It is no secret that the real estate market in the United States is spiraling downhill rapidly. While the admired television financial media are fast to pronounce that ?the worst is behind us? after every unfavorable news story on the topic, the documentation suggests that the end of the line is nowhere to be had. Prices of homes continue to fall, foreclosures continue to soar, it remains exceedingly difficult to get approved for a , and the secondary mortgage market continues to dodder along in a terminal state, just barely operating.



Within all the bad news and despair, the US Treasury Department is providing a twinkle of hope by actively promoting the development of a new form of debt called a "covered bond" to raise money for home mortgage loans. The Treasury Department cannot proclaim credit for creating the program, as they are the chief source of mortgage-loan financing for European banks.

Covered bonds are a form of mortgage-backed security, but are very separate from the derivative-laced speculative packages that powered the real estate expansion that peaked in 2006. It was the inclusion of high risk derivatives in those packaged mortgage securities that got many Wall Street banks in this predicament. They were utterly unregulated (and still are). These extremely speculative ?investments? were held off the balance sheets of financial institutions and were most of the time deliberately opaque. Investors had not only the claim to the mortgage payments but also the double risk of defaults and derivative failure, which turned out to be overpowering.

On the other hand, covered bonds are currently viewed as much safer investments because they're not packaged and sold but endure on a bank's balance sheet and the buyer of the bonds gets protection in not one, but two ways. The bonds are backed first by a "cover pool" of high-quality mortgages that must meet certain criteria, such as being in good standing. If the mortgages fail to be repaid by the borrower, the bank must take the necessary steps to ensure bond holders get their interest.

Banks seeking capital to lend to homebuyers also have the established method -- garnering deposits from consumers. This strategy is still an important provenance of financing for mortgages, but deposits can be pricey to attract and less anchored than bonds sold to vast institutional investors.

Until mid 2007, lending institutions had little trouble obtaining the funds to make loans. They could smoothly bundle mortgages into assorted forms of securities, sell those packages and use the income to make a new set of loans.

Currently, however, investors have become timid by rising defaults combined with incapacity to market structured financial packages that include problematic derivatives and have completely lost conviction in mortgage-backed securities originated by Wall Street firms. The only mortgage products that investors are willing to place funds in are the ones guaranteed by government-sponsored entities like Freddie Mac, Fannie Mae and the FHA.

U.S. TreasurySecretary Henry Paulson and other policy regulators discern covered bonds as a way to deliver another fountainhead of financing for the housing market. The endeavor is being orchestrated by Mr. Paulson, Chairman Ben Bernanke, Federal Deposit Insurance Corp. Chairwoman Sheila Bair and other financial regulators, who are aware that the feeble housing market will perpetuate the falling economy.

The Treasury is expecting to release a document to stipulate regulatory clarity within the coming couple of months. Another hurdle in the U.S. has been legal confusion about the rights of investors if a bank defaults. Under prevailing regulations, the Federal Deposit Insurance Corporation has 90 days in the event of a bank failure to pay off the covered bonds. The reule helps the Federal Deposit Insurance Corporation decrease the cost of dissolving a bank but at the same time creates a delay for investors as well injecting a level of uncertainty. The Federal Deposit Insurance Corporation has come out and proposed a new regulation shrinking the time duration to ten days. A final regulation could be forthcoming as quickly as this summer. This is no season to be procrastinating. The housing and mortgage markets need all the assistance available.