On October 31, Federal Reserve Chairman Ben Bernanke discussed the mortgage market and mortgage securitization in the United States at a symposium held in Berkeley, California. Bernanke outlined three principles for successful mortgage securitization: high credit quality in the underlying mortgages, capacity to manage risk by the investors that hold the securities, and transparency in the underlying assets and the security itself. During the credit boom, several of these principles gave way as demand for securities increased.
The mortgage securitization process serves several important purposes, including providing loan originators wider sources of funding and a reduction in the overall cost of providing mortgage credit. In the current market, almost no mortgage securitization is occurring absent some government guarantee. Historically, government-sponsored enterprises (GSEs) have represented a large percentage of the total securitization market in the United States. Bernanke discussed possible alternatives to the current GSE model, including privatization of the GSEs (Fannie Mae, Freddie Mac and Ginnie Mae), which would eliminate the inherent conflict between the private shareholders and public policy objectives. Bernanke also mentioned tying the GSEs even more closely to the government, akin to the model public utilities use, or using a cooperative ownership structure. Creating a different balance between the public/private ownership and oversight of the GSEs might lead to greater flexibility and innovation.
Bernanke discussed issuance of covered bonds as a means to providing successful mortgage financing without GSE-type organizations. To date, there have not been many covered bonds issued in the United States, in part because there have been other, more competitive means to fund mortgage financing, including securitization through the GSEs. Covered bonds are debt obligations issued by financial institutions and secured by a pool of high-quality mortgages or other assets. Covered bonds remain on the balance sheet of the issuing banks, exposing the issuing banks to the credit quality of the underlying assets. This feature better aligns the incentives of investors in securities backed by mortgages to obtain high-quality assets with the incentives of the mortgage lenders. Regardless of the form, the housing finance system must ensure successful funding and securitization of mortgages during financial stress but not create institutions that pose systemic risks to financial markets and the economy.