White House Pushes 'Covered' Mortgages

Wall Street Journal (07/23/08) P. C5; Aneiro, Michael
Both Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke believe that covered bonds popular in Europe could expand mortgage availability, reduce loan costs and bolster the housing market in the United States. Some experts believe covered bonds could be a tough sell among banks because they would be required to originate the mortgages, issue the bonds and hold the loans in their portfolios; but investors favor covered bonds because they are more transparent and provide safeguards not offered by traditional U.S. mortgage-backed securities. However, analysts contend that covered bonds would need an identity in the United States, having been designated as a separate asset class in Europe. Additionally, the Federal Deposit Insurance Corp. initial cap on covered bond issuance to 4 percent of banks' liabilities would put a damper on liquidity and necessitate higher yields to keep investor interest.