European mortgage tool eyed in U.S.

By Patrick Rucker

WASHINGTON (Reuters) - A mortgage finance tool popular among European banks could be a fitting model for a U.S. housing finance sector rattled by the ongoing subprime mortgage crisis, a leading bank regulator said on Tuesday.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said she would like to clear the way for the investment product to grow in the United States.

At issue are covered bonds that are issued by financial institutions against pools of assets like home loans that they continue to hold on their books.

Proponents of the investments say they restore the interdependence between the mortgage issuer and investor that was lost during the recent housing craze when lenders and brokers handed risky loans off to investors.

"My sense is to try and accommodate it, but do it in an incremental way, so we get some experience with it before we open the door," Bair told the Reuters Regulation Summit.

Bair said covered bonds have many virtues that can make them safer investments than the mortgage-backed securities that proliferated during the recent housing boom and are being blamed in part for eroding lending standards.

Bair said "there are a couple" of large financial institutions interested in the covered bond market and acknowledged that Bank of America Corp (BAC.N: Quote, Profile, Research) was one such company, when asked by Reuters.

Covered bonds offer a "hybrid approach" between traditional bank lending and securitization, Bair said, because it allows banks to tap into the capital markets while still holding the loans on their books.