The U.S. government should only back home loans as a last resort in times of economic stress and should explicitly charge for that support, Federal Reserve Board Chairman Ben Bernanke said on Wednesday.
He made the comments just two days before the release of an Obama administration white paper that is expected to lay out three options for revamping the way U.S. homes are financed.
The options mark an opening salvo in what could be a multi-year political debate over the government's large and costly support of a housing sector still struggling after the U.S. financial crisis and recession.
If the government is involved in providing credit guarantees, they should do so only as a deep backstop -- that is, the first losses should be borne by the originators of the mortgages or by the securitizers, Bernanke told the U.S. House of Representatives Budget Committee in response to a question.
The government, if it does provide backstop insurance, should do so for an actuarially fair fee, premium, and that would essentially allow the government to provide backstop in situations like we had in the last few years where the housing market comes under enormous stress, Bernanke added.
The Obama administration's options for the housing market, which the White House confirmed would be released on Friday, range from gradual elimination of mortgage finance giants Fannie Mae and Freddie Mac to one where the government would provide a guarantee during times of stress.
They also include a third option where the government would be more heavily involved in the mortgage market.
More than 85 percent of new home lending is currently backed by the government in some form -- the vast majority by Fannie Mae, Freddie Mac and the Federal Housing Administration.
Fannie Mae and Freddie Mac were seized by the government in late 2008 as losses mounted from mortgage loans gone bad. Since then, they have been propped up with more than $150 billion in taxpayer aid.
The housing and financial services industries are already pushing back on Capitol Hill against some of the more aggressive elements of the administration's ideas, congressional sources said.
The administration could take limited steps to pull government support for mortgages in the short-term. Congress would have to approve any substantial changes to the overall housing finance system.
The political battle over remaking the mortgage system is expected to be long and potentially bitter given deep ideological rifts between Republicans and Democrats.
Many Republicans want to leave the mortgage market entirely to free market forces. Democrats generally see at least a limited role for government.
This is why we believe the odds remain against legislation even if the Obama administration appears more open to eliminating Fannie and Freddie than expected, Jaret Seiberg, an analyst with MF Global Inc in Washington, said in a research note.
The American Bankers Association called the upcoming release of the Obama administration's proposals the start of a constructive dialogue. This is going to be a multi-year process, said ABA Executive Vice President Robert Davis.
In the short-term, the administration is also expected to endorse a temporary increase in the size of loans the government can back expire as scheduled in September. The limits are set to revert to $625,500 from $729,500. That could work as a test case to see if the private market fills the void.
The administration is also expected to propose increasing the premiums charged on loans backed by the Federal Housing Administration, which would see an increase in its business if loans backed by Fannie Mae and Freddie Mac were made more expensive. Industry sources said that proposal would be included in a White House budget proposal due Monday.
(Additional reporting by Caren Bohan, Margaret Chadbourn and Mark Felsenthal; Editing by Andrew Hay)