WASHINGTON, D.C. — The Treasury Department and the nation’s four biggest banks on Monday said they were ready to kick-start a market for a new tool to support home financing in the latest effort to spur a moribund housing market.

The Treasury released a set of “best practices” for institutions that issue so-called covered bonds, and Bank of America, Citigroup, JPMorgan Chase and Wells Fargo said they planned to begin issuing them.

“We look forward to being leading issuers as the U.S. covered bond market develops,” executive from the four banks said in a joint statement.

Covered bonds, issued by banks and secured by pools of assets like home loans, are widely used in Europe but have only become attractive in the United States since the segment of the mortgage securitization market driven by investment banks dried up last year amid a wave of home foreclosures.

Unlike mortgage securities, which pass all the risk to investors, covered bonds collateralized with mortgages would continue to perform even if the mortgages backing them default — as long as the bank remains solvent.
“The key to the U.S. economy making a major improvement will be turning the corner on housing finance and on the housing correction,” the Treasury secretary Henry M. Paulson Jr. told a news conference. “We’re not going to be able to do that unless we have availability of mortgage financing, and this is an attractive resource for mortgage financing.”

Two weeks ago, the Federal Deposit Insurance Corporation had offered guidance specifying how investors would get their collateral if an issuing bank fails, and the Treasury put together the set of best practices in the hope of further encouraging the market’s development.

The Federal Reserve governor Kevin M. Warsh told the news conference the Fed was willing to consider highly rated, high-quality covered bonds as collateral for banks seeking emergency funds from the Fed.

“A covered bond framework may attract investor interest and facilitate greater access to mortgage credit,” Mr. Warsh said.

Some analysts, however, were skeptical covered bonds would be the answer to the housing market’s woes.

The Securities Industry and Financial Markets Association, a bond market industry group, said a dedicated covered bond trader would be appointed within each of its member firms and those institutions would provide price information to electronic platforms for covered bonds -- steps that could help the market develop.

Source: Reuters, July 29, 2008