The Treasury and the nation's four
biggest banks on Monday said they will kick-start a market for
an investment product to support home financing in the latest
effort to spur a slumping housing market.
Bank of America (BAC.N), Citigroup (C.N), JPMorgan Chase
(JPM.N) and Wells Fargo (WFC.N) said they planned to begin
issuing covered bonds, which are secured by pools of assets
like home loans.
And the Treasury released a set of "best practices" for
covered bonds, in a move designed to help develop the market
for the investment instrument.
"The key to the U.S. economy making a major improvement
will be turning the corner on housing finance and on the
housing correction," Treasury Secretary Henry Paulson told a
news conference. "We're not going to be able to do that unless
we have availability of mortgage financing, and this is an
attractive resource for mortgage financing."
The U.S. housing market has traditionally been supported by
mortgage-backed securities, which involves bundling loans into
securities and selling them to investors worldwide. Financing,
however, has dried up since the wave of foreclosures spawned by
the collapse of the subprime mortgage market last year.
Unlike mortgage securities, which pass all the risk to
investors, covered bonds collateralized with mortgages would
continue to perform even if the mortgages backing them default
-- as long as the bank remains solvent.
Covered bonds are widely used in Europe but have only
become attractive in the United States since the segment of the
mortgage securitization market driven by investment banks dried
up last year.
"I think there'll be some issuance very soon," Paulson
said. "There's not 100 percent certainty that it ever will
become very significant but this is an innovative tool and we
think it's one that we think is very promising."
Officials from the four banks, said in a statement, "We
look forward to being leading issuers as the U.S. covered bond
market develops."
Covered bond loans stay on the balance sheet of the bank
that issues the bond, so they are obligations on the bank. The
issuer retains control of the assets that back the loans, which
will be high-quality home mortgages in good standing.
Covered bonds are not totally new in the United States, but
have been a small factor in the nation's $11 trillion home
mortgage market that Paulson thinks can become bigger with the
backing of the four big banks.
A Bank of America official said that, given time, covered
bond issuance might reach $1 trillion, enough to be considered
significant part of the mortgage market.
Whatever it amounts to, Paulson made clear that any new
source of mortgage financing was welcomed given the seriousness
of a housing downturn that is rated the worst since the Great
Depression.
Two weeks ago, the Federal Deposit Insurance Corp. had
offered guidance specifying how investors would get their
collateral if an issuing bank failed, and the Treasury put
together the set of best practices in the hope of further
encouraging the market's development.
Federal Reserve Governor Kevin Warsh told the news
conference the U.S. central bank was willing to consider highly
rated, high-quality covered bonds as collateral for banks
seeking emergency funds from the Fed.
"A covered bond framework may attract investor interest and
facilitate greater access to mortgage credit," he said.
Some analysts, however, were skeptical covered bonds would
be the answer to the housing market's woes.
"Absent of (lowering) the capital requirement on covered
bonds, which would put them on the same footing as agency
mortgage-backed securities, this is like exercising on a
stationary bike," said Michael Youngblood, principal and
portfolio manager at Five Bridges Capital in Washington.
The Securities Industry and Financial Markets Association,
a bond market industry group, said a dedicated U.S. covered
bond trader would be appointed within each of its member firms
and those institutions would provide price information to
electronic platforms for covered bonds -- steps that could help
the market develop.
In another move to jump-start this market, Bank of New York
Mellon (BK.N) said banks can use covered bonds as collateral
for its repurchase program.
(Additional reporting by Richard Leong in New York and Mark
Felsenthal in Washington; Editing by Leslie Adler)
Related posts: