The Wall Street Journal

WASHINGTON — The U.S. Treasury Department is continuing to consider ways to resuscitate weak homebuying activity, Treasury Secretary Henry Paulson said Tuesday, highlighting the potential of covered bonds as a “promising” solution.

Speaking at a mortgage lending forum in Virginia, Mr. Paulson said he is working with the Federal Deposit Insurance Corp., the Federal Reserve and other federal offices “to explore the potential of covered bonds,” which he described as a “promising vehicle” to speed up the availability of mortgage financing.

“As Treasury seeks to encourage new sources of mortgage funding in the United States, improve underwriting standards and strengthen financial institutions’ balance sheets, covered bonds have the potential to serve these purposes and reduce the costs for first-time home buyers, and for existing homeowners to refinance,” Mr. Paulson said in the written text of his speech.

Covered bonds, which are widely used in Europe, are a mortgage-backed security that usually provides funding to a commercial banks through a secured debt instrument collateralized by a pool of residential mortgage loans that remain on the issuer’s balance sheet. Interest is paid to investors from the issuer’s cash flow, as Mr. Paulson noted.

Mr. Paulson said public and private efforts to address the mortgage meltdown have been working, but Treasury officials are continuing to find ways to lower the cost of mortgage financing.

“Today we are also looking more broadly for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal homebuying activity,” he said.

Meanwhile, he said the housing correction has been made “more challenging” by the erosion of the subprime lending market and argued that the benefits of that market shouldn’t be lost.