Federal Reserve chair says Fannie and Freddie Can Be Replaced

Fannie Mae and Freddie Mac can possibly be replaced or not be part anymore of a U.S. housing finance system

Government-backed mortgage finance companies Fannie Mae and Freddie Mac can possibly be replaced or not be part anymore of a U.S. housing finance system because they are just too risky, Federal Reserve chairman Ben Bernanke said Friday.

In a letter to Representative Marcy Kaptur, Bernanke said that firms like Freddie and Fannie pose systemic risk and that a housing finance system can be strengthened instead to make sure mortgage funding and support a secondary mortgage market during events of financial instability.

"There are a variety of organizational forms that might replace Fannie Mae and Freddie Mac that could likely provide mortgage credit without the systemic risks associated with these institutions in the past," Bernanke said in the letter.

In the midst of the 2008 financial crisis, Fannie Mae and Freddie Mac, which owns half of U.S. mortgages, incurred huge losses and had to be taken over completely by the federal government to remain viable.

The two companies were owned by shareholders and run like a corporation, but were created under a congressional charter, which had investors believing the federal government would step in and take over in the event of a financial crisis.

Fannie Mae and Freddie Mac use that mandate to promote affordable housing. Their system works by buying mortgages from lenders and re-selling them as securities or store them as part of their own portfolio, with the aim of ensuring readily available funding for home owners.

Both companies are still under the control of the government, as it is still trying to figure out a plan to reform the financial system in the housing sector.

Posted by James Fried on Sunday August 08 2010, 12:38 PM EST. All trademarks acknowledged. Filed under Featured News, Finance. Comments and Trackbacks closed. Follow responses: RSS 2.0