Geithner backs covered bond bill for mortgages

Treasury Secretary Timothy Geithner on Tuesday backed efforts by U.S. lawmakers to create a new market for financing mortgages that would help wean the $10.6 trillion U.S. mortgage market from government support.

Geithner said he backed efforts to create a market for covered bonds, which are securities issued by banks and backed by pools of loans. The loans underlying covered bonds remain on the issuer's balance sheet.

That is different from the current U.S. mortgage system, where lenders sell many of the loans they make to Fannie Mae and Freddie Mac, which then repackage them as securities for investors.

"We would support legislation that would help create better conditions for a covered bond market," Geithner told the Senate Banking Committee in response to a question from Senator Charles Schumer.

Republican Representative Scott Garrett, a strong proponent of covered bonds, last week called advocates to testify to a House panel heads to push the idea. He thinks a covered bond market could lessen the role of Fannie Mae and Freddie Mac.

Schumer, a Democrat, said he was considering introducing a Senate version of Garrett's bill.

The government seized Fannie Mae and Freddie Mac in 2008 as losses on the loans they held spiraled. The government, through Fannie Mae, Freddie Mac and the Federal Housing Administration, now backs almost nine in 10 new mortgages.

In Europe, covered bonds have long been in use. But they have failed to catch on in the United States.

In a covered bond system, banks can borrow against the value of the underlying mortgages to obtain fresh capital to extend further loans. The bond investors have the right to those underlying assets in the case of a bank default.

The Federal Deposit Insurance Corporation has warned a covered bond system could put its bank deposit insurance fund at increased risk for losses because the investors would have seniority over the agency in the event of default.

Geithner said the FDIC concerns are legitimate and would have to be worked out.

"For this to work, you would be putting the taxpayer in some sense behind private investors, and that has its own consequences, but that is something we can work through and I think it can play a greater role in our system," Geithner said.

The White House and Congress are in the midst of a major policy debate on how to overhaul the finance system for buying U.S. homes, which collapsed in 2008.

The Obama administration last month announced several steps to make those government-backed mortgages more expensive in a bid to lure private capital back to the mortgage market.

It also announced plans to phase-out Fannie Mae and Freddie Mac over time and presented Congress with three options for replacing them long-term.

Geithner cautioned Congress not to act too quickly because the battered housing market is still fragile, but said he would like to see changes in place within two years.

"Haste would be counterproductive -- possibly destabilizing the housing finance market or even disrupting the broader recovery," Geithner said.