I thought the Fed wouldn't interfere into things, which don't belong to them?
Idea of Jumbo-Loan Guarantee Is Floated
By DAMIAN PALETTA
November 9, 2007; Page A2
WASHINGTON -- Federal Reserve Chairman Ben Bernanke yesterday floated a new idea to fix the troubled market for mortgages too large for Fannie Mae and Freddie Mac to buy: Allow the companies to securitize jumbo-size mortgages but have the federal government guarantee them.
Fannie and Freddie currently can buy mortgages only up to $417,000, and Congress -- so far -- hasn't acted to lift that limit despite distress in that market that has made jumbo mortgages at "somewhat tighter terms and higher prices," as Mr. Bernanke put it.
As an alternative to lifting that $417,000 cap, Mr. Bernanke offered a surprise answer to questions on Capitol Hill. He suggested that Congress could consider allowing the companies, known as "government sponsored enterprises," buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors.
"That would be, I think, of some assistance to the mortgage market," the Fed chairman said. "From the federal government's point of view, it would be taking on some credit risk, which you may or may not be willing to do." He added, "It would be a good idea to make the GSEs ultimately responsible for some, any excess losses, or some part of excess losses, relative to the premiums that are paid."
Mr. Bernanke's idea is significant because it could potentially extend the government's support and exposure to the mortgage market.... For years, the Fed and the Bush Treasury have complained that investors believe the companies have an implicit government guarantee of their debt. Fannie Mae and Freddie Mac purchase loans on the secondary market and either package them into securities or hold them in their portfolios, which now total $1.4 trillion.
Sen. Charles Schumer (D., N.Y.), chairman of the Joint Economic Committee, where Mr. Bernanke was testifying, said he would consider introducing a bill very soon to accomplish Mr. Bernanke's suggestion. "I think that's a very good idea," Sen. Schumer said.
Rep. Carolyn Maloney (D., N.Y.), who chairs the relevant subcommittee in the House, endorsed the plan. She said Mr. Bernanke's idea could be added to a broader legislative effort to overhaul oversight of the companies.
The House of Representatives has already passed such a measure but it has had little traction in the Senate.
A spokesman for Fannie said the company will seek more information on Mr. Bernanke's idea.
The Treasury and Freddie Mac had no comment.
Write to Damian Paletta at damian.paletta@dowjones.com
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