US Treasury Secretary Hank Paulson last week promulgated guidelines for financial institutions that issue covered bonds in an effort by the Treasury to inject some much needed liquidity into the US housing market. The guidelines set forth by the Treasury are intended to provide clarity to issuers and investors about the types of assets banks must hold if they issue covered bonds and how investors would fare in the event of failure of an issuing bank. According to the guidance provided by the FDIC, to issue cover bonds, the collateral in the cover pool must meet the following requirements at all times: one- to four-family residential properties; underwritten at the fully-indexed rate; current when they are added to the pool, and any mortgages that become more than 60 days past due must be replaced; first lien only; maximum loan-to-value of 80% at the time of inclusion in the cover pool; and negative amortization loans are not eligible for the cover pool. Despite the support of the federal government for the nascent market, hedge funds remain wary of covered bonds, in large part due to the ailing health of the banking sector.