Shelby: Bernanke backs privatizing GSEs

WASHINGTON Mon Sep 20, 2010 5:00pm EDT

1 of 2. Senator Richard Shelby (R-AL) speaks at the Reuters Washington Summit in Washington September 20, 2010.

Credit: Reuters/Kevin Lamarque

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke favors privatizing troubled U.S. mortgage finance giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), the top Republican on the Senate Banking Committee said on Monday.

Senator Richard Shelby, speaking at the Reuters Washington Summit, said he discussed the issue of overhauling the U.S. housing finance market as recently as Friday with Bernanke.

"I believe he's on board knowing that Freddie and Fannie need reform and they need to be privatized but you ought to ask him that question, just for the record," Shelby said.

The Federal Reserve declined to comment.

Almost two years after the housing market bubble burst and threw the global financial system into crisis, Congress and the Obama administration are drawing preliminary lines in what is expected to be a long fight over fixing the mortgage business.

The views of Bernanke and Shelby, who would take over as chairman of the powerful banking panel if Republicans take control of the Senate in November's congressional elections, are expected to be pivotal.

Well before the crisis that led the government to seize the two congressionally chartered firms, critics contended Freddie and Fannie presented a risk to the financial system.

But earlier attempts at overhauling the politically connected companies broke down along party lines -- Democrats saw a need for a government role in housing, while many Republicans pushed for cutting all government ties.

The Senate rejected a measure proposed by Shelby and two fellow Republicans that would have moved Fannie and Freddie out of government conservatorship within two years.

At the summit in Reuters' Washington office, Shelby said a major overhaul was needed and that he would be "very skeptical" about preserving government mortgage guarantees, as the Obama administration has called for.

Fannie and Freddie -- charged by Congress to stabilize mortgage markets and promote affordable housing -- have already received about $150 billion in taxpayer aid since the government seized them in 2008.

Together with the Federal Housing Administration, Fannie and Freddie today back 90 percent of new U.S. home mortgages.

SHELBY: PRIVATIZE THEM

"What we need to do is privatize Freddie and Fannie, make them smaller to where they can be run right and get them away as much as we can from a guarantee by the taxpayer," Shelby said.

In a speech on housing finance in late 2008, Bernanke said privatization would address conflicts of interest in the sector but might leave mortgage lending too vulnerable to crisis by stripping away the government's implicit backing.

Treasury Secretary Timothy Geithner said last month the federal government should still provide some guarantees in the deeply troubled $10.7-trillion market for home loans.

Both chambers of Congress plan hearings in the weeks ahead on the issue. Geithner made his remarks at an August 17 conference of housing leaders held by the administration, which is working to draft a housing overhaul proposal by January.

"It's a long-term project," Shelby said. "I don't know that this administration would have the political will to deal with Fannie and Freddie in a positive way. It might take a Republican House, Senate and president."

Fannie and Freddie pose a vexing policy challenge. Their pursuit of growth and profits helped precipitate the credit crisis of 2007-2009 but their vast resources also helped minimize its impact. Since their takeover, the two have become more prominent in the market, while posting heavy losses.

"Freddie and Fannie are hemorrhaging, as you well know, and will continue to hemorrhage," Shelby said. "Yet they're the only game in town as far as buying mortgages. So you've got a dilemma there. But Freddie and Fannie need to be reformed."

ACTION UNLIKELY SOON

With Congress focused on the election in November, federal coffers depleted and nerves on edge about avoiding another property crash, lawmakers do not plan to take on a housing finance overhaul until 2011.

"The future of housing finance may be outstanding until 2013 as lawmakers debate what to do," said Concept Capital financial services policy analyst Jaret Seiberg.

The problems and costs of Fannie and Freddie were not addressed in the sweeping Wall Street reform legislation approved by Congress in July -- a yawning gap in the Democratic bill that Republicans have sharply criticized.

On the broad consensus expressed at the administration's conference about a government guarantee, Shelby said he would like to see specifics.

"I'd be very skeptical because otherwise we're just going to create another hybrid situation -- private ownership, government guarantee; privatize the profits, socialize the risk," he said. "That's what some people might like. I think that's a mistake."

(Additional reporting by Mark Felsenthal and Pedro da Costa, Editing by John O'Callaghan)