July 18, 2013 / 6:32 PM / 4 years ago

Bernanke sees need for backstop for mortgage market

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke weighed into the contentious debate over the future of the housing finance system on Thursday, saying some sort of backstop for mortgages was needed to protect the financial system in times of stress.

However, he stopped short of explicitly endorsing a government role, which many Democrats see as the best approach.

“I think a key issue is going to be ... making sure that there is some kind of backstop or protection for situations where the financial markets are in distress,” Bernanke told the Senate Banking Committee.

A bipartisan group of senators has proposed winding down government-controlled mortgage financiers Fannie Mae FNMA.OB and Freddie Mac FMCC.OB over five years as part of an effort to reduce taxpayer support for the market.

The two companies, which were seized by the government in 2008 as bad loans threatened their solvency, currently back nearly half of all new U.S. home loans.

To fill the role they have played in ensuring a flow of housing credit in good times and bad, the senators would create a government backstop that would kick in times of stress after private creditors had absorbed large losses.

A separate draft bill unveiled by Republicans in the House would also wind down Fannie Mae and Freddie Mac, but it would put much sharper curbs on government guarantees.

Bernanke said that if lawmakers created a system in which the government was offering guarantees, they should ensure that the government is appropriately compensated.

He also said they should make sure that firms that are repackaging mortgages into securities for investors hold enough capital to avoid taxpayers getting stuck with losses.

“I think those would be very helpful if you come to a solution that involves a government role,” Bernanke added.

Fannie Mae and Freddie Mac were chartered by Congress to expand mortgage finance but operated as private, profit-making companies. Given the central role they played in the financial system, the government felt compelled to bail them out in 2008 when they almost failed.

They were propped up with $187.5 billion in taxpayer funds, but have since returned to profitability and have paid taxpayers about $132 billion in dividends.

Reporting by Margaret Chadbourn; Editing by Chizu Nomiyama

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