Paulson unveils new mortgage plan I

 New “covered bond” concept to help U.S. mortgage marketTreasury Secretary Henry Paulson unveiled guidelines for “covered bond” which are issued by the banks. These bonds are issued to finance home mortgages. Four big U.S. lenders - Citi (C, Fortune 500), Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Wells Fargo (WFC, Fortune 500) offered their support to the new guideline. Though, none of the banks mentioned about any plan to issue the bonds now.

The concept of covered bond is present in the Europe, but hasn’t been used in the U.S till now. How it works? This type of bonds is issued by banks who borrow money by issuing these bonds. The collateral in these bonds is the home mortgage loans. If the bank fails, then the investor gets a claim on the specific assets underlined in the bonds.

Covered bonds can help in many ways. It can increase mortgage potential, it can offer a new source o funds to the U.S. financial institutions thereby increasing the strength. This can help strengthen the institutions by diversifying their portfolio. Now, the efforts of the big banks will help in kick starting the concept. Paulson mentioned this in his comments.

This move was very much needed as the shares of brokerage and bank shares are showing sharp decline lately. The fall in the house prices is showing its impact on the financial institutions which is threatening the investors. Though Federal Reserve reduced short-term interest rates, but the mortgage rates are skyrocketing making housing loans dearer for the borrowers.