By Benton Ives, CQ Staff

Federal Reserve Chairman Ben S. Bernanke discussed with lawmakers steps they could take to help struggling borrowers caught in the subprime mortgage crisis.

In testimony before the Joint Economic Committee on Thursday, Bernanke urged enactment of an overhaul of the Federal Housing Administration. And in response to questioning, he offered a new idea for how to get mortgage giants Fannie Mae and Freddie Mac involved in the effort.

Bernanke reiterated broader economic concerns about allowing Fannie and Freddie to buy more expensive loans, but he suggested a way to mitigate the risks: Have the federal government bear some credit risk from jumbo loans bought by the companies.

“One possibility would be if the federal government were willing to act as guarantor,” Bernanke said.

Lawmakers have talked about temporarily allowing Fannie and Freddie to buy loans larger than the current limit of $417,000, or “jumbo” loans, as a way to help stabilize battered real estate markets.

Providing a government guarantee could “take away the credit risk from the [companies], then they could process these jumbo loans and sell them into the secondary market, and that would be . . . of some assistance to the mortgage market,” Bernanke said.

In response to a question from Chairman Charles E. Schumer , D-N.Y., he suggested Congress could set an upper limit of $1 million for mortgages bought under the program.

Continued Housing Woes

Bernanke said overall economic growth was likely to be slower in the coming quarters, driven in large part by the slumping housing industry.

He said the housing market could continue to struggle well into next year. With that in mind, the chairman said the Fed will soon unveil new rules against deceptive and unfair mortgage practices.

Lawmakers have criticized the Fed for not wielding its authority more aggressively in response to the subprime troubles.

Many subprime borrowers — those with spotty credit histories — qualified for adjustable-rate loans at low “teaser” interest rates, only to see their payments later leap to levels they could not afford.

Bernanke said legislation to modernize and overhaul the Federal Housing Administration (FHA) might “encourage joint efforts with the private sector that expedite the refinancing of subprime loans held by creditworthy borrowers facing resets.”

On Sept. 18, the House passed an FHA bill (HR 1852) intended to stem mortgage foreclosures and prevent home buyers from entering risky home loans in the future.

The Senate Banking, Housing and Urban Affairs Committee approved a draft FHA bill Sept. 19 that has not come to the floor and differs significantly from the House bill.

Congress initially planned to overhaul FHA, which has lost market share to subprime and other private mortgage providers, because of outdated loan limits and stringent credit requirements.

But lawmakers see an FHA overhaul as a way to help at-risk borrowers refinance out of loans that have gotten too expensive.

The House bill would allow certain subprime loan holders to refinance through the FHA and allow the agency to vary the premiums it charges borrowers, based on risk.

Bernanke said those kinds of steps could help FHA provide more refinancing options.