Bernanke discusses future of Fannie and Freddie

Fed chairman says government will need to back mortgage loans going forward regardless of what happens to Fannie Mae and Freddie Mac.

NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Friday that the federal government will need to continue to play a role in the future of the mortgage financing market.

In a speech broadcast to an economic symposium in Berkeley, Calif., Bernanke said there are many alternatives that need to be considered but that all will involve a role for the federal government and federal guarantees for securities backed by mortgage loans.

"Government likely has a role to play in supporting mortgage securitization, at least during periods of high financial stress," he said.

The remarks included a detailing of the recent problems in the mortgage markets, which led to the Treasury Department putting mortgage financing giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) into conservatorship on Sept. 7.

The two government sponsored firms either owned or guaranteed about $5 trillion in mortgages between them and their problems could end up costing taxpayers hundreds of billions of dollars in future losses.

But Bernanke said having them replaced by totally private firms could cause greater problems for the economy during a future financial crisis. Thus, he said that the federal government will likely have a role guaranteeing mortgages into the future.

"From a public policy perspective, a greater concern with fully privatized [firms] is whether mortgage securitization would continue under highly stressed financial conditions," he said. "As I have noted, almost no mortgage securitization is occurring today in the absence of a government guarantee."

Bernanke did not endorse any specific alternative for Fannie and Freddie and he stopped short of advocating for the government to completely nationalize the two firms. Instead, he gave a rundown of numerous proposals that have already been raised by Fed and Treasury officials as well as other experts.

Bernanke did caution that going back to the structure of Fannie Mae and Freddie Mac before the credit crisis -- as shareholder-owned companies with only an implicit government guarantee -- is not a good idea, especially with their huge portfolios of mortgage loans.

"As the Federal Reserve has argued for many years, the enormous [Fannie and Freddie] portfolios pose risks to financial stability," he warned.