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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

Bernanke: Govt. Should Stay in Mortgage Game

In a speech underway right now, Fed Chairman Ben Bernanke said that even during the worst days of the financial meltdown, investors were still willing to buy securitizations based on mortgages that were sold by Fannie Mae and Freddie Mac, because there was the perception they were backed, at least in part, by the federal government.

"Some form of government backstop may be necessary to ensure securitization," Bernanke said.

Bernanke touted securitization as an important part of the market for its ability to raise cash and spread around risk. But such securities must be a) based on sound mortgages b) managed carefully and c) transparent, Bernanke said.

The conflict at the heart of Fannie and Freddie is that they were quasi-government agencies pulled between two opposite goals -- making money for their shareholders and providing rock-solid stability. That type of structure may not be able to endure, Bernanke said.

"Perhaps the recent mortgage cycle will be remembered as just another failed episode of financial innovation," Bernanke said.

Bernanke said that banks and thrifts are still making home loans, but at terms that essentially locks out potential borrowers "with weaker credit histories."

-- Frank Ahrens

By Frank Ahrens  |  October 31, 2008; 2:23 PM ET
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