Here Comes the Government Bailout
Bernanke sets out jumbo mortgage plan
By Krishna Guha in Washington
Published: November 8 2007 15:36 | Last updated: November 8 2007 15:36
Ben Bernanke, Federal Reserve chairman, on Thursday put forward a plan to help revive the secondary market for jumbo (large denomination) mortgages that would involve Fannie Mae and Freddie Mac, as well as credit guarantees from the federal government.
Mr Bernanke told Congress he would support raising the limit on the size of the individual loans eligible for securitisation by the government-sponsored mortgage finance entities from $417,000 to $1m (€680,000, £475,000) on a temporary basis.
He suggested that Fannie and Freddie could pay insurance premiums on these loans to the federal government, which would "act as guarantor" by taking on some of the credit risk.
Charles Schumer, the Democratic chairman of the Joint Economic Committee, enthusiastically welcomed the idea and said he would try to insert it into legislation already before Congress.
The unusually specific proposal by Mr Bernanke reflects his disappointment at the continued problems in the jumbo market, and concern that this will aggravate the US housing downturn.
It came as Mr Bernanke told Congress that estimates that set the total losses from subprime mortgages at about $150bn were probably "in the ballpark".
The Fed chairman said the US central bank would not be "dogmatic" and would respond actively to new economic and market developments, while reiterating that it presently saw the risks to inflation and growth as roughly balanced.
"As we see these risks change in one direction or another we will certainly want to respond as needed to meet our mandate," he said.
The Fed chairman's remarks leave open the possibility of further rate cuts in December and January, while making it clear that the Fed does not currently expect to be making cuts again then.
Mr Bernanke emphasised that the Fed would take the action necessary to stop import and energy price inflation becoming embedded in core inflation.
However, he also made it clear that the strong growth performance of the third quarter was not "likely to be sustained in the near term".
Mr Bernanke said the Fed expected that growth would weaken in the fourth quarter and remain "sluggish during the first part of next year" before strengthening from the second quarter onwards.
However, there were two risks to growth. The first was that "financial market conditions would fail to improve or even worsen". The second was that "house prices might weaken more than expected, which could further reduce consumers' willingness to spend".
Since the meeting on October 31, he said, economic data had continued to suggest that the overall economy remained "resilient".
However, he added that "financial market volatility and strains have persisted" and new information "has intensified investors' concerns about credit market developments and the implications of the downturn in the housing market for economic growth".
In addition, further sharp increases in the price of oil had put "renewed upward pressure on inflation and may impose further restraint on economic activity", Mr Bernanke said.
Mr Schumer and Republican Senator John Sununu meanwhile expressed serious doubts about the US Treasury-backed plan to create a superfund to provide liquidity in the market for asset-backed securities.
"To be direct, I am worried that this may just be a shell game - an attempt to move bad investments around and keep them from landing on the books," Mr Schumer said.
Mr Bernanke was noncommittal, saying the plan could help the market recover but everything would depend on how it was implemented.
By Krishna Guha in Washington
Published: November 8 2007 15:36 | Last updated: November 8 2007 15:36
Ben Bernanke, Federal Reserve chairman, on Thursday put forward a plan to help revive the secondary market for jumbo (large denomination) mortgages that would involve Fannie Mae and Freddie Mac, as well as credit guarantees from the federal government.
Mr Bernanke told Congress he would support raising the limit on the size of the individual loans eligible for securitisation by the government-sponsored mortgage finance entities from $417,000 to $1m (€680,000, £475,000) on a temporary basis.
He suggested that Fannie and Freddie could pay insurance premiums on these loans to the federal government, which would "act as guarantor" by taking on some of the credit risk.
Charles Schumer, the Democratic chairman of the Joint Economic Committee, enthusiastically welcomed the idea and said he would try to insert it into legislation already before Congress.
The unusually specific proposal by Mr Bernanke reflects his disappointment at the continued problems in the jumbo market, and concern that this will aggravate the US housing downturn.
It came as Mr Bernanke told Congress that estimates that set the total losses from subprime mortgages at about $150bn were probably "in the ballpark".
The Fed chairman said the US central bank would not be "dogmatic" and would respond actively to new economic and market developments, while reiterating that it presently saw the risks to inflation and growth as roughly balanced.
"As we see these risks change in one direction or another we will certainly want to respond as needed to meet our mandate," he said.
The Fed chairman's remarks leave open the possibility of further rate cuts in December and January, while making it clear that the Fed does not currently expect to be making cuts again then.
Mr Bernanke emphasised that the Fed would take the action necessary to stop import and energy price inflation becoming embedded in core inflation.
However, he also made it clear that the strong growth performance of the third quarter was not "likely to be sustained in the near term".
