Bernanke mulls alternative forms of Fannie, Freddie
By Greg Robb, MarketWatch
Last update: 2:20 p.m. EDT Oct. 31, 2008
WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke on Friday launched the public debate over what the government should do with Fannie Mae and Freddie Mac once the financial-market crisis is over.
Uncle Sam took over the two mortgage giants last month after they were judged to be operating in "an unsafe and unsound manner," in Bernanke's words.
Debate over alternative organizational structures for Fannie (FNM
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FRE) "seems worthwhile," Bernanke said in a speech delivered via satellite to a conference on the meltdown in the mortgage industry at the University of California at Berkeley.
The market for mortgage-backed securities has shrunk dramatically in the wake of the subprime-mortgage crisis, but the two government-sponsored entities have been able to continue to sell the securities, according to the Fed chairman.
This shows that some form of government guarantee is going to be needed if the public mortgage-securities business is to recover. But with government guarantees involved, then the problems of systemic risks and taxpayer involvement have to be dealt with, he said.
How to craft a government backstop must be considered if Fannie Mae and Freddie Mac are privatized, as some experts have advocated, Bernanke added.
To get over this obstacle, the government might create a government mortgage-bond insurer. Covered bonds, which are popular in Europe, are another attractive option, but at the moment these securities can't compete with Federal Home Loan Bank funding for mortgage assets, he said.
Another option is to turn Fannie and Freddie into public utilities, without shareholders. One approach could be to structure a quasipublic corporation without shareholders that would provide mortgage insurance generally, he commented. Whatever course is chosen, the entities must be forced to shrink their loan portfolios, Bernanke elaborated.
"We must strive to design a housing-financing system that ensures the successful funding and securitization of mortgages during times of stress, but that does not create institutions that pose systemic risks to our financial markets and the economy," he said. End of Story
Greg Robb is a senior reporter for MarketWatch in Washington.
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