Bernanke says GSE debt backing must be maintained

By Jim Christie

BERKELEY, California (Reuters) - Federal Reserve Chairman Ben Bernanke said on Friday that U.S. backing for the debt issued by home mortgage finance firms Fannie Mae and Freddie Mac in their current form must stand firm, even though it is appropriate to debate their future.

Uncertainty about how the U.S. government might treat debt issued by the two government-sponsored enterprises in the future has depressed investor appetite, keeping U.S. mortgage rates elevated. Speaking to a public policy symposium at the University of California at Berkeley by videoconference, Bernanke appeared to address those concerns.

"Even if alternative organizational structures are considered for the future, the U.S. government's strong and effective guarantee of the obligations issued under the current GSE structure must be maintained," he said.

The U.S. government took over Fannie Mae (FNM.P) and Freddie Mac (FRE.P) in September as the companies' finances foundered.

Bernanke said that some form of government backing for bundling mortgages together as securities is probably still needed in times of financial strain.

"Experience suggests that, at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securitization of mortgages," he said.

Fannie and Freddie, which own or guarantee about half the $12 trillion U.S. mortgage market, purchase home loans from mortgage originators and then bundle them into securities that are sold, with a guarantee of payment, to investors worldwide.

CHEAPER CREDIT

Analysts said Bernanke's confirmation of government backing for debt the GSEs have issued and are issuing under government control should help calm mortgage markets.

"I think it's a big positive for anyone who is involved in the agency market," said William Larkin, fixed income portfolio manager for Cabot Money Management, in Salem, Massachusetts.

Bernanke said that if lenders can sell the loans they make into broader markets, a wide array of funding sources is available to them, and they also reduce their exposure to risk. The cost of mortgage lending is lower as a result, he said.

"This whole speech is basically focused at the next step in their attack, which is going to be on making mortgages more affordable," Larkin said.

Bernanke said it would be useful to consider the future structures of the companies while they are under government operation.

Letting Fannie Mae and Freddie Mac eventually go back to business under their old charters might encourage the companies again to expand their mortgage portfolios in a risky way to boost profits, he said.

SYSTEMIC RISKS?