July 22, 2008 / 9:19 PM / 9 years ago

UPDATE 1-US Treasury to unveil covered bond protocols-sources

(Adds detail, background)

By Patrick Rucker

WASHINGTON, July 22 (Reuters) - 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, sources said.

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 February.

In the words of an industry source, covered bonds “force the banks to eat their own cooking.” (Reporting by Patrick Rucker,)

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