Fed's Bernanke sees U.S. backing Fannie, Freddie debt

Current Fannie Mae and Freddie Mac mortgage-backed securities are likely to retain U.S. government backing should Congress create a new system for financing U.S. homes, Federal Reserve Board Chairman Ben Bernanke said on Wednesday.

The comments follow speculation earlier this month bondholders in the mortgage funding giants seized by the government could ultimately lose some of their investment.

My assumption is the mortgage backed securities which are already outstanding will be grandfathered and will retain the U.S. government backing that they currently have, Bernanke told lawmakers on the U.S. House Financial Services Committee.

At some point there will be a change in the structure and there will be no more of the current type of MBS created. But the existing MBS I assume will be protected until such time as they either expire or are purchased back, Bernanke said in response to a question about the future of Fannie and Freddie.

The Fed chief urged Congress to come up with an entirely new way of financing U.S. homes soon.

My assumption is that sometime soon and, I hope soon, that the Congress will reform Fannie and Freddie. Perhaps break them up, perhaps make them officially governmental, Bernanke said.

Then Treasury Secretary Henry Paulson seized control of the two mortgage finance firms in September 2008 at the height of the crisis.

The government takeover was supposed to be temporary, but the Obama administration deepened the government's role in late 2009. Treasury Secretary Timothy Geithner has said any substantive proposals on what to do with the two firms will not come until next year at the earliest.

Panel chair Barney Frank has scheduled a hearing on the future of the so-called government sponsored enterprises for March 23. Geithner is expected to testify.

Frank caused a stir earlier this month when he told reporters Fannie Mae and Freddie Mac bondholders could lose some of their investment.

Frank backed off those comments later that same day after the Treasury Department said it was committed to supporting the two entities.

Bernanke, in response to a question at the hearing, said he could not say whether Treasury's statements backing the entities would be enough for investors to consider the debt sovereign.

Whether it is legally sovereign debt or not, I am not equipped to tell you. I don't know, Bernanke said.

Government issued debt is referred to as sovereign debt.

(Editing by Andrew Hay)