Paulson Pushes 'Covered Bonds' In Housing Fix

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Treasury Secretary Henry Paulson has a new idea for easing problems in the mortgage finance markets. He wants U.S. banks to emulate European banks by issuing something called "covered bonds." But getting investors on board is easier said than done.

DEBORAH AMOS, host:

The government is pushing a new tool to jumpstart the housing market. Officials issued guidelines to promote what's called the covered bond market. It's another way to finance mortgages. Covered bonds are popular in Europe but never took off here. Proponents say if they do, it could reduce some of the reckless lending that led to the foreclosure crisis, as NPR's Jim Zarroli reports.

JIM ZARROLI: The mortgage market is in such disarray right now that U.S. officials have had to adopt a kind of scattershot approach to fixing it, trying one strategy and then another, hoping something makes a difference. Yesterday they dusted off a financing tool called covered bonds. Treasury Secretary Henry Paulson told a press conference that fixing the U.S. economy requires fixing the housing market.

Secretary HENRY PAULSON (United States Treasury): We're not going to be able to do that unless we have availability of mortgage financing, and this is - it's one source.

ZARROLI: Covered bonds are sold by banks to investors. They do this so they can raise money to issue mortgages. But instead of selling the mortgages to third parties like Fannie Mae or Freddie Mac, the way they so often do now, the banks have to hold them on their balance sheets. That means they have to make sure they have enough capital on hand to guarantee the mortgages.

And Karen Shaw Petrou, managing partner of Federal Financial Analytics, says they're less likely to do some of the crazy things they did during the mortgage boom like lending to borrowers with undocumented income or poor credit histories.

Ms. KAREN SHAW PETROU (Federal Financial Analytics): Because the bank doesn't wipe its hands clean, their reputation stands behind the mortgage, the risk stands behind it. They're still at risk because of it, so they will take a lot better care ensuring that mortgages aren't high risk or predatory than was the case.

ZARROLI: The aim of all this is to keep banks in the business of mortgage lending, but without the excesses of recent years. Covered bonds aren't new, but most investors in the United States have been reluctant to buy them, in part because of questions about their legal status. It was never clear what would happen if the banks that sold the bonds failed. Would bond holders get part of any assets that remained, or would they go to the Federal Deposit Insurance Corporation, the regulatory agency that ensures banks?

The new guidelines issued by the Treasury Department and the FDIC are supposed to clarify such questions in a way that will reassure investors. But attorney Ken Kohler, of the law firm Morrison and Forester, says that still may not be enough to overcome investor fears.

Mr. KENNETH KOHLER (Attorney): The real problem is getting the first investors - at least in terms of a U.S. market - to really take a leap of faith that everything's going to work out, particularly knowing what we know now about the state of the mortgage markets.

ZARROLI: But Kohler says a lot of big institutional investors may come on board. At yesterday's press conference, executives from Bank of America, JP Morgan Chase, Wells Fargo and Citigroup showed up to say they were ready to get into the covered bond business. It was an attempt to instill confidence in this new strategy.

But U.S. officials also acknowledge that covered bonds are no silver bullet and there's no guarantee they will have any significant impact on the beleaguered housing industry. It's just one more strategy for turning the market around. And in the current environment, U.S. officials say they have to try anything that shows any promise of making that happen.

Jim Zarroli, NPR News, New York.

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