Bernanke puts onus on lenders
He urges principal reductions to prevent rampant foreclosures.
Published March 5, 2008
ORLANDO - Ben Bernanke is using his bully pulpit to try to keep more Americans from getting swept up in a wave of home foreclosures.
The Federal Reserve chairman urged banks and other mortgage lenders Tuesday to lower the amount of their loans to distressed home-owners.
"This situation calls for a vigorous response," Bernanke said in a speech to a banking group meeting in Orlando.
Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise "for a while longer," Bernanke warned.
Rising foreclosures threaten to worsen the problems in the housing market and the economy, which many fear is on the verge of a recession, if not in one.
One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of loans to help struggling owners. Bernanke acknowledged this idea, which goes beyond the stance of the Bush administration, might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal.
"We've been talking about it as bankers," said Bill Stevens, chief executive officer of CapitalBank in Greenwood, S.C. "It's a tough business decision."
Tom Loonan, vice president of the State Bank of Easton in Minnesota, suggested that debt relief for some who got in over their heads may anger others, who took out mortgages that they could afford. "There's going to be some animosity," he said.
Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again.
"When the mortgage is under water, a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.
Brookly McLaughlin, spokeswoman for the Treasury Department, which has been leading the Bush administration's relief efforts, noted that foreclosures are expensive for both lenders and homeowners, giving parties an incentive to renegotiate a mortgage contract.
However, "we're not going to dictate how those renegotiations should be accomplished," she said. "If lenders find that in some cases a principal writedown is less costly than foreclosure, then that is an option they have the incentive to consider."
More than half of the projected 1.5-million home foreclosure proceedings started in 2007 were on subprime loans given to borrowers with blemished credit histories or low incomes.
This year, about 1.5-million loans - representing more than 40 percent of the outstanding stock of subprime adjustable-rate mortgages - are scheduled to reset to higher rates, Bernanke said. The Fed estimates that the interest rate on a typical subprime ARM slated to reset in the current quarter will increase to about 9.25 percent from just above 8 percent. That would raise the monthly payment by more than 10 percent, to $1,500 on average, he said.