Banks tout mortgage tool

Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. threw their support behind Treasury Secretary Henry Paulson's effort to spur covered bonds as a new source of mortgage financing.

“We look forward to being leading issuers as the U.S. covered bond market develops,” the banks said in a joint statement.

The banks stopped short of announcing specific plans for issuing the bonds, illustrating that the market may be slow to take off in the U.S. in the aftermath of the mortgage meltdown.

“Mortgage-backed-securities investors are not in the mood right now to buy bonds with anything less than government backing,” said Kenneth Hackel, managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Conn.

While the market is “not yet” ready for covered bonds, “the concept is certainly more interesting now than it has been in a very long time,” he said.

Paulson said the four U.S. banks are “ready to go” and that sales by the largest banks can help encourage smaller mortgage lenders to proceed.

Covered bonds offer greater protection to investors because banks keep the home loans on their books, and must make up shortfalls if homeowners fail to pay. The bonds also achieve higher ratings than regular notes by augmenting the issuer's pledge to pay with a group of assets such as mortgages that can be sold in a default. The extra security allows lenders to pay less interest.

The Treasury's guidelines exclude riskier types of mortgages that contributed to the crisis of the past year.

Paulson said covered bonds will help provide financing to a U.S. mortgage market that now depends on Fannie Mae and Freddie Mac and other government-linked institutions for more than 70 percent of funds.

Fannie and Freddie slid to their lowest levels in more than 17 years this month on concern they lacked sufficient capital to offset losses and writedowns. That forced Paulson to ask Congress for emergency authority to make equity purchases in them if needed.

President George W. Bush plans to sign the bill this week.

Bank of America Treasurer Jeffrey Brown said in a separate statement that “today's announcement paves the way to substantial growth in the U.S. market.”