WASHINGTON — Federal Reserve Board Chairman Ben Bernanke told lawmakers Wednesday that fixing the nation's housing finance system remains "the main piece of unfinished business" in financial regulatory policy.
Bernanke, appearing before the House Financial Services Committee, said depressed home prices continue to hamper the economic recovery, and among the challenges to a housing rebound is uncertainty about what will happen if Fannie Mae and Freddie Mac are wound down.
"We have to get our housing finance system back in order," Bernanke said in one of his two congressional appearances this week on the state of the economy. He will testify before the Senate Banking Committee on Thursday.
Bernanke added, "It would be very helpful if we could begin to get some clarity. ... It would probably increase confidence in the part of mortgage originators to know they would be able to find a secondary market for their mortgages."
Despite the sweeping reforms passed in last year's Dodd-Frank Act, the law failed to address the future of the government-sponsored enterprises. While members of both parties agree Fannie and Freddie — now held in federal conservatorships — caused huge costs to the federal government, no one has proposed a comprehensive plan with bipartisan support for replacing them.
Bernanke also cited sluggish growth in consumer spending, limited access to credit and the government's fiscal tightening as obstacles to economic growth.
"Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained," Bernanke said.
The fact that the housing market still has not bottomed out is likely discouraging consumers from looking at real estate, he added.
"Many potential homebuyers remain concerned about buying into a falling market, as weak demand for homes, the substantial backlog of vacant properties for sale, and the high proportion of distressed sales are keeping downward pressure on house prices," said Bernanke.
Lawmakers pressed Bernanke on which path policymakers should take for fixing the housing finance system.
Rep. Gary Miller, R-Calif., one of the committee's most outspoken critics of Fannie and Freddie, said a plan is needed sooner rather than later.
"Lack of clarity is killing the market place," said Miller. "Nobody knows what to expect tomorrow. Many are pulling back today because they don't know what to expect."
Bernanke said private capital should be part of the solution in getting the market for housing credit back on track. However, he did warn that without entities like Fannie and Freddie in the future, the cost of mortgages was likely to increase.
"A private market system is probably going to increase the cost of mortgages a little bit, but that's just the consequence of taking away a subsidy which in the end proved to be very costly to our economy," he said.
Offering an optimistic outlook, Bernanke said that private capital would return to the market more quickly after other positive developments take place, including a further reduction in default rates.
"I suspect though that when the housing market begins to show signs of life that there will be expanded interest," said Bernanke. "There's a lot of things that need to happen, but I don't see any reason why the private sector can't play a big role in the housing market, securitization, etc., going forward."
