although this amount represents a decline of 45 percent from a year earlier. moreover, interest rate spreads on covered bonds have typically been much narrower than the comparable spreads on senior unsecured debt and mortgage - backed securities. this relationship has continued to hold throughout the market turmoil, perhaps because of the comprehensive regulatory and statutory frameworks associated with covered bonds in most european countries. to date, not many covered bonds have been issued in the united states, for several reasons. first, the federal home loan banks ( fhlb ) can tap capital markets and provide cost - effective funding for mortgage assets. in addition, as a source of financing, covered bond issuance today is not generally competitive with fhlb advances. second, fannie mae and freddie mac have traditionally securitized u. s. prime mortgage assets. the gses'implicit government backing and their scale of securitization operations have made it difficult for banks to use covered bonds to finance their own prime mortgages. third, the united states does not have the extensive statutory and supervisory regulation designed to protect the interests of covered bond investors that exists in european countries. to this end, the recent introduction of the fdic policy statement on covered bonds and the treasury covered bond framework were constructive steps. finally, the cost disadvantage of covered bonds relative to securitization through fannie and freddie is increased by the greater capital requirements associated with covered bond issuance. covered bonds do help to resolve some of the difficulties associated with the originate - todistribute model. the on - balance - sheet nature of covered bonds means that the issuing banks are exposed to the credit quality of the underlying assets, a feature that better aligns the incentives of investors and mortgage lenders than does the originate - to - distribute model of mortgage securitization. the cover pool assets are typically actively managed – nonperforming assets are replaced with similar, but performing assets – ensuring that highquality assets are in the cover pool at all times and providing a mechanism for loan modifications and workouts. the structure used for such bonds tends to be fairly simple and transparent. these features, together with the demonstrated success of covered bonds in other countries, make this approach attractive. that said, given longstanding features of the u. s. system such as the prominent role of the federal home loan banks, covered bonds may remain an unattractive option to u. s. banks. even closer ties to the government, with or without shareholders. a

and bankers, have an incentive to undertake careful underwriting. second, because the pools of assets underlying mortgage - backed securities have highly correlated risks, including interest rate, prepayment, and credit risks, the see kenneth snowden ( 1995 ), " mortgage securitization in the united states : twentieth century developments in historical perspective, " in michael d. bordo and richard sylla, eds., anglo - american financial systems : institutions and markets in the twentieth century ( new york : mcgraw - hill ). institutions and other investors that hold these securities must have the capacity to manage their risks carefully. finally, because mortgage - backed securities are complex amalgamations of underlying mortgages that may themselves be complex to price, transparency about both the underlying assets and the mortgage - backed security itself is essential. during the early phases of the development of the subprime mortgage market, most lenders and investors followed these principles. investors readily understood the simple senior / subordinated structure, and substantial useful information was provided about the subprime pools. however, during the credit boom period in the united states, worldwide demand for assets of perceived high quality became intense. incentives to properly underwrite and evaluate new mortgage credit weakened, and many investors became overreliant on credit ratings. to meet investor demand for customized products, the securities became increasingly complex. although highly sophisticated methods for sharing risk were developed, not enough attention was paid to the risk that housing markets might turn down sharply across a range of geographical areas. the rapid rise in early payment defaults in the fall of 2006 signaled that something had gone wrong. as investors lost confidence, significant flaws in the securitization process, including inadequate risk management and disclosure as well as excessive complexity, became apparent. perhaps the recent mortgage cycle will be remembered as just another failed episode of financial innovation. but one feature that makes it different from previous episodes was the relative success of government - sponsored securitization. fannie mae and freddie mac continued to produce and sell significant quantities of mortgage - backed securities to secondary - market investors throughout the period of turmoil. their ability to continue to securitize when private firms could not did not appear to result from superior business models or management. instead, investors remained willing to accept gse mortgage - backed securities because they continued to believe that the government stood behind them. that experience suggests that, at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securi