Fed chairman Ben Bernanke offered his view on GSE reform yesterday, saying in remarks to a community banker's convention in Hawaii that Fannie and Freddie's portfolio holdings do little to promote homeownership and lack a clear focus on fostering affordable housing. The chairman's comments highlighted what he sees as a need for both Fannie and Freddie to "refocus" on providing affordable housing to millions of Americans, particularly in light of ongoing troubles in the subprime credit sector. Many executives at Fannie and Freddie have argued in recent months that the portfolio holdings at each financial giant serve to reduce costs in the mortgage market, and in his remarks Bernanke made it clear that he feels this may only be true in "some circumstances." "[GSE] portfolio purchases may create benefits for home purchase mortgages extended to lower-income households, to low- and moderate-income first-time homebuyers, and to buyers of homes in lower-income neighborhoods," the Fed chairman said. "These are all mortgage markets in which the private sector might have greater difficulties making mortgage credit more widely available and thus for which the case for government support may be stronger."
In outlining a plan for reigning in the GSEs, Bernanke stressed the need to define a clear public purpose that would provide boundaries for Fannie and Freddie's market activies, proposing that any regulation of the GSEs require a focus "almost exclusively" on mortgages and securities tied to affordable housing. "A standard for determining the public benefit of Fannie's and Freddie's portfolios seems readily available: Do the GSE portfolios support affordable housing? At the present time, Fannie and Freddie appear to fail this test," he said. "Indeed, by OFHEO's estimation, less than 30 percent of the GSEs' current portfolio holdings are oriented toward affordable housing." Bernanke's focus on driving the GSEs towards affordable housing comes as the subprime credit sector is roiling, sending numerous lenders to the brink and others out of business. While Bernanke stressed he isn't advocating a change in the exposure of the GSEs to subprime loans, he did suggest that Fannie and Freddie could provide additional liquidity to a market that, right now, desperately needs it. "In all, from a social perspective, focusing the GSE portfolios on affordable housing could provide benefits that might offset some of the risks that these more-targeted portfolios might pose to financial markets and to taxpayers," Bernanke said. "The key principle here is that the GSEs' senior debt--which investors view as government-backed--should be used only to finance assets that have, in the view of the Congress, a clear and measurable public benefit."
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