Housing Plan Must Be Clear About Government's Role: Bernanke

WASHINGTON — Federal Reserve Board Chairman Ben Bernanke told House lawmakers that whatever housing finance reform plan is enacted to replace Fannie Mae and Freddie Mac, policymakers must be clear to private investors about the government's role.

In his first of two semiannual hearings this week to update Capitol Hill about the state of the economy, Bernanke was careful not to express preference for any of the competing reform plans circulating around Washington, despite lawmakers' attempts to seek his opinion. But he did say that if a final plan included a government backstop, it would be wise for policymakers to provide as much detail as possible in advance to the private market about how that backstop would work.

"The question we are discussing is, if that's going to happen anyway, is there a case for setting up the rules in advance in some sense and figuring out what the government ought to charge for whatever protection it is prepared to provide?" Bernanke told members of the House Financial Services Committee. (His second hearing, before the Senate Banking Committee, will occur Thursday.)

The Fed chairman said policymakers could lay out "rules of the game" with details, for example, on how a potential government insurance fund would charge premiums to private-sector participants.

"If the government does play a role then it should be fairly compensated," said Bernanke. "Instead of having an implicit guarantee that it ended up having to make good on, like the [Federal Deposit Insurance Corp.] or some other similar institution it should receive some kind of insurance premium."

What role the government should play in a future housing finance system has been a central question as Democrats and Republicans debate how to move on from Fannie and Freddie. A bill released last week by House Republicans, led by Financial Services Committee Chairman Jeb Hensarling, R-Texas, would leave the government out entirely. A more bipartisan bill authored by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would create a new government agency to regulate private mortgage insurers and protect them against loss.

Bernanke said the Fed had warned for years about the lack of capital held by Fannie and Freddie, the implicit nature of the guarantee provided by the government for the two government-sponsored enterprises and the persistent conflict between public and private goals. The GSEs, as they stood before the crisis, had "very serious flaws" which need to be fixed as part of any reform effort, he said.

The Fed released a white paper by economists nearly two years ago analyzing various housing reform plans that have been aired. But the U.S. central bank itself has not supplied policymakers with its own plan or offered any endorsements.

With the government currently supporting nearly 90% of the mortgage market, policymakers, regulators, and industry participants have stressed the importance of reinvigorating the private market, which has stayed on the sidelines in the absence of certainty by the government about what lawmakers and regulators plan to do to reform the housing market.

"Everyone agrees that one of the key questions is what role, if any, the government should play," said Bernanke. "It seems pretty clear that the private sector should be playing more of a role than it is now."

Hensarling's bill would require Fannie and Freddie to be unwound in five years. Before they are dismantled, the portfolios of mortgage-backed securities at both firms would have to be reduced by 15% annually and conforming limits would have to drop as well. Additionally, the bill would reduce the Federal Housing Administration's role in the market, and create a new National Mortgage Market Utility.

Democrats are already criticizing the bill, suggesting it would eliminate the 30-year fixed rate mortgage and make owning a home more expensive.

"While I support reducing the current government footprint in the housing market, I'm concerned that such a drastic reduction will adversely affect homeowners, depress the broader economy and eliminate the 30-year fixed rate mortgage as we know it," said Rep. Maxine Waters, D-Calif., the ranking member of the committee, at the hearing.

Bernanke endorsed the importance of American families having access to mortgage credit to provide them a chance to buy a home. But he suggested that such credit should not be limited to 30-year mortgages alone.

"Many people use different types of mortgage structures," he said. "I think the main thing, again, is not the instrument itself but rather the access of the average American to home ownership and to mortgage credit."

Some lawmakers said a final plan must ensure that whatever entity ends up supporting the housing market is sufficiently capitalized to deal with crises to prevent the type of chaos that ensued when the government had to bail out Fannie and Freddie.

"If you don't have some entity that is self-sufficient, has huge capital to make sure that it can withstand a downturn, we're going to end up in the situation again," said Rep. Gary Miller, R-Calif.