Federal Reserve Chairman Ben Bernanke warned Congress on Thursday that raising the ceiling on the size of loans that mortgage finance enterprises Fannie Mae and Freddie Mac can buy could undermine market discipline.
Bernanke said that if Congress were to raise the so-called conforming loan limit imposed on the two government-sponsored enterprises, or GSEs, from its current $417,000, lawmakers should move swiftly enough to make sure the move serves its intended purpose of easing current strains in the mortgage market.
The perception, however inaccurate, that the GSEs are fully government-backed implies that investors have few incentives in their role as counterparties or creditors to act to constrain GSE risk-taking, Bernanke said in testimony obtained by Reuters that was prepared for delivery to the U.S. House of Representatives Financial Services Committee.
Raising the conforming-loan limit would expand this implied guarantee to another portion of the mortgage market, reducing market discipline further, he added.
Bernanke said that if there is a significant delay in implementing any increase in the conforming loan limit, private securitization would likely be delayed in the interim.