Mr Bernanke said the Fed expected that growth would weaken in the fourth quarter and remain "sluggish during the first part of next year" before strengthening from the second quarter onwards.
However, there were two risks to growth. The first was that "financial market conditions would fail to improve or even worsen". The second was that "house prices might weaken more than expected, which could further reduce consumers' willingness to spend".
Since the meeting on October 31, he said, economic data had continued to suggest that the overall economy remained "resilient".
However, he added that "financial market volatility and strains have persisted" and new information "has intensified investors' concerns about credit market developments and the implications of the downturn in the housing market for economic growth".
In addition, further sharp increases in the price of oil had put "renewed upward pressure on inflation and may impose further restraint on economic activity", Mr Bernanke said.
Mr Schumer and Republican Senator John Sununu meanwhile expressed serious doubts about the US Treasury-backed plan to create a superfund to provide liquidity in the market for asset-backed securities.
"To be direct, I am worried that this may just be a shell game - an attempt to move bad investments around and keep them from landing on the books," Mr Schumer said.
Mr Bernanke was noncommittal, saying the plan could help the market recover but everything would depend on how it was implemented.
Comments
You must put yourself in the place of a poor financial CEO to see the wisdom behind Ben The Puppet's decision to raise the limit from 417K to 1M. The problem facing most banks is this...how do you repackage dog turds as "Tootsie Rolls" and get someone to "bite"?
Once you realize that everything our government and the FED does is self-serving to the financial mafia that runs this country, you will see the truth.
And yes, you should be angry.....very angry. :x
What does that mean? Is he planning to take that out of the formulas they use to calculate inflation?
Next thing you know, they will be using the salary increases of people working at minimum wage to calculate inflation.
BEING THE FEDERAL RESERVE BANK CHAIRMAN may make you feel like a know-it-all, but it doesn't actually make you one.
Ben Bernanke demonstrated the truth of this axiom on Capitol Hill recently when he suggested that secondary mortgage-market giants Fannie Mae and Freddie Mac temporarily be granted the authority to buy jumbo home-mortgages of up to $1 million -- more than double the companies' current limit on loan sizes. Though Bernanke said this would help the beleaguered housing sector, James Lockhart, the man who regulates Fannie and Freddie, was totally surprised by the suggestion and told us it would do more harm than good.
"We're talking to the Fed about this," says Lockhart, who is director of the Office of Federal Housing Enterprise Oversight, an agency that is supposed to prevent Freddie and Fannie from doing anything unsafe and unsound. "Given the moment," Lockhart points out wisely, "Fannie and Freddie have enough to do in their own space -- the conforming-loan area. They don't have any particular expertise with jumbos. They don't buy them, they don't have systems, models or risk-management tools for them. It would take a lot of implementation."
The two congressionally chartered companies buy mortgages from banks and mortgage companies, which, in turn, use the proceeds to make even more loans, providing liquidity to the marketplace. The size limit on loans eligible for sale to Fannie and Freddie, currently $417,000, is revised annually to reflect changes in an index of housing prices.
Right now, thousands of struggling homeowners in expensive markets like California and parts of Florida are burdened with adjustable-rate jumbo loans -- mortgages larger than the Fannie-Freddie limit -- with introductory "teaser" rates that will reset to much higher levels this year and next. Those homeowners would like to convert to more manageable fixed-rate loans. But Wall Street, pension funds and other buyers of jumbos have all but stopped their purchases, lest they get caught holding the bag if conditions worsen.
For this reason, Bernanke also suggested that the U.S. Treasury explicitly guarantee the repayment of such jumbos if purchased by Freddie and Fannie. (Markets already treat the two mortgage titans as if their actions carry "implicit" guarantees, despite annual denials from Treasury.)
We asked the White House and Treasury what they thought of Ben's brainstorm and, not surprisingly, were put off with "No comment."
Lockhart wasn't so bashful. This reliable Bush school-chum was placed at the helm of OFHEO in 2006 to make sure that Fannie and Freddie fulfilled the terms of consent agreements signed earlier when they were caught cooking their books to make earnings appear more robust than in reality. The firms promised to strengthen accounting and management systems, to begin reporting their financial results to the Securities and Exchange Commission, and to limit growth and maintain capital levels 30% higher than required by law -- until they got their houses in order.
Those restrictions, says Lockhart, prevented the current mortgage crisis from being even larger, by keeping Fannie and Freddie in good shape to buy loans. But he might have to lift the capital and portfolio-growth restrictions sometime after February 2008, if the two giants meet the terms of their earlier agreements and are operating safely. He certainly wouldn't want to do that now: "It would be a major mistake to lower capital requirements in this market -- almost like repeating the mistakes of the S&L days."