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WASHINGTON (AFP) — The Treasury and major US banks endorsed plans Monday to help pump additional liquidity into the strained housing market by issuing “covered bonds,” or flexible mortgage-backed securities.

The announcement by the banks along with US Treasury Secretary Henry Paulson comes amid a frozen market for most mortgage-backed securities and troubles for the main sources of housing market liquidity, funding firms Fannie Mae and Freddie Mac.

Paulson said covered bonds, used extensively in Europe, represent “a promising financing vehicle” and can be used without special legislation. The Treasury published a “best practices” guide” for the securities.

“As we are all aware, the availability of affordable mortgage financing is essential to turning the corner on the current housing correction,” 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.”

Analysts say covered bonds are similar to traditional mortgage-backed securities in that they are backed by a pool of assets, usually mortgages.

But unlike most used in the US market today, covered bonds allow the issuer to remove bad loans from the pool to maintain its quality and also alter the terms of the mortgages if needed.

This feature “gets around a current problem with mortgage-backed securities over who has the right to alter the terms of the underlying mortgages should the borrower get in trouble,” said Robert Eisenbeis, an economist at Cumberland Advisors.

Bank of America, Citigroup, JPMorgan Chase and Wells Fargo announced their support for regulatory efforts taken to promote the development of a US covered-bond market.

“We believe a robust US covered-bond market would provide an additional stable and cost-effective funding source for banks to originate and hold mortgages on their balance sheet,” the banks said in a joint statement.

“We look forward to being leading issuers as the US covered-bond market develops, with programs consistent with the (regulatory) and Treasury statements.”

Paulson said covered bonds represent a market of 3.3 trillion dollars worldwide and “have the potential to increase mortgage financing, improve underwriting standard and strengthen US financial institutions by providing a new funding source that will diversify their overall portfolio.”

“We are at the early stages of what should be a promising path, where the nascent US covered bond market can grow and provide a new source of mortgage financing,” the Treasury chief said.

“Covered bonds are simply one tool for mortgage financing and will not, alone, complete the housing correction.”