In testifying before Congress today on the subprime crisis, three of the Bush administration's leading authorities on economic and housing issues said they favor working more closely with the Federal Housing Administration as opposed to expanding the role of GSEs Fannie Mae and Freddie Mac.

"I prefer using the FHA to solve the subprime problem instead of the GSEs," said Federal Reserve Chairman Ben Bernanke, who testified this morning before the House Financial Services Committee along with Treasury Secretary Henry Paulson, Jr., and HUD Secretary Alphonso Jackson.

"The FHA is set up to help low- and moderate income home buyers, and there's money budgeted for this purpose," said Bernanke. "Plus, FHA has an explicit mission to help home buyers, not stockholders," he concluded.

The testimony from Bernanke and the other administration officials came on the heels of a busy news week surrounding the subprime crisis.

On Tuesday, in an effort to aid the struggling housing market, the Federal Reserve Board cut the federal funds rate a half-percentage point to 4.75 percent. Also on Tuesday, the House passed its version of the FHA Modernization bill, and yesterday, the Senate Banking Committee sent a Senate version of FHA reform to the Senate floor.

One area of difference between the House bill and the Senate and administration position is on the size of the FHA loans. Right now, the cap on FHA loans is $362,000. The House bill would expand that loan cap to $829,750 in some instances, while the Senate version raises the cap to $417,000, the limit also supported by the Bush administration.

At the same time Congress is debating FHA reform, it is also considering reforming the GSEs. One proposal under discussion is temporarily allowing the GSEs to get into the jumbo loan market. In effect, this would let the GSEs invest in loans above the current $417,000 limit for conforming loans.

Fed Chairman Bernanke told Congress to go down this route with caution. Bernanke said any attempt to raise the conforming loan limit must be done in the context of broader GSE reform.

"If Congress does this it must be temporary and prompt," Bernanke said. "If it's not prompt it won't be productive because the markets will have worked themselves out," he explained.

Secretary Jackson urged Congress to pass FHA Modernization. He said of the 2 million subprime loans that are expected to reset by the end of 2008, roughly 500,000 will foreclose. Jackson said under existing HUD programs, the government can help roughly 240,000 refinance their mortgages. If FHA Modernization passes, Jackson said the government could potentially help another 200,000 homeowners.