Bernanke: Low Financing Costs Likely to Cover Any GSE MBS Losses

The spread between the Federal Reserve's low financing costs and the coupon on the GSE mortgage-backed securities it buys will likely cover any losses due to changes in interest rates or other market risks, according to Fed chairman Ben Bernanke. The chairman told a congressional panel that the Fed is purchasing 4% MBS coupons with 0.25% financing. "There is a substantial flow of revenue that comes in that will offset losses that might accrue down the road," Mr. Bernanke testified. "We are pretty comfortable this will be providing revenue to the Treasury." Mr. Bernanke's comments were in response to questions about whether the Fed might see losses on its huge holdings of MBS. At a March monetary policy meeting, Fed officials increased their $500 billion commitment to purchase Fannie Mae, Freddie Mac and Ginnie Mae MBS up to $1.25 trillion by yearend and initiated purchases of up to $300 billion in Treasury securities. Since taking that "aggressive action," the Fed chief said, "we have seen a significant improvement in financial markets and in the economic outlook - and that is the most important thing." In his prepared testimony, Mr. Bernanke said housing market is showing "some signs of "bottoming" and overall economic activity should "bottom out, and then turn up later this year."