Monday, November 12, 2007

Ben Bernanke Recommends Ways to Loosen Up the Jumbo Mortgage Market

Chairman Bernanke suggested ways to loosen up the jumbo mortgage market, which is largely stuck at this time. The jumbo mortgage market are those mortgages greater than $417,000. It used to be that lenders had to hold these in their portfolio if they could not securitize them in some fashion. As a result of the credit crunch lenders have no secondary market for the mortgages so now everyone has to hold these in their portfolio. As a result this market has all but seized up with higher interest rates and tougher terms. From the WSJ:

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.

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