Federal Reserve Chairman Ben Bernanke weighed in on 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, Reuters reported yesterday. However, he stopped short of explicitly endorsing a government role, which many Democrats see as the best approach. A bipartisan group of senators has proposed winding down government-controlled mortgage financiers Fannie Mae and Freddie Mac 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 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 reserve enough capital to avoid sticking taxpayers with losses.
