The latest attempt to help stimulate the mortgage market is encouraging what are known as covered bonds. The Wall Street Journal reports that covered bonds are already used in Europe as a source of funding:

Washington’s interest in pushing covered bonds stems from the success
of Europe’s $2.75 trillion covered-bond market. Such bonds are the
primary source of mortgage-loan funding for European banks.

What are covered bonds?

Covered bonds are types of mortgage backed securities, but they are considered safer than the types of securities that brought the whole mortgage market down. The reason that covered bonds are considered safer are as follows:

* Bonds remain on bank balance sheets.

* High quality mortgages make up the "cover pool." (These are mortgages that are up to date in payments, and meet other criteria.)

* Bank must make sure that bond holders receive interest if the mortgages go bad.