Bernanke Positive On Housing, Uncertain on GSE Reform

NEW YORK ( TheStreet) -- Federal Reserve Chairman Ben Bernanke said he remained optimistic about the housing recovery despite the recent rise in interest rates.

In his quarterly press conference with reporters Wednesday following the release of the central bank's monetary policy statement, Bernanke said that housing was now a source of strength for the economy.

The rise in home prices has spurred the creation of construction jobs and the improvement in household wealth will support spending and consumer sentiment, he said.

The recovery in housing was one of the reasons the Fed raised its outlook for the economy and jobs in 2014 and 2015, Bernanke added. The national unemployment rate, for instance, is now projected to drop to 6.5% by the end of 2014 compared to an earlier estimate of 6.8%.

Bernanke told reporters he is not too worried that the recent rise in interest rates will hurt demand for housing.

"People are more optimistic about housing and expect home prices to rise...that compensates for slightly higher mortgage rates," he said.

The chairman added that the recent move in interest rates has not had a dramatic impact on monthly mortgage payments.

According to Bernanke, if interest rates rise for the "right reasons" - due to optimism about the economy and expectations regarding future monetary policy -- "that is a good thing, not a bad thing."

Bernanke also touched on the issue of housing reform in his exchange with reporters. A number of bills are being floated in Congress that look to eliminate Fannie Mae ( FNMA) and Freddie Mac ( FMCC), also known as the government sponsored enterprises, or GSEs.

Increasingly, the proposals are backing away from a completely private model to a hybrid one, where private capital takes the first hit on losses, but the government still provides some sort of a backstop in the event of catastrophic losses.

In response to a question on whether a government backstop was necessary for a well-functioning mortgage market, Bernanke noted that other countries had a different structure and still managed to have the same levels of homeownership.

Significantly. Bernanke noted that these reforms could end up changing the market for agency mortgage-backed securities, which the Federal Reserve has been aggressively buying up these past few years. It remains uncertain what would happen to the bond portfolio if Fannie Mae and Freddie Mac are indeed wound down.

"We might end up holding securities left over from a different era in some respect," Bernanke said.

-- Written by Shanthi Bharatwaj in New York.

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