Covered Bond Market to be Expanded to Fund Mortgages

The U.S. Treasury Department and four of the largest banks in the country announced plans Monday to leverage a little-used method for financing mortgages to try to breathe life into the flat lined housing market.

A type of debt security called covered bonds would be used more by U.S. banks. Covered bonds are securities that a bank sells to raise money to finance home loans. The bank receives monthly payments from homeowners and pays back the bonds according to the terms of their issuance.

Covered bonds are popular among European lenders.

If the operation seems simple compared to the complex securities banks have been selling this decade, then regulators are getting their wish. Treasury Secretary Henry Paulson said the use of covered bonds should lead to better loan writing standards on Wall Street because banks would retain the risk of the bonds.

"The availability of affordable mortgage financing is essential to turning the corner on the current housing correction," Paulson said at a news conference Monday. "We are at the early stages of what should be a promising path, where the nascent U.S. covered bond market can grow and provide a new source of mortgage financing."

Bank of America, Citigroup, JPMorgan Chase and Wells Fargo released a joint statement Monday supporting the idea of creating a covered bond market in the U.S.

“We believe a robust U.S. covered bond market would provide an additional stable and cost effective funding source for banks to originate and hold mortgages on their balance sheet. We look forward to being leading issuers as the U.S. covered bond market develops, with programs consistent with the FDIC and Treasury statements,” the companies said in the statement.