Reform of US home loan system a must, says Bernanke
Posted: 01 November 2008 0404 hrs

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WASHINGTON - US Federal Reserve chairman Ben Bernanke said Friday that the creation of a new system of US home-loan financing should be a top priority of financial reform.

"Regardless of the organizational form, we must strive to design a housing financing system that ensures the successful funding and securitization of mortgages during times of financial stress," Bernanke said.

The government "likely" has a role to play in supporting the system, "at least during periods of high financial stress," he said in a speech to a university symposium in Berkeley, California.

But he warned against creating institutions that pose systemic risks to the financial markets and the economy.

Bernanke referred to the huge mortgage finance giants Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) which the government took over in September to avert a financial system meltdown from the housing crisis.

Shares in the two GSEs that underpin trillions of dollars of home loans had nearly lost all their value amid mortgage-related financial turmoil.

"The existing GSE model involves an inherent conflict between the objectives of the companies' private shareholders and the objectives of public policy," he said.

Bernanke outlined a range of approaches to reform of the GSE model, from privatization to nationalization and including covered bonds, the primary source of mortgage funding for European banks.

"Achieving the appropriate balance among these design challenges will be difficult, but it nevertheless must be high on the policy agenda for financial reform," he said.

The government's placement of the troubled firms into "conservatorship" on September 7 has allowed a "time out" to reconsider their future role, he added.

Bernanke addressed by videoconference a symposium on the mortgage crisis, the economy and public policy.

He did not discuss economic prospects or the current crisis in the global financial markets.

- AFP /ls