(Adds detail, background)
By Patrick Rucker
WASHINGTON, July 22 The U.S. Treasury is close
to completing a document that will outline best practices for
the issuance of covered bonds in a move meant to offer an
alternative model for financing home mortgages, industry and
government sources said on Tuesday.
Covered bonds are a financing tool popular among European
banks that U.S. Treasury Secretary Henry Paulson and other U.S.
regulators have said could restore confidence in a housing
sector rattled by foreclosures and doubts about the soundness
of the current mortgage finance system.
The bonds are issued by financial institutions against
pools of assets, like home loans, that they continue to hold on
their books, in contrast to the mortgage securitization model
that passes all risk onto investors.
Senior Treasury officials have been working on the document
for months and Paulson is due to be joined by executives from
several leading banks, including Bank of America (BAC.N),
Washington Mutual (WM.N) and Citibank (C.N), when he unveils
the best practices document as early as Monday, sources
familiar with the matter said.
Sheila Bair, chairman of the Federal Deposit Insurance
Corporation, has been a leading proponent of more widespread
use of covered bonds.
Last week, the FDIC issued a ruling on how investors would
access collateral if a bank issuing covered bonds bank fails.
Bair and other regulators may join Paulson at the event,
Covered bonds offer a "hybrid approach" between traditional
bank lending and securitization, Bair has said, because it
allows banks to tap into the capital markets while still
holding the loans on their books.
"Because you are holding on balance sheet perhaps you don't
get the same dilution of underwriting standards that you can
get when you move them completely off," she told Reuters in
In the words of an industry source, covered bonds "force
the banks to eat their own cooking."
(Reporting by Patrick Rucker,)