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Fed and Bush moving closer to mortgage rescue

Bernanke calls for more action by banks and the govt to help millions of home owners

(WASHINGTON) However much they might oppose it on ideological grounds, the Bush administration and the Federal Reserve are inching closer towards a government rescue of distressed home owners and mortgage lenders.

Fed chairman Ben Bernanke told a group of bankers in Florida on Tuesday that ‘more can and should be done’ to help millions of people with mortgages that are often bigger than the value of their homes.

Though Mr Bernanke stopped well short of calling for a government bailout, he used his bully pulpit to try to push the banking industry into forgiving portions of many mortgages and signalled his concern that market forces would not be enough to prevent a broader economic calamity.

He also suggested that the Federal Housing Administration expand its insurance programme to let more people switch from expensive sub-prime mortgages to federally insured loans.

And he urged the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to raise more capital so they could buy more mortgages. The companies already guarantee or hold as investments about US$1.5 trillion in mortgages.

Similarly, the Bush administration, despite its public opposition to bailouts, has set the stage for a bigger government role.

One month ago, President George Bush signed an economic stimulus bill that greatly increased the size of loans the FHA can insure, while allowing Fannie Mae and Freddie Mac to purchase significantly larger mortgages from lenders and guarantee them against default by homeowners.

The move, which administration officials had previously opposed, increases the limits on FHA, Freddie Mac and Fannie Mae mortgages from US$417,000 to as much as US$729,750.

Historically, the FHA and the mortgage companies have focused on conservative mortgages for people borrowing relatively modest sums. But they are now being encouraged to finance much bigger mortgages, in some cases to people who put almost no money down.

Last week, the administration went further by removing limits on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy up billions of dollars in mortgages that other investors have been too frightened to touch.

In theory, the change should not cost taxpayers. But because the companies are chartered by Congress, investors have assumed that Congress would bail them out if needed.

The Fed has been offering its own resources to soften the credit squeeze. In addition to sharply cutting interest rates, the Fed has lent more than US$160 billion to banks since mid-December.

Source: NYT (Business Times 6 Mar 08)

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