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Speaking in California today, Bernanke said one lesson learned from the current credit crisis was that Fannie Mae and Freddie Mac were able to continue securitizing mortgages even when the crisis took hold, and said this shows the importance of the implicit government guarantee of these two GSEs.
"That experience suggests that, at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securitization of mortgages," Bernanke said in his prepared remarks.
Bernanke defended the concept mortgage securitization by saying it expands the funds available to write mortgages and reduces the originator's exposure to risks associated with holding mortgages. But he stressed that the government's role in backing the securitization must be made clear.
Bernanke offered several different ways the government could remain involved in the securitization process, but declined to offer an explicit preference for any option other than to point out the flaws of the current system.
Under that system, Fannie and Freddie were private companies with public-sector missions, something that led to inherent conflicts. One example was the public need for the GSEs to raise capital, which conflicted with the private-sector preference for not watering down existing shares.
Another option would be to privatize the GSEs, which would likely eliminate these sorts of conflicts. But then, he said, privatized GSEs might not securitize mortgages under stressed conditions.
Bernanke suggested that one way around this problem would be to offer government insurance for all financing used to support the mortgage market. This, he said, would "clearly limit the government's exposure while making the benefits of explicit government support available to the market."
Another possibility is to have lenders raise new funds for mortgages by issuing covered bonds. Bernanke said this would support the goal of prudent lending, since mortgage originators would continue to hold the mortgages they write.
But while this system is used widely in Europe, Bernanke said it faces major hurdles in the US because of the ease with which funding can already be found in the markets by the Federal Home Loan Banks, which lend funds to regular banks to support the mortgage market.
Bernanke said another option is to tie the GSEs more closely to government, perhaps by having them overseen by a public board, either with or without private shareholders.
pete.kasperowicz@thomsonreuters.com pik/wash
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