Hoping to spur new housing finance techniques, the Treasury Department has issued “Best Practices for Residential Covered Bonds.”

A covered bond is a secured debt instrument that provides funding to a depository institution, collateralized by mortgage loans that remain on the issuer’s balance sheet. Covered bonds have the potential to increase funding for mortgages and to strengthen financial institutions by offering them a new funding source that will diversify their overall funding portfolio.

While covered bonds are common in Europe, only two U.S. institutions to date have issued them. Market participants needed “structural clarity” to develop the U.S. covered bond market, Treasury said, and so it issued the “Best Practices” document. This document will provide clarity and homogeneity to the new market and serve as a complement to the recent FDIC policy statement on the bonds.

“As we are all aware, the availability of affordable mortgage financing is essential to turning the corner on the current housing correction,” Treasury Secretary Henry Paulson said. “And so we have been looking broadly for ways to increase the availability and lower the cost of mortgage financing to accelerate the return of normal home buying and refinancing activity.”

Treasury worked with the FDIC, the Fed, the OCC, the OTS, and the SEC when developing the guide. The Department also consulted with market participants, including potential issuers, investors, underwriters, ratings agencies as well as international regulators.

Treasury believes covered bonds can serve as a complement to the housing government sponsored enterprises, helping to provide additional funding to homeowners.