of attention lately. Many commentators believe that covered bonds have the potential to supplement securitization and to form part of a well-diversified liquidity management program for financial institutions and other issuers. Covered bonds also may provide investors with an asset-backed debt instrument that protects against many of the risks recently experienced with the securitization model. In this article, we examine whether covered bonds may supplement commercial mortgage-backed securities (CMBS) as a means of financing commercial real estate loan origination.