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Wants refinancing of troubled mortgages and forgiving part of mortgages for some

(NEW YORK) Federal Reserve chairman Ben Bernanke, seeking to end the worst US housing slump in 25 years, has urged the government and mortgage lenders to intensify their efforts to avoid home foreclosures.

Mr Bernanke, in a speech here on Monday, also reiterated his call for lenders to forgive portions of mortgages for some struggling homeowners. He said proposals should be ‘tightly targeted’ at borrowers at greatest risk of losing their properties, and avoid providing an incentive for defaults.

The Fed chief also backed the idea of having the Federal Housing Administration (FHA) refinance troubled mortgages, a concept included in Democratic legislation in Congress, without explicitly endorsing the bill. His remarks indicate a gap with the Bush administration, which has preferred to rely on industry-led efforts.

‘Realistic public and private sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment,’ Mr Bernanke said in remarks to a Columbia Business School dinner. He also reiterated his call for a stronger role for Fannie Mae and Freddie Mac, the government-chartered companies that are the biggest sources of money for US mortgages, to ease the crisis.

He didn’t comment on the outlook for interest rates in his speech, his first since the Federal Open Market Committee (FOMC) met last week. The panel on April 30 cut the benchmark interest rate by a quarter- point to 2 per cent, and signalled it may take a breather after seven reductions.

Mr Bernanke did note that accelerating foreclosures may push home prices down further, hurting the broader economy and threatening the financial system. He anticipated the foreclosure rate will increase this year after such proceedings began on 1.5 million properties last year.

In the past, typical approaches to helping homeowners included temporary repayment plans or folding missed payments into the principal balance, Mr Bernanke noted on Monday. That may not work in the current crisis, he said.

‘In some cases, when the source of the problem is a decline of the value of the home well below the mortgage’s principal balance, the best solution may be a writedown of principal or other permanent modification of the loan,’ the Fed chief said.

One option would be for the FHA to refinance a loan after the lender or investor forgives part of the mortgage, he said. That idea is incorporated in legislation sponsored by House Financial Services Committee chairman Barney Frank, a Massachusetts Democrat.

Mr Frank’s bill would have the FHA insure as much as US$300 billion in mortgages after loanholders agree to reduce principal. The proposal may come up for deliberation in the House in two days. Mr Frank’s committee approved it last week.

‘Finding the right balance - particularly the need to avoid programmes that give borrowers who can make their payments an incentive to default - is difficult,’ the Fed chairman said.

As the housing recession deepened, officials in Washington have offered a number of different proposals.

Foreclosure filings rose 57 per cent in March from a year earlier, according to Irvine, California-based RealtyTrac Inc.

‘Conditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply,’ Mr Bernanke said.

Last week, Federal Deposit Insurance Corp chairman Sheila Bair proposed that Congress authorise the Treasury Department to make loans to homeowners to help pay down as much as 20 per cent of their mortgage principal. - Bloomberg

Source : Business Times - 07 May 2008