Four big banks sign onto the 'covered bond' concept in a new bid to ease the strains in U.S. mortgage markets.
By Colin Barr, senior writerLast Updated: July 28, 2008: 3:39 PM EDT NEW YORK (Fortune) --
By issuing covered bonds, a bank borrows money from investors, using assets on its balance sheet - such as home mortgage loans - as collateral. Until now, covered bonds haven't been issued in the U.S., though the concept has long been in use in Europe.
But with the housing bust threatening to push the economy into recession - the International Monetary Fund warned Monday that "a bottom for the housing market is not visible" - policymakers and financial institutions have been trying out new ideas in hopes of making mortgages more available, while breaking the cycle of falling house prices and rising foreclosures.
"I believe covered bonds have the potential to increase mortgage financing, improve underwriting standards, and strengthen U.S. financial institutions by providing a new funding source that will diversify their overall portfolio," Paulson said. The efforts of the big banks would "kick-start" the development of the U.S. covered bond market, he added.
